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As filed with the Securities and Exchange Commission on June 8, 2020

Registration Statement No. 333-236325

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CPG Newco LLC

to be converted as described herein to a corporation named

The AZEK Company Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3089   90-1017663
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

1330 W Fulton Street #350

Chicago, IL 60607

877-275-2935

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jesse Singh

Chief Executive Officer

CPG Newco LLC

1330 W Fulton Street, #350

Chicago, IL 60607

877-275-2935

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

John L. Savva, Esq.

Rita-Anne O’Neill, Esq.

Sullivan & Cromwell LLP

1870 Embarcadero Road

Palo Alto, CA 94303

650-461-5600

 

Rachel Sheridan, Esq.

Samuel D. Rettew, Esq.

Latham & Watkins LLP
555 Eleventh Street, NW
Suite 1000

Washington, D.C. 20004
202-637-2200

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ☐

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

 

Large Accelerated Filer  ☐   Accelerated Filer  ☐    Non-accelerated Filer  ☒   Smaller Reporting Company  ☐
       Emerging growth company  ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act of 1933.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities
to be Registered

  Amount to be
Registered(2)
  Maximum Offering
Price Per Share
  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fee(3)

Class A Common Stock, par value $0.001 per share

  35,937,500   $21.00  

754,687,500

 

$97,959

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933.

(2) Includes 4,687,500 shares that the underwriters have the option to purchase.

(3) The Registrant previously paid $12,980 of this amount in connection with the initial filing of this Registration Statement.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

CPG Newco LLC, the registrant whose name appears on the cover of this registration statement, is a Delaware limited liability company. Prior to the effectiveness of this registration statement, CPG Newco LLC intends to convert into a Delaware corporation pursuant to a statutory conversion and change its name to The AZEK Company Inc. as described in the section “Corporate Conversion” of the accompanying prospectus. In addition, a special purpose entity, CPG Holdco LLC, which was formed at the time of the acquisition of CPG Newco LLC solely for the purpose of holding membership interests in CPG Newco LLC and that will continue to hold such interests until the Corporate Conversion, will be merged with and into us. In the accompanying prospectus, we refer to all of the transactions related to our conversion to a corporation and the merger described above as the Corporate Conversion. As a result of the Corporate Conversion, the members of CPG Newco LLC will become holders of shares of Class A common stock and Class B common stock of The AZEK Company Inc. Except as disclosed in the prospectus, the Consolidated Financial Statements and selected historical consolidated financial data and other financial information included in this registration statement are those of CPG Newco LLC and its subsidiaries and do not give effect to the Corporate Conversion. Shares of Class A common stock of The AZEK Company Inc. are being offered by the prospectus.


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This information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell, and it is not soliciting an offer to buy, these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated June 8, 2020

PROSPECTUS

 

 

31,250,000 Shares

 

 

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Class A Common Stock

 

 

This is the initial public offering of shares of Class A common stock of The AZEK Company Inc. We are offering 31,250,000 shares of Class A common stock.

Prior to this offering, there has been no public market for our Class A common stock. We anticipate that the initial public offering price for our Class A common stock will be between $19.00 and $21.00 per share. We have been approved to list our Class A common stock on the New York Stock Exchange under the symbol “AZEK”.

After giving effect to this offering and the Corporate Conversion (as defined in this prospectus), an entity affiliated with Ares Management Corporation, or Ares, will hold 53,312,907 shares of our Class A common stock, and Ontario Teachers’ Pension Plan Board, or OTPP, will hold 20,243,944 shares of our Class A common stock. OTPP will hold all of our outstanding Class B common stock. After giving effect to this offering and the Corporate Conversion, Ares and OTPP will hold approximately 37.6% and 37.6%, respectively, of our aggregate common stock. Accordingly, we expect to be a “controlled company” as defined in the corporate governance rules of the New York Stock Exchange and will be exempt from certain corporate governance requirements of the rules. We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements.

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 28.

 

     Per Share      Total  

Price to the public

   $                            $                        

Underwriting discounts and commissions

   $        $    

Proceeds, before expenses, to us(1)

   $        $    

 

(1)

See “Underwriting” for additional information regarding underwriting compensation.

We have granted the underwriters a 30-day option to purchase up to 4,687,500 additional shares at the initial public offering price, less the underwriting discount.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                     , 2020.

 

 

 

Barclays   BofA Securities     Goldman Sachs & Co. LLC       Jefferies  

 

 

 

Citigroup   Credit Suisse     Deutsche Bank Securities       RBC Capital Markets  

 

 

 

B. Riley FBR    Baird    Stephens Inc.
Stifel    SunTrust Robinson Humphrey    William Blair

 

 

Prospectus dated                     , 2020


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TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1  

Risk Factors

     28  

Special Note Regarding Forward-Looking Statements

     61  

Market and Industry Data

     63  

Use of Proceeds

     64  

Corporate Conversion

     65  

Dividend Policy

     66  

Capitalization

     67  

Dilution

     69  

Selected Consolidated Financial Data

     72  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     77  

Business

     108  

Management

     136  

Executive Compensation

     145  

Certain Relationships and Related Party Transactions

     163  

Principal Stockholders

     166  

Description of Certain Indebtedness

     169  

Description of Capital Stock

     173  

Shares Eligible for Future Sale

     179  

Material U.S. Tax Consequences to Non-U.S. Holders of Common Stock

     182  

Underwriting

     185  

Validity of Class A Common Stock

     193  

Experts

     194  

Where You Can Find Additional Information

     195  

Index to Consolidated Financial Statements

     F-1  

 

 

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of Class A common stock only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of Class A common stock.

You should rely only on the information contained in this prospectus. No dealer, salesperson or other person is authorized to give information that is not contained in this prospectus. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

For investors outside the United States: Neither we nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus in any jurisdiction where action for those purposes is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, this offering of Class A common stock and the distribution of this prospectus outside the United States.

Until                      (25 days after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.


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PROSPECTUS SUMMARY

The following summary contains selected information about us and about this offering. It does not contain all of the information that is important to you and your investment decision. Before you make an investment decision, you should review this prospectus in its entirety, including matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our Consolidated Financial Statements and the related notes included elsewhere in this prospectus. Some of the statements in the following summary constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements.” Our fiscal year ends on September 30. Any references to fiscal years in this prospectus are to the 12 months ended September 30 of that year and any references to fiscal quarters in this prospectus are to the applicable quarter or quarters within a fiscal year. Certain percentages and other figures provided and used in this prospectus may not add up to 100.0% due to the rounding of individual components. Unless the context otherwise requires, all references in this prospectus to “The AZEK Company,” “AZEK,” “CPG Newco LLC,” the “company,” “we,” “us,” “our” or similar terms refer to CPG Newco LLC and its consolidated subsidiaries, and after the Corporate Conversion, The AZEK Company Inc. and its consolidated subsidiaries.

COMPANY OVERVIEW

We are an industry-leading designer and manufacturer of beautiful, low-maintenance and environmentally sustainable products focused on the highly attractive, fast-growing Outdoor Living market. Homeowners are continuing to invest in their outdoor spaces and are increasingly recognizing the significant advantages of long-lasting products, which are converting demand away from traditional materials, particularly wood. Our products transform those outdoor spaces by combining highly appealing aesthetics with significantly lower maintenance costs compared to traditional materials. Our innovative portfolio of Outdoor Living products, including deck, rail, trim and accessories, inspires consumers to design outdoor spaces tailored to their unique lifestyle needs. We are well known in the industry, and, according to data provided by Principia, we generally hold one of the top two market share positions by revenue in our product categories. 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, lockers and storage solutions.

One of our core values is to “always do the right thing”. We make decisions according to what is right, not what is the cheapest, fastest or easiest, and we strive to always operate with integrity, transparency and with the customer in mind. In furtherance of that value, we are focused on sustainability across our operations and have adopted strategies to enable us to meet the growing demand for environmentally-friendly products.

Our businesses leverage a shared material technology and U.S.-based manufacturing platform to create products that convert demand from traditional materials to those that are long lasting and low maintenance, fulfilling our brand commitment to deliver products that are “Beautifully Engineered to Last”. Our Residential segment product portfolio is highly complementary and allows us to provide a wide-ranging solutions set to Outdoor Living projects. Our primary consumer brands in our Residential segment, TimberTech and AZEK, are recognized by contractors and consumers for their premium aesthetics, uncompromising quality and performance and for their diversity of style and design options. In our Commercial segment, we manufacture engineered sheet products and 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 to innovation 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.



 

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Our focus on new product development, material science and research and development, or R&D, enables us to capitalize on favorable secular growth trends that are accelerating material conversion from traditional materials such as wood, to sustainable, low-maintenance engineered materials, and to expand our markets. We believe our core competency of consistently launching new products into the market, combined with our recent investments in sales, marketing, R&D and manufacturing, will continue to solidify our incumbent position as a market leader and enable us to generate long-term demand for our products through economic cycles. Over our 30-year history, we have introduced numerous disruptive products and demonstrated our ability to drive material conversion and extend our portfolio, addressing consumer needs across a wide range of price segments. In fiscal 2015, we introduced our Vintage premium decking collection, and through fiscal 2019, sales for these products, including new colors introduced in fiscal 2018 and variable widths introduced in fiscal 2019, have increased at a compound annual growth rate, or CAGR, of more than 50.0% per year. The extended success of the Vintage premium decking collection demonstrates the longevity of demand for our product portfolio. We have leveraged the strong consumer response to Vintage to expand the platform with the introduction of new designs that address evolving industry trends and consumer demands. Our material science expertise and differentiated R&D capabilities enable us to create award-winning products and back them with some of the industry’s longest warranties, such as the 50-year fade & stain warranty that we offer on our TimberTech AZEK decking product line. Most of our product categories are in the early growth stage of their life cycles, and we anticipate that they will continue to benefit from substantial material conversion over the long term.

We have created an operating platform that is centered around sustainability, one of our core strategic pillars, which extends across our value chain from product design to raw material sourcing and manufacturing, and we increasingly utilize plastic waste, recycled wood and scrap in our products. We have also made significant recent investments in our recycling capabilities, including our recent acquisition of Return Polymers, which further enhance the sustainability of our manufacturing operations and reduce our costs. In fiscal 2019, we utilized more than 200 million pounds of recycled materials in our deck boards, and we expect to increase the amount of recycled materials used in our deck boards by over 25% in fiscal 2020. In addition, we believe we have the opportunity to further increase the amount of recycled material used in our products. In fiscal 2019, we opened a new 100,000 square foot recycling facility that utilizes advanced technologies to transform a broad range of plastic waste into raw material used in our products. Today, our TimberTech PRO and EDGE decking lines offer high-quality products made from approximately 80% recycled material. Through our recycling programs, approximately 290 million pounds of waste and scrap were diverted from landfills in fiscal 2019. Furthermore, approximately 98% of scrap generated is re-used, and the majority of our TimberTech, AZEK Exteriors and Versatex products are recyclable at the end of their useful lives. In addition to the sustainability advantages and cost benefits of our vertically integrated in-house manufacturing operations, our supplier base is located primarily in the United States, making us less susceptible to trade disruptions or supply chain dislocations resulting from extended crises such as the COVID-19 pandemic.

Within our Residential segment, we sell our products through a national network of more than 4,200 dealers, more than 35 distributors and multiple home improvement retailers providing extensive geographic coverage, enabling us to effectively serve contractors across the United States and Canada. Our geographic breadth, combined with our extensive market knowledge and broad product portfolio, positions us to continue to accelerate our growth within the industry. Our customer-focused sales organization generates pull-through demand for our products by driving increased downstream engagement directly with consumers and key influencers such as architects, builders and contractors, and by focusing on strengthening our position with dealers and growing our presence in retail. We have been investing in our consumer brands, marketing campaigns and digital tools in order to strengthen our relationships with consumers and key influencers, many of whom serve as advocates of our brands. Within our Commercial segment, we sell our products through a broad distribution network as well as directly to original equipment manufacturers, or OEMs.



 

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Through our Residential and Commercial segments, we deliver market-focused product solutions that drive material conversion. We have experienced strong growth over our history, and over the last several years we have made significant investments in our business to further accelerate our growth and increase our profitability.

 

 

LOGO

 

(1)

For a discussion of Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin, see the Segments Note in the Notes to our Consolidated Financial Statements included elsewhere in this prospectus and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Results of Operations.”

(2)

10-Year Net Sales CAGR refers to the CAGR for the ten years ended September 30, 2019, on a trailing twelve-month basis. Our growth over this period reflects the contribution to net sales of acquisitions, including the acquisitions of VAST Enterprises and TimberTech in fiscal 2012 and Ultralox and Versatex in fiscal 2018.

(3)

We define Five Year New Product Vitality as the percentage of gross sales in fiscal 2019 derived from products first introduced in fiscal 2019 and the four preceding years, excluding gross sales from Versatex and Ultralox.

In fiscal 2019, our net sales, net loss and Adjusted EBITDA were $794.2 million, $20.2 million and $179.6 million, respectively. We intend to continue developing new products, building the leading consumer brand in Outdoor Living and leveraging our downstream-focused sales force, and we believe the demand for our products will benefit from continued material conversion and the resilience of the Outdoor Living market. Adjusted EBITDA is a non-GAAP financial measure used by management as a measure of our core operating results and the effectiveness of our business strategy. For more information on Adjusted EBITDA and for a reconciliation to net income, its most comparable financial measure calculated in accordance with GAAP, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

INDUSTRY OVERVIEW

Our products are widely used across several large, attractive markets, including residential and commercial end markets. We primarily serve the Outdoor Living market, which we define as the market for decks, rail, trim, wood and wood-look siding, porches, pavers, outdoor furniture, outdoor cabinetry and outdoor lighting designed to enhance the utility and improve the aesthetics of outdoor living spaces. We expect the Outdoor Living market will continue to benefit from increased investment as homeowners choose to spend more leisure time outdoors. As more members of the Millennial generation purchase first homes in the United States, we expect the demand for outdoor living spaces will rise, and the appeal of low- to no-maintenance features to gain further momentum. We believe that consumers are increasingly environmentally-conscious in their purchasing behaviors, and that our sustainable manufacturing practices and the high recycled content of our products address evolving consumer preferences.



 

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The primary products that we sell into the Outdoor Living market are composite deck, composite and aluminum rail and PVC trim. Based on data provided by Principia Consulting, LLC, a third-party industry research and consulting firm, or Principia, the total U.S. market sales of these products were $7.2 billion in 2018, grew at a 6.3% CAGR from 2014 to 2018 on a linear foot basis and are expected to grow at a 3.0% CAGR from 2018 to 2022 on a linear foot basis to $8.3 billion in 2022. By material type, based on data provided by Principia, the total U.S. market sales of composite deck, composite and aluminum rail and PVC trim products are expected to grow at a 5.7% CAGR from 2018 to 2022, compared to deck, rail and trim manufactured from wood which are expected to grow at a 2.7% CAGR and to deck, rail and trim manufactured from other materials, such as engineered wood, vinyl and other metals, which are expected to grow at a 1.4% CAGR, in each case measured in terms of linear feet. In addition, based on data provided by The Freedonia Group, Inc., an international market research company, or Freedonia, the total U.S. market sales of wood and wood-look siding, pavers, outdoor furniture and outdoor lighting were $10.9 billion in 2018, and, when combined with the total U.S. market sales of deck, rail and trim, according to Principia, in 2018, totaled $18.1 billion in 2018.

 

 

LOGO

 

 

Source:

2018 and 2022 projected market sizes based on data provided by Principia as of October 2019.

(1)

Represents total market (all materials). Principia market definition for trim excludes specialty exteriors products, such as tongue and groove profiles, sheets, sills, thresholds and column wraps.

(2)

Decking category includes composite and PVC decking, rail category includes composite and aluminum rail and trim category includes PVC trim.

Based on data provided by Principia, there were approximately 57 million decks in the United States as of 2018, of which approximately 5.0 million were built in 2018, up from approximately 4.0 million in 2014, representing a CAGR of 5.9%. Decking, our single largest product category, represents a significant opportunity for homeowners to extend the total livable space of their home and to design a unique space for relaxation and entertainment. Through our portfolio of Outdoor Living products, we provide a broad range of material and design options to homeowners as they tailor their outdoor living space to their unique lifestyle. In addition, we believe that we have significant opportunities to leverage our material science expertise, brand awareness and channel relationships to expand into additional segments of the Outdoor Living market. We believe that the current COVID-19 crisis, which has caused people to spend an extended amount of time at home, could be an additional catalyst that may cause an increasing number of homeowners to further recognize the benefits that our portfolio of Outdoor Living products can offer.

We believe our products offer a compelling value proposition due to their enhanced durability, quality, attractive aesthetics and lower life-cycle costs relative to traditional materials such as wood. For example, we estimate the total lifecycle cost of our new TimberTech EDGE Prime decking, including materials, labor and annual maintenance, is approximately 37% less expensive over its 25-year warranty period than the cost of a



 

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comparable pressure treated lumber deck. Further, given that the cost of our TimberTech EDGE Prime decking products typically constitutes approximately 15% of the total deck project installation cost, consumers have the opportunity to cost-effectively upgrade to our long-lasting, low-maintenance materials by replacing traditional deck boards with our product while utilizing an existing substructure that has been appropriately maintained.

 

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Total Deck Project Installation Costs(1) Total Deck Life-Cycle Costs(2)

 

 

 

(1)

These assumptions and estimates are based on AZEK market knowledge and feedback from decking-focused contractors with experience installing TimberTech and wood decking products. Actual costs for any particular installation can vary significantly.

(2)

Total Deck Project Installation Costs represent the total aggregate costs of an initial deck installation for a 16’ x 20’ elevated deck and exclude costs associated with the installation of rail or stairs.

(3)

Total Deck Life-Cycle Costs represent both the aggregate costs of an initial deck installation and the estimated maintenance costs over a 25-year period for a 16’ x 20’ elevated deck excluding potential replacement costs.

(4)

Other costs include substructure installation costs, initial staining and sealing of wood decking materials and the cost of top down fasteners for EDGE Prime and pressure treated lumber and hidden fasteners for ipe and AZEK Vintage.

(5)

Estimated maintenance costs include an assumed annual cleaning of TimberTech products and an assumed maintenance requirement of annual pressure washing and sanding, staining and sealing a pressure treated lumber deck every three years and an ipe deck every two years to maintain aesthetics.

Composite deck (which includes wood composite and PVC decking), rail and trim products have continued to increase market share relative to other materials, due to their superior product qualities. Based on data provided by Principia, between 2014 and 2018, composite deck, composite and aluminum rail and PVC trim products collectively grew at a CAGR of 8.7% as compared to deck, rail and trim manufactured from wood, which grew at a CAGR of 5.9%, in each case measured in terms of linear feet. We believe the market for composite products will continue to increase at an above-market growth rate as it benefits from material conversion. Based on data provided by Principia, wood represented approximately 65% of the total U.S. deck, rail and trim markets based on 2018 linear feet sold. With respect to the individual components of these markets, based on this data, composite deck represented approximately 18% of the decking market, composite and aluminum rail represented approximately 16% of the rail market and PVC trim products represented approximately 11% of the trim market, each in terms of linear feet.



 

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Material Type Penetration By Market (Linear Feet, 2017)(1)

 

(1)

Based on data provided by Principia as of October 2019. Other includes (A) hollow vinyl, plastic lumber and metal for decking, (B) iron, stainless steel, hollow vinyl and other plastic for railing and (C) engineered wood, fiber cement, vinyl, other polymer composite and other for trim.

(2)

Wood for the decking market includes premium hardwoods, cedar and redwood, which accounted for approximately 13% of the total decking market in 2018 according to data provided by Principia.

We believe there is a significant opportunity for further market penetration by composite products as consumer awareness towards sustainable materials increases and advances in material science and manufacturing improve the range of colors and textures available. We offer products that reduce the relative premium between composite and other materials to increase the affordability and further improve the lifetime value advantages of composite products. In addition, we believe our products are well positioned to benefit from growth across economic cycles given their low market penetration and improving cost and value proposition. We believe that we have been, and will continue to be, a driving force behind the growth of low-maintenance products in our markets.

Our deck, trim, rail and accessory products are primarily sold through both one-step and two-step distribution channels, and we are increasing our direct engagement with consumers. Within our Residential segment, we sell our products to distributors, professional dealers and home improvement retailers, who in turn sell our products to builders, contractors and homeowners. Based on data provided by Principia as of October 2019, the relative industry volumes of composite deck, composite and aluminum rail and PVC trim products sold by distribution channel and by end user channel are as follows:

 

 

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Residential Channel Summary Sales by Manufacturers Residential Channel Summary Sales to End Users

 

(1)

Rail includes composite and aluminum rail.



 

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We are a leader within the professional dealer channel due to our depth across product categories, brand reputation and the superior quality of our products. We estimate that our U.S. decking sales represented approximately 34% of total composite decking sales in 2018 and that our U.S. trim sales represented approximately 36% of total PVC trim sales in 2018, in each case within the professional dealer channel. Based on data provided by Principia, in 2018, the retail channel represented approximately 35% of the total $3.1 billion decking market, and, within that channel, composite decking sales represented approximately $0.3 billion. We estimate approximately half of all composite decking sales through that retail channel were special order products. Although less than 10% of our Residential segment sales were directly through home improvement retailers, we have seen substantial year-over-year growth in special order sales through such retailers, resulting in a CAGR of such gross sales of over 20% between fiscal 2015 and fiscal 2019. We believe we have an opportunity for significant expansion within retail and that this channel represents a key area of potential growth for us in the future. Our Commercial segment sells its products to OEMs and through distribution channels that reach a number of end markets including education, industrial, commercial and marine.

THE AZEK DIFFERENCE

An Industry Leader in the Outdoor Living Market

We are a leader in a number of large and growing segments of the Outdoor Living market and are benefiting from the early stages of material conversion and secular growth trends. Our significant scale, vertically-integrated manufacturing capabilities and extensive material science expertise enable our leadership position. We have leveraged these capabilities to establish a track record of innovation across a broad range of products with superior quality, aesthetics and performance that has been recognized by respected industry sources. In Hanley Wood’s 2020 BUILDER brand use study of U.S. builders, developers and contractors, TimberTech decking ranked #2 for quality within the deck category, and AZEK trim ranked #1 for quality within the decorative mouldings, trim and columns category. Additionally, our engineered bathroom partitions are a leading product specified by architects, and our Aria partitions won a Product Innovation Award from Architectural Products Magazine in 2018. These strengths, combined with our downstream focus and expanding marketing and digital strategy, have generated strong brand awareness and preference among contractors and consumers.

Serving Large, High-Growth and Resilient Markets That Are Benefitting from Material Conversion

We believe that the Outdoor Living market is benefiting from material conversion from traditional wood materials to low-maintenance, engineered materials. Based on data provided by Principia, wood represented approximately 65% of the total U.S. deck, rail and trim markets as measured by linear feet sold in 2018. Within the decking market specifically, wood represented approximately 80% of the total decking market in 2018, with premium hardwoods, cedar and redwood comprising 13% of the total decking market. We believe these markets present substantial growth opportunities in the coming years and that our leading scale, vertically-integrated manufacturing capabilities and extensive material science expertise position us to capitalize on these highly attractive markets as material conversion continues.

In addition, we believe that the residential repair and remodel market, which is the primary market served by our core products, is significantly more resilient through economic cycles than the home building industry. For example, from 2007 to 2009, single family housing starts declined approximately 57% according to the U.S. Census Bureau, while the home improvement products market declined approximately 14% according to the Home Improvement Research Institute. Moreover, our business demonstrated resilience through this period as net sales declined approximately 15% and cash flows from operations remained positive and increased through this period as a result of product mix, lower raw material costs and working capital management. In addition, even during periods of industry decline, we believe many home improvement projects are deferred rather than



 

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permanently cancelled, making it possible for industry activity to rebound quickly. We have increased our focus on serving the residential repair and remodel market over time, and we estimate that, within our Residential segment, over 85% of our net sales are attributable to repair and remodel activity. Based on data provided by Principia, in 2018, approximately 95% of total decking, 80% of rail and 65% of trim sales were attributable to the residential repair and remodel market. Our markets are also experiencing multiple favorable long-term secular growth trends. For example, within our Residential segment, consumers increasingly spend their leisure time outdoors and demand products that expand the usable living space of their home and enhance their outdoor lifestyle. In addition, according to a 2019 survey by the American Institute of Architects, outdoor living spaces have ranked as the most popular space amongst residential architects over the past two years and continue to increase in popularity. As a result, we believe our business will continue to benefit from strong material conversion, continued repair and remodel activity and favorable secular trends.

Premium Brands Known for Service, Quality, Aesthetics and a Broad Range of Styles and Designs

We achieved our premium brand reputation through our unwavering commitment to developing innovative new products that combine the latest style and design trends with our differentiated material science expertise and proprietary production technologies. For example, we have launched products that take premium flooring trends, such as wire-brushed and hand-scraped finishes and multiple widths, into the decking market.

In addition, we have deployed significant direct sales and service resources that have helped us develop strong brand awareness and loyalty among dealers, home improvement retailers and contractors. Over the last several years, we have made substantial investments to further enhance and strengthen our brands, including launching a variety of innovative new products with superior aesthetics, initiating cutting edge marketing campaigns, expanding our digital footprint and capabilities and unveiling a new set of tools focused on enhancing the consumer experience. We are well known in the industry, and we are generally one of the top two recognized brands in our product categories.

Committed to Sustainably Produced, Long-Lasting, Beautiful Products

Our commitment to sustainability permeates our operations, and our products divert waste from landfills and reduce deforestation. Approximately 90% of our gross sales are attributable to products that are manufactured through an extrusion process, and approximately 44% of all of our extruded materials were manufactured from recycled materials in fiscal 2019. We expect this percentage to increase to approximately 54% in fiscal 2020, and we believe there is an opportunity to increase this percentage in the future. Additionally, our operations are designed with sustainability in mind, with our facilities in Wilmington, OH and Scranton, PA employing closed-loop water filtration systems that recycle approximately 96% of water used annually and our polyethylene recycling facility utilizing energy-efficient systems for power, water, heating, cooling and lighting. Further, our products are designed to retain their aesthetic and structural qualities throughout their lifetimes, and the majority of our products are recyclable at the end of their useful lives. The increasing use of recycled content in our products also leads to improvements in our operating margins, as the flexibility of material input sourcing lowers input costs and reduces reliance on virgin raw materials.

Highly Versatile, U.S.-based Manufacturing Platform with Differentiated Capabilities

We are a vertically-integrated manufacturer, delivering superior quality products with a competitive cost position. Our versatile, process-oriented manufacturing operations are built on a foundation of extensive material development and processing capabilities. Our proprietary production technologies, material blending proficiency and range of extrusion methods enable innovation and facilitate expansion into new markets. We have deep experience working with multiple technologies that enable us to provide some of the industry’s most attractive visuals through advanced streaking and multi-color technologies. Our manufacturing footprint has been consolidated into seven facilities over five geographic locations totaling over 1.7 million square feet, and we have



 

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made significant investments in people, processes and systems to increase our manufacturing scale and productivity. We recently expanded our vertical manufacturing capabilities with our new 100,000 square foot polyethylene recycling facility and our recent acquisition of Return Polymers, which enable further use of recycled content in our product offering and further reduces our reliance on higher-cost alternatives. In 2017, we introduced our AZEK Integrated Management System, or AIMS, to manage and monitor operations, and in 2018, we implemented Lean Six Sigma, or LSS, tools and techniques at our manufacturing facilities to reduce material waste and improve manufacturing efficiency. We believe these initiatives create an opportunity for continued expansion of our margins.

Leader in Product Development and Innovation with a Robust New Product Pipeline

Over the past 30 years, we have built an R&D organization with significant expertise in material science and production process technologies. We leverage our R&D and manufacturing capabilities to deliver innovative new products to market that address evolving customer needs while expanding our use of recycled materials. Our product managers and marketing team actively analyze proprietary consumer research and work with architects, contractors and consumers to identify and develop new products that incorporate consumer feedback, expand our portfolio and extend the range of style and design options we offer. Our R&D team then designs, prototypes and tests these new products prior to full scale production. Our rigorous R&D process incorporates in-house analytical capabilities and comprehensive product testing with more than 260 distinct tests, such as accelerated weathering. During the four years ended September 30, 2019, our team successfully led over 20 significant new product introductions, and, for the twelve-month period ended September 30, 2019, our Five Year New Product Vitality for our Residential segment was approximately 51%. We expect to continue to maintain a robust pipeline of new products and technologies that we intend to launch over the next several years, which we believe will help us continue to maintain our leadership in product innovation and drive strong product vitality.

Extensive Network of Contractors, Dealers and Distributors

Throughout our history, we have developed an extensive network in the United States and Canada of loyal contractors, dealers and distributors, many of whom are brand advocates for our products. Our extensive network consists of more than 4,200 dealers, over 130 distributor branch locations and thousands of contractors throughout the United States and Canada. We believe our strong relationships with dealers and contractors are driven by the trust and reliability that we have generated through product innovation, superior quality and performance, and the continuing service and support that we offer. Such support includes specialized training opportunities such as AZEK University and sales support initiatives such as digital lead generation, joint marketing funds, new sample kits, display kiosks, enhanced product literature, print, TV and radio advertising and social media initiatives. AZEK University provides hands-on training for contractors and customers using TimberTech and AZEK Exteriors products and our AZEK Pro Rewards program leverages our new website and digital capabilities to share curated digital leads with our contractors. In our Commercial segment, we sell our highly engineered polymer sheeting products through a network of approximately 130 engineered product distributors across the United States, Canada and Latin America, who sell primarily to OEMs, and we sell our low-maintenance bathroom partitions, shower and dressing stalls, lockers and other storage solutions through a network of approximately 900 dealers who sell to institutional and commercial customers across the United States and in Canada. We believe that the combination of consumer awareness for our product categories and our ability to directly engage with consumers to drive conversion makes us a highly attractive partner for our distributors, dealers, contractors and home improvement retailers, and that combination is a key reason that we expect them to continue to prioritize their own investment in our products and our product categories.

Strong Margin Profile with Significant Opportunity for Expansion

Our business has a strong margin profile driven by our differentiated premium branded products, vertically-integrated U.S.-based manufacturing capabilities and strong customer relationships. We continue to invest in new



 

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innovations in current and adjacent markets that we believe will support our long-term growth. Our Residential segment generated Segment Adjusted EBITDA Margin of 28.8% in the year ended September 30, 2019, and we are well positioned to continue to execute on our operational excellence initiatives, including recycling and continuous manufacturing efficiency improvement. As our recent capital investments mature, we believe there is a significant opportunity for us to expand our margins. In addition, a large percentage of our cost base is variable, providing us with significant financial flexibility and the ability to manage costs to reflect changes in economic conditions.

Proven Management Team Focused on Execution

We have assembled a diverse team of highly experienced and accomplished executives with public company experience, a proven track record of leading global consumer and industrial organizations and driving profitable growth, product innovation, cost reduction and manufacturing efficiency. In the past two years, under our management team’s leadership, our Adjusted Gross Profit as a percentage of net sales increased by approximately 400 basis points while we continue to enjoy strong top line growth. Our Chief Executive Officer, Jesse Singh, joined our team in 2016, after serving in numerous leadership roles at 3M, including Chief Commercial Officer, President of 3M’s Health Information Systems business and VP of the Stationery and Office supplies business, which included the iconic Post-it and Scotch Brands. Our Chief Financial Officer, Ralph Nicoletti, joined our team in 2019 after serving as Executive Vice President and Chief Financial Officer of Newell Brands and has more than 35 years of finance experience. Collectively, our team is approximately 50% gender and ethnically diverse and has extensive experience at leading companies, including 3M, Newell Brands, Owens Corning, Eaton, Armstrong, Grainger and Emerson. Our management team has executed key strategic initiatives across the platform to drive accelerated growth and improved profitability, including upgrading operational capabilities, implementing productivity tools, and investing in new products, sales force expansion, marketing, M&A and internal recycling capabilities.

OUR GROWTH STRATEGY

We believe our multi-faceted growth strategy positions us to drive profitable above-market growth in the markets we serve.

Introduce Innovative New Products That Expand Our Markets

We have a proven track record of developing innovative new products across multiple price points that accelerate material conversion, increase the use of recycled materials and expand our markets. Our strong manufacturing capabilities, proprietary production technologies, detailed consumer research and extensive material science expertise allow us to rapidly introduce differentiated products. In our Residential segment, our new products are driving conversion away from traditional wood materials across all pricing segments, from various forms of pressure treated wood at the entry level to more exotic woods such as cedar and ipe at the premium level. In 2019, our Residential segment launched three new product platforms: TimberTech EDGE, Multi-Width decking and PaintPro trim. We believe that TimberTech EDGE will accelerate conversion of low-cost traditional pressure treated wood materials by offering superior aesthetics and performance at an accessible price point. Our entry-level decking category volume, which includes our TimberTech PRO Terrain collection in addition to our TimberTech EDGE Prime and Premier collections, increased over 35% on a linear foot basis in fiscal 2019 as compared to the prior year. Multi-Width decking, which extends the technological advancements available in our highly successful Vintage platform, expands the range of style and design options available to consumers seeking premium decking solutions and provides a unique combination of superior performance and a natural wood-look and feel. Our premium Vintage collection volume increased approximately 50% on a linear foot basis in fiscal 2019 as compared to the prior year. PaintPro expands the addressable market for our trim products and accelerates wood conversion by delivering the same high-quality, low-maintenance performance of traditional white PVC trim across a full spectrum of paintable colors. Each year, we continue to



 

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launch new products across our business, and as of the year ended September 30, 2019, our blended Five Year New Product Vitality across our Residential segment and Commercial segment was approximately 45%.

In 2020, we are expanding on these product innovations in our Residential segment and launching a new multi-color TimberTech EDGE Prime+ decking collection, a new Wide-Width profile for the TimberTech AZEK Harvest decking collection and the new, multi-tonal Reserve collection under the TimberTech PRO decking line, among others. We will continue to leverage our material technology capabilities and commission detailed consumer research to regularly introduce new products that set us apart from our competition and accelerate future growth.

Accelerate Market Conversion by Capitalizing on Downstream Investments

We view the continued growth in homeowner outdoor investment and repair and remodel activity as a powerful secular trend driving material conversion across our industry. We believe low-maintenance alternatives at a range of premium quality designs and accessible pricing will continue to increase consumer demand and accelerate material conversion.

Over the three years ended September 30, 2019, we have increased our R&D, sales and marketing expenses by over 40% in the aggregate, and we are continuing to make additional investments during fiscal 2020 that we believe will accelerate material conversion and growth in our markets. We expanded our marketing organization and sales force with new talent, enabling us to generate greater awareness of our products and enhance our sales growth in underpenetrated markets and geographies. We invested in new premium and traditional merchandising displays for our dealers and special order merchandising and training for pro desk support associates for our home improvement retailers to increase consumer awareness of our products and to accelerate sales growth. Starting in 2018, we have added new trim and retail focused sales teams and have also established a dedicated sales team to enhance our dealer sales in underpenetrated geographies. We believe these initiatives are helping to accelerate our growth. For example, we believe our new trim-focused sales team has helped increase our AZEK Exteriors trim net sales by more than 15% in fiscal 2019 as compared to the prior year. In addition to expanding our sales force, we realigned the compensation framework for our sales teams to increase downstream engagement with consumers and key influencers such as architects, builders and contractors, to drive increased pull-through demand for our products. We recently opened our third AZEK University location in Chicago, and we are hosting regular contractor training events to encourage contractors to use our products. We believe we can continue to leverage our downstream investments to accelerate material conversion in our markets, strengthen our position in the pro channel and enhance our retail presence.

Build the Leading Consumer Brand in Outdoor Living

We are well-known for quality, innovation and delivering a broad range of on-trend style and design options to customers. We have made significant investments in sales and marketing and R&D over the past two years to differentiate and strengthen our brands and to simplify and transform the consumer experience for purchasing our products. In 2019, we unified our decking and railing product portfolio under our leading TimberTech brand with a differentiated “Go Against the Grain” marketing campaign. We continue to invest in our marketing organization and alongside our channel partners to increase consumer awareness and preference for our products. Our focused digital strategy, enhanced media presence and differentiated marketing campaigns drive increased engagement with consumers and homeowners as well as key influencers such as architects, builders and contractors. Our new digital platform facilitates the consumer journey from inspiration and design through installation. The experience educates consumers on the features and benefits of our products versus traditional materials, utilizes digital visualization tools to allow consumers to re-imagine their outdoor living spaces and directly connects them to a pre-qualified local contractor. During fiscal 2019, website traffic to our outdoor living



 

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branded websites increased by approximately 45% and sample orders for our decking products have increased at a double-digit rate, in each case when compared to the prior year. We enjoy strong preference for our products among contractors, who typically purchase our products at dealers, and we are investing to increase our presence within home improvement retailers as the majority of consumers include visits to home improvement retailers in their research of deck products. These consumer engagement strategies are focused on creating additional pull-through demand and accelerating our growth.

Expand Margins Through Enhanced Recycling Capabilities and Productivity Initiatives

Our broad range of U.S.-based manufacturing capabilities, proprietary production technologies and extensive material science expertise position us as a leading innovator in the Outdoor Living market, and our brands command premium prices and afford us a strong margin profile. However, we believe there is an opportunity for significant improvement in our margins as we continue to invest in and expand our recycling capabilities and focus on operational excellence. Since fiscal 2017, we have invested over $28 million in developing our recycling capabilities to substantially reduce our material cost, divert waste from landfills and increase our utilization of recycled materials. For example, in fiscal 2019, we increased the recycled material content used in the core of our deck boards by approximately 20%, as compared to the recycled material content in fiscal 2018. Increasing the recycled material content in our deck boards has allowed us to substantially reduce the utilization of virgin HDPE in the production of the core of our TimberTech PRO and EDGE products, representing approximately $9 million in cost savings on an annualized basis when compared to legacy material content formulations. We are still in the early stages of material substitution across our manufacturing network and realizing the benefits of our investments in recycling, and we expect to drive additional cost savings as we ramp up internal processing of recycled materials used in the manufacturing of our products.

In addition to enhancing our recycling capabilities, we have also implemented various LSS initiatives across our manufacturing operations to reduce waste and enhance productivity. We utilize a systematic approach, AIMS, to drive continuous improvement throughout our organization. In fiscal 2019, we realized approximately $11 million of cost savings related to net manufacturing productivity improvements. We define net manufacturing productivity as the year-over-year change in net manufacturing expenses required to achieve a given level of manufacturing output, assuming constant raw material and other manufacturing input prices and excluding the effect of freight expense, warranty expense and unusual items. We identified and have begun to implement additional projects that we expect will provide incremental net manufacturing productivity in the coming years. We believe AIMS, our investments in people, processes and equipment and our investments in recycling, productivity and operational excellence will enable us to expand our margins through reduced material cost, improved net manufacturing productivity and enhanced business operations.

Execute Strategic Acquisitions That Broaden Our Platform and Enhance Our Manufacturing Operations

Our markets are large and highly fragmented, and they provide a wide range of opportunities for us to execute acquisitions to augment our growth independent of end-market demand. We have completed several strategic acquisitions since our company was founded, and we have proven to be a highly effective consolidation platform. For example, the acquisition of Versatex strengthened our position in the exterior trim and moulding market, enhanced our product capabilities and generated attractive cost savings, and the acquisition of Ultralox extended our rail portfolio to include aluminum solutions with proprietary interlocking technology and expanded our ability to address the high-growth aluminum railing market.

We intend to continue to prudently execute strategic acquisitions and utilize our disciplined process to identify, evaluate, execute and integrate acquired businesses. We actively monitor a pipeline of attractive opportunities across multiple product categories and geographies. We target opportunities that strengthen our



 

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existing platforms, enhance our market positions, expand our portfolio of products and technology capabilities and increase our business diversity. In addition, the acquisitions we pursue must also provide opportunities for us to leverage our strong U.S.-based manufacturing capabilities, material formulation proficiency and extensive dealer and distributor network to meaningfully enhance their scale, growth, profitability and cash flow. For example, we recently acquired Return Polymers, which we expect will significantly enhance our in-house recycling capabilities, reduce reliance on external suppliers and further improve our overall manufacturing cost position.

RECENT DEVELOPMENTS

COVID-19

Since the onset of the COVID-19 pandemic, we have been focused on protecting our employees’ health and safety, meeting our customers’ needs as they navigate an uncertain financial and operating environment, working closely with our suppliers to protect our ongoing business operations and rapidly adjusting our short-, medium- and long-term operational plans to proactively and effectively respond to the current and potential future public health crises. While the COVID-19 pandemic presents serious concerns for our business and operations, our employees and their families, our customers and our suppliers, we believe that we are adapting well to the wide-ranging changes that the global economy is currently undergoing, and we remain confident that we will continue to maintain business continuity, produce and sell our products safely and in compliance with applicable laws and governmental orders and mandates, maintain our robust and flexible supply chains and be in a strong position to maintain financial success even in the event of a potentially extended economic downturn.

Our manufacturing facilities continue to operate as they have been determined to be “essential businesses” in the jurisdictions where they are located. Moreover, only a few states and other jurisdictions placed construction activities on hold. Demand for our products in the second fiscal quarter of 2020 has been largely consistent in overall amount with prior years. We expect that the economic effects of the COVID-19 pandemic will likely continue to adversely affect demand for our products over the balance of fiscal 2020.

However, our medium-term expectations also include increased interest among homeowners in enhancing their Outdoor Living spaces as they spend more time at home during and likely following the COVID-19 pandemic. We expect this may partially offset a general reduction in consumer spending. Further, we anticipate that consumers will increasingly shop online, and we continue to enhance our digital sales capabilities and direct, personal interaction with homeowners to more easily allow them to research, and ultimately purchase, our products.

We have taken a number of steps to adapt our business and operations to the current environment. First and foremost, we have implemented measures to protect the health and safety of our employees. These measures include encouraging our employees who are able to work remotely to do so, enacting and enforcing employee spacing protocols in our factories, reducing the need for face-to-face interactions, and providing facial protection and other personal protection equipment to on-site employees.

We have also taken steps to engage directly with our distributors to share information and ensure we are servicing the market appropriately. In addition to engaging directly with distributors, we are adapting how we reach customers in response to changing consumer behavior. For example, we are focused on expanding and enhancing our digital “shop from home” content and marketing, while leveraging our call center to support customers and generate leads. We are expanding our do-it-yourself tools and continuing our contractor and architect training in a digital format, emphasizing contactless designs and proposals for new projects.



 

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We have taken steps to reduce costs (with a cost reduction target of more than 10% for the second half of 2020), and we have aligned our manufacturing to current and expected demand. We have reduced our headcount in select areas, including our Vycom business, and we have the ability to adjust our manufacturing operations and output to meet demand. We are also taking steps to enhance our liquidity given the uncertainties resulting from the COVID-19 pandemic, including deferring non-essential capital expenditures, drawing up to the maximum amount of funds available under our Revolving Credit Agreement and conserving our working capital.

Although we have implemented measures to mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations, including reducing our production and expenses, we expect that these measures may not fully mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations. We cannot predict the degree to, or the period over, which we will be affected by the pandemic and resulting governmental and other measures. The global impact of the COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the situation closely. Nevertheless, the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change rapidly and without forewarning. We do not yet know the full extent of potential delays or impacts on our business, financial condition, operations or the economy as a whole. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemic will not occur, or that the economy will recover, either of which could seriously harm our business. As the COVID-19 pandemic continues, it may also have the effect of heightening many of the risks described in “Risk Factors” in this prospectus. See “Risk Factors” for a further discussion of the adverse impacts of the COVID-19 pandemic on our business.

Liquidity

During the three months ended March 31, 2020, we borrowed $129.0 million under the Revolving Credit Agreement, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. On May 12, 2020, CPG International LLC issued $350.0 million aggregate principal amount of 9.500% senior notes due 2025, or the Senior Notes. We used net proceeds from the offering of the Senior Notes to satisfy and discharge CPG International LLC’s obligations under its former 8.000% senior notes due 2021, or the 2013 Notes. On May 14, 2020, we also used net proceeds from the offering of the Senior Notes to repay $15.0 million of outstanding principal under the Revolving Credit Agreement. We intend to use net proceeds from this offering first to redeem the Senior Notes, plus accrued and unpaid interest thereon, and then to prepay approximately $198.3 million of the outstanding principal amount under our Term Loan Credit Agreement. See “Use of Proceeds.”

On June 5, 2020, we entered into an amendment to the Revolving Credit Agreement, or the RCA Amendment, which established $8.5 million of commitments for loans under the Revolving Credit Agreement that are referred to as FILO Loans. The FILO Loans are available to be drawn in a single disbursement on or prior to December 31, 2020. The availability of the FILO Loans will be subject to satisfaction of certain conditions at the time of borrowing, including the value of borrowing-base eligible assets at the time of borrowing. Under the terms of the Revolving Credit Agreement as amended by the RCA Amendment, FILO Loans may be borrowed against increased percentages of borrowing-base eligible assets (as compared to the percentages of borrowing-base eligible assets applicable to all other loans under the Revolving Credit Agreement). The RCA Amendment did not increase the total aggregate amount of commitments under the Revolving Credit Agreement. Borrowing of FILO Loans under the Revolving Credit Agreement will reduce the total aggregate commitments available for revolving loans for so long as the FILO Loans remain outstanding. If borrowed, the FILO Loans will mature on December 4, 2021. There is no assurance that we will be able to draw on the FILO Loans at any time.



 

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Preliminary Financial Results

Set forth below are preliminary estimates of certain unaudited financial information for the two months ended May 31, 2020 and actual unaudited financial results for the comparative period ended May 31, 2019. Our actual results for the two months ended May 31, 2020, will be included in the financial information for the three months ending June 30, 2020, which will not be available until after the completion of this offering. We have provided ranges, rather than specific amounts, for the preliminary estimates primarily because our financial closing and review procedures for the three months ending June 30, 2020 are not yet complete. The estimated ranges are preliminary and have not been audited or reviewed and are inherently uncertain and subject to changes as we complete our financial closing and review procedures for the three months ending June 30, 2020. While we currently expect that our final results will be consistent with the preliminary estimates set forth below, we caution you that the estimated financial information for the two months ended May 31, 2020 is not a guarantee of future performance or outcomes and actual results may differ materially from those described herein. In addition, the preliminary estimates set forth below should not be considered an indication of expected performance for the remainder of the three months ending June 30, 2020. Factors that could cause actual results to differ from those described above are set forth in “Risk Factors” and “Special Note Regarding Forward-Looking Statements and Information.” You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited historical Consolidated Financial Statements and related notes appearing elsewhere in this prospectus. This preliminary information should not be viewed as a substitute for full quarterly financial statements prepared in accordance with GAAP.

The preliminary estimates set forth below have been prepared by, and are the responsibility of, our management. PricewaterhouseCoopers LLP has not audited, reviewed, compiled or performed any procedures with respect to the preliminary estimates. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.

 

     Two Months Ended  
     May 31, 2020
(Estimated)
    May 31, 2019
(Actual)
 
(U.S. dollars in thousands)    Low     High        

Net sales

   $ 124,900     $ 132,600     $ 135,796  

Net income (loss)

   $ (2,100   $ (2,500   $ (5,319

Non-GAAP financial measures

      

Adjusted EBITDA(1)

   $ 28,700     $ 33,800     $ 28,278  

 

(1)

We define Adjusted EBITDA as net income (loss) before interest expense, net, income tax expense (benefit) and depreciation and amortization and by adding to or subtracting therefrom certain items of expense and income. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

For the two months ended May 31, 2020, we estimate our net sales to be in the range of $124.9 million to $132.6 million, as compared to $135.8 million for the two months ended May 31, 2019, representing a decrease of 8% and 2%, respectively. The decrease in our consolidated net sales reflects net sales from our Residential segment of between $107.6 million and $114.2 million for the two months ended May 31, 2020, as compared to $111.4 million for the two months ended May 31, 2019, with such change primarily due to higher organic net sales related to deck, rail and accessories, offset by a decline in trim sales. The decrease in our net sales also reflects net sales from our Commercial segment of between $17.3 million and $18.4 million, as compared to $24.4 million for the two months ended May 31, 2019, with such decrease primarily due to declining sales in our Vycom business.

For the two months ended May 31, 2020, we estimate our net loss to be in the range of $2.1 million to $2.5 million, as compared to a net loss of $5.3 million for the two months ended May 31, 2019. This decrease in net loss was primarily due to improvements in gross margins and reduced spending on strategic initiatives.



 

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For the two months ended May 31, 2020, we estimate our Adjusted EBITDA to be in the range of $28.7 million to $33.8 million, as compared to $28.3 million for the two months ended May 31, 2019, representing an increase of 1% to 20%.

The following table provides a preliminary reconciliation of preliminary estimated net income, the most directly comparable financial measure calculated in accordance with GAAP, to preliminary estimated Adjusted EBITDA for the two months ended May 31, 2020, and a reconciliation of actual net income to actual Adjusted EBITDA for the two months ended May 31, 2019.

 

     Two Months Ended  
     May 31, 2020
(Estimated)
    May 31, 2019
(Actual)
 
(U.S. dollars in thousands)    Low     High        
      

Net income (loss)

   $ (2,100   $ (2,500   $ (5,319

Interest expense

     14,300       16,800       14,330  

Depreciation and amortization

     16,300       19,200       15,922  

Tax benefit

     (1,300     (1,500     (848

Share-based compensation costs

     500       600       654  

Business transformation costs(1)

     100       100       1,807  

Acquisition costs(2)

     100       200       348  

Initial public offering costs

     800       900       1,269  

Other costs(3)

     —         —         115  
  

 

 

   

 

 

   

 

 

 

Total adjustments

     30,800       36,300       33,597  
  

 

 

   

 

 

   

 

 

 
Adjusted EBITDA    $28,700     $33,800     $ 28,278  
  

 

 

   

 

 

   

 

 

 

 

 

(1)

Business transformation costs reflect consulting and other costs related to repositioning of our brands, compensation costs related to the transformation of the senior management team and other integration-related costs. Consulting and other costs related to repositioning of our brands were $0.4 million for the two months ended May 31, 2019; compensation costs related to the transformation of the senior management team are estimated to be approximately $0.1 million for the two months ended May 31, 2020 and were $0.1 million for the two months ended May 31, 2019; start-up costs of our new recycling facility of $1.0 million for the two months ended May 31, 2019; and other integration-related costs were $0.3 million for the two months ended May 31, 2019.

(2)

Acquisition costs reflect costs directly related to completed acquisitions. Acquisition costs are estimated to be in the range of $0.1 million to $0.2 million for the two months ended May 31, 2020 and were $0.3 million for the two months ended May 31, 2019.

(3)

Other costs reflect costs for legal defense of $0.1 million for the two months ended May 31, 2019.

The unaudited, preliminary information is presented for informational purposes only and does not purport to represent the company’s financial condition or results of operations for any future period. As a result, prospective investors should exercise caution in relying on this information and should not draw any inferences from this information regarding financial or operating data not provided.



 

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Risk Factors

Investing in our Class A common stock involves risks, which are discussed more fully under “Risk Factors.” You should carefully consider all the information in this prospectus, including under “Risk Factors,” before making an investment decision. These risks include, but are not limited to, the following:

 

   

our business, financial condition and results of operations are being, and are expected to continue to be, adversely affected by the current COVID-19 public health pandemic;

 

   

demand for our products is significantly influenced by general economic conditions and trends in consumer spending on outdoor living and home exteriors, and adverse trends in, among other things, the health of the economy, repair and remodel and new construction activity, industrial production and institutional funding constraints;

 

   

we compete against other manufacturers of (i) engineered and composite products; and (ii) products made from wood, metal and other traditional materials;

 

   

the seasonal nature of certain of our products and the impact that changes in weather conditions and product mix may have on our sales;

 

   

our ability to develop new and improved products and effectively manage the introduction of new products;

 

   

our ability to effectively manage changes in our manufacturing process resulting from cost savings and integration initiatives and the introduction of new products;

 

   

risks related to our ability to accurately predict demand for our products and risks related to our ability to maintain our relationships with key distributors or other customers;

 

   

risks related to shortages in supply, price increases or deviations in the quality of raw materials;

 

   

our ability to retain management;

 

   

risks related to acquisitions or joint ventures we may pursue;

 

   

our ability to maintain product quality and product performance at an acceptable cost, and potential exposures resulting from our product warranties;

 

   

our ability to ensure that our products comply with local building codes and ordinances;

 

   

risks arising from the material weaknesses we have identified in our internal control over financial reporting and any failure to remediate these material weaknesses;

 

   

our ability to maintain an effective system of internal controls and produce timely and accurate financial statements or comply with applicable regulations;

 

   

our ability to protect our intellectual property rights;

 

   

the increased expenses associated with being a public company;

 

   

risks associated with our substantial indebtedness and debt service;

 

   

our reliance on dividends, distributions and other payments from our subsidiaries to meet our obligations;

 

   

the continuing control after this offering of our company, including the right to designate individuals to be included in the slate of nominees for election to our board of directors, by our Sponsors, whose interests may conflict with our interests and those of other stockholders;

 

   

our status as a “controlled company” within the meaning of the NYSE rules, and our exemption from certain corporate governance requirements; and

 

   

certain provisions in our certificate of incorporation and our bylaws that may delay or prevent a change of control.



 

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Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

reduced obligations with respect to financial data, including presenting only two years of audited financial statements and only two years of selected financial data;

 

   

an exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

   

reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements, and registration statements; and

 

   

exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards, and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies or that have opted out of using such extended transition period, which may make comparison of our financial statements with those of other public companies more difficult. We may take advantage of these reporting exemptions until we no longer qualify as an emerging growth company, or, with respect to adoption of certain new or revised accounting standards, until we irrevocably elect to opt out of using the extended transition period.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We may choose to take advantage of some but not all of these reduced reporting burdens.

Our Sponsors

Prior to this offering, Ares and OTPP, and, together with Ares, the Sponsors, indirectly owned substantially all of our limited liability company interests. Following the Corporate Conversion, each of the Sponsors will receive a number of shares of our common stock in direct proportion to their respective interests in AOT Building Products, L.P., our indirect parent, or the Partnership. In order to ensure compliance with the requirements of certain provisions of the Pension Benefits Act (Ontario) applicable to OTPP, pursuant to which OTPP is restricted from investing monies of the Ontario Teachers’ Pension Plan, directly or indirectly, in securities of a corporation to which are attached more than 30% of the votes that may be cast for the election of directors of the corporation, OTPP will hold a number of shares of our Class A common stock representing 30% or less of the total number of shares of Class A common stock outstanding. The remaining shares of common stock to be received by OTPP following the Corporation Conversion will be shares of our Class B common stock. The relative economic interests of Ares and OTPP will not be altered as a result of the Corporate Conversion or our dual-class common stock structure. After giving effect to this offering and the Corporate Conversion, Ares and OTPP will hold 53,312,907 and 20,243,944 shares of our Class A common stock, respectively. OTPP will hold all of our Class B common stock. After giving effect to this offering and the Corporate Conversion, Ares and OTPP will hold approximately 37.6% and 37.6%, respectively, of our aggregate common stock.



 

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Our Sponsors will have significant power to control our affairs and policies, including with respect to the election of directors (and through the election of directors, the appointment of management). For a description of certain potential conflicts between the Sponsors and our other stockholders, see “Risk Factors—We continue to be controlled by the Sponsors, and the Sponsors’ interests may conflict with our interests and the interests of other stockholders.” For a description of the Sponsors’ ownership interests in us and their rights with respect to such ownership interests, including the right to designate individuals to be included in the slate of nominees for election to our board of directors, see “Certain Relationships and Related Party Transactions,” “Principal Stockholders” and “Description of Capital Stock.”

Corporate Conversion

We currently operate as a Delaware limited liability company under the name CPG Newco LLC. CPG Newco LLC is a holding company which holds all of the limited liability company interests in CPG International LLC, the entity which directly and indirectly holds all of the equity interests in our operating subsidiaries. Prior to the effectiveness of the registration statement of which this prospectus forms a part, CPG Newco LLC will convert into a Delaware corporation pursuant to a statutory conversion and will change its name to The AZEK Company Inc. In addition, a special purpose entity, CPG Holdco LLC, which was formed at the time of the acquisition of CPG Newco LLC solely for the purpose of holding membership interests in CPG Newco LLC and that will continue to hold such interests until the Corporate Conversion, will be merged with and into us. In this prospectus, we refer to all of the transactions related to our conversion into a corporation and the merger described above as the Corporate Conversion. For more information, see “Corporate Structure” and “Corporate Conversion.”



 

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Corporate Structure

The following diagram sets forth a simplified view of our corporate structure and our principal indebtedness as of March 31, 2020 after the consummation of the Corporate Conversion, the redemption of the 2013 Notes, our repayment of $15.0 million of the outstanding principal amount under our Revolving Credit Agreement on May 14, 2020 and the consummation of this offering and giving effect to the use of proceeds therefrom, including the redemption of the Senior Notes and the prepayment of approximately $198.3 million of the outstanding principal amount under our first lien credit facility, or the Term Loan Credit Agreement, which currently bears interest at a rate of 5.93% per annum; for more information, see “Description of Certain Indebtedness.” This chart is for illustrative purposes only and does not represent all legal entities affiliated with, or all obligations of, the entities depicted. Our indirect subsidiaries are omitted.

 

 

LOGO

 

 

 

(1)

Prior to the Corporate Conversion, AZEK was named CPG Newco LLC.

(2)

The Revolving Credit Agreement provides for commitments, as of March 31, 2020, of up to $150.0 million, subject to our option to increase the commitments by up to $100.0 million, subject to certain conditions.

(3)

The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. See “Description of Capital Stock.”

(4)

CPG International LLC is also the issuer of the Senior Notes expected to be redeemed following the consummation of this offering.

Corporate Information

CPG Newco LLC (formerly known as AOT Building Products Newco LLC) was formed on August 15, 2013 in connection with the Sponsors’ acquisition of CPG International LLC. Upon completion of this offering, we will be a Delaware corporation, and we will change our name to The AZEK Company Inc. Our principal executive offices are located at 1330 W Fulton Street, Suite 350, Chicago, Illinois 60607, and our telephone number is 877-275-2935. Our website address is www.AzekCo.com. Information contained on, or that can be accessed through, our website is not part of and is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.



 

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“The AZEK Company,” “AZEK,” “TimberTech,” “TimberTech EDGE,” “TimberTech PRO,” “TimberTech AZEK,” “PaintPro,” “Harvest Collection,” “Arbor Collection,” “Vintage Collection,” “ULTRALOX,” “VERSATEX,” “Vycom,” “Impression Rail Express,” “Scranton Products,” the AZEK logo, the TimberTech logo, the ULTRALOX logo, the VERSATEX Logo, the Vycom logo, the Scranton Products logo and other trademarks or service marks of The AZEK Company and its direct and indirect subsidiaries appearing in this prospectus are the property of The AZEK Company. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus generally appear without the ® or symbols.



 

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The Offering

 

Class A common stock offered by us

31,250,000 shares

 

Class A common stock to be outstanding after this offering

108,888,187 shares

 

Class B common stock to be outstanding after this offering

33,068,963 shares

 

Total Class A common stock and Class B common stock to be outstanding after this offering

141,957,150 shares

 

Option to purchase additional shares of Class A common stock offered by us

4,687,500 shares

 

Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $577.1 million (or approximately $665.4 million if the underwriters exercise their option to purchase additional shares of Class A common stock from us in full), based on an assumed initial public offering price of $20.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use net proceeds received by us from this offering first to redeem the Senior Notes, plus accrued and unpaid interest thereon, and then to prepay approximately $198.3 million of the outstanding principal amount under our Term Loan Credit Agreement. As of May 28, 2020, $350.0 million in aggregate principal amount of Senior Notes was outstanding. We intend to redeem the Senior Notes at a redemption price equal to 107.125% of the aggregate principal amount outstanding plus accured and unpaid interest to the redemption date; see “Description of Certain Indebtedness—Senior Notes.” As of March 31, 2020, we had $804.3 million in principal amount outstanding under our Term Loan Credit Agreement.

 

  We will use any additional net proceeds raised in this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of any additional net proceeds we receive from this offering for acquisitions or other strategic investments, although we do not currently have any specific plans to do so. See “Use of Proceeds.”

 

Voting and conversion rights

Following this offering, we will have two classes of common stock: Class A common stock and Class B common stock. The rights of the



 

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holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion.

 

  Each share of our Class A common stock entitles its holder to one vote per share on all matters to be voted upon by the stockholders. Each share of our Class B common stock entitles its holder to one vote per share on all matters to be voted upon by stockholders, except with respect to the election, removal or replacement of directors. Shares of our Class B common stock will not entitle the holders thereof to vote with respect to the election, removal or replacement of directors. Holders of Class A common stock and Class B common stock will generally vote together as a single class on all matters other than with respect to the election, removal or replacement of directors.

 

  Holders of our shares of Class B common stock may convert their shares of Class B common stock into shares of our Class A common stock on a one-for-one basis, in whole or in part, at any time and from time to time at their option. Additionally, each share of Class A common stock is convertible into one share of Class B common stock at any time and from time to time at the option of the holder so long as such holder holds one or more shares of Class B common stock at the time of conversion. OTPP will hold all shares of our Class B common stock outstanding immediately following this offering. See “Description of Capital Stock.”

 

Dividend policy

We currently do not anticipate paying any cash dividends after this offering and for the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including restrictions in our current and future debt instruments, our future earnings, capital requirements, financial condition, future prospects, and applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits. See “Dividend Policy.”

 

Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our Class A common stock.

 

Controlled company

Following this offering, affiliates of the Sponsors will continue to control a majority of the voting power of our outstanding voting stock, and as a result we will be a controlled company within the meaning of the NYSE corporate governance standards.

 

Proposed NYSE symbol

“AZEK”

All references to common stock that are not qualified by reference to a particular class refer to our Class A common stock and our Class B common stock collectively.



 

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In addition, unless otherwise expressly stated or the context otherwise requires, the information in this prospectus assumes:

 

   

the split of our single unit, representing all of our limited liability company interests, into 108,162,741 units, consisting of 75,093,778 Class A units and 33,068,963 Class B units;

 

   

the completion of the Corporate Conversion, including:

 

   

our merger with CPG Holdco LLC, our direct parent entity, following which we will be the surviving entity; and

 

   

a one-for-one conversion of our Class A units into shares of Class A common stock and a one-for-one conversion of our Class B units into shares of Class B common stock;

 

   

the distribution by the Partnership of shares of Class A common stock and shares of Class B common stock to the Sponsors and the other holders of partnership interests in the Partnership as described in “Corporate Structure” and “Corporate Conversion;”

 

   

no exercise of the underwriters’ option to purchase additional shares of our common stock; and

 

   

the effectiveness of our certificate of incorporation and bylaws in connection with the completion of this offering.

Prior to the consummation of this offering, we will have an aggregate of 110,707,150 shares of Class A common stock and Class B common stock outstanding, (i) after giving effect to the split of our units described above and the Corporate Conversion and (ii) reflecting the 2,544,409 vested shares of Class A common stock, based on the mid-point of the estimated offering price range set forth on the cover page of this prospectus, issued in exchange for vested Profits Interests of the Partnership (but not including the 5,144,202 unvested shares of Class A common stock, based on the mid-point of the estimated offering price range set forth on the cover page of this prospectus, issued in exchange for unvested Profits Interests). See “Executive Compensation—Additional Narrative Disclosures—Profits Interests Conversion” for a description of the conversion of the Profits Interests awards into shares of Class A common stock in connection with the offering and the grant to current employees who receive shares of Class A common stock in exchange for Profits Interests of options to purchase shares of Class A common stock.

Unless we indicate otherwise or the context otherwise requires, all information in this prospectus does not give effect to or reflect the following shares (all of which are calculated based on an assumed initial public offering price of $20.00 per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus):

 

   

5,144,202 unvested shares of Class A common stock issued in exchange for unvested Profits Interests;

 

   

4,710,177 shares of Class A common stock issuable upon exercise of options, with an exercise price that will be equal to the initial public offering price per share, which options will be issued in connection with the exchange of Profits Interests for shares of Class A common stock (1,030,833 shares will be issuable in respect of vested options and 3,679,344 shares will be issuable in respect of unvested options);

 

   

236,843 shares of Class A common stock issuable upon the vesting of restricted stock units and 968,423 shares of Class A common stock issuable upon exercise of options, with an exercise price that will be equal to the initial public offering price per share, in each case that will be granted to certain directors, officers and employees in connection with this offering;

 

   

4,555,642 shares of Class A common stock available for further issuance under our 2020 Omnibus Incentive Plan after the completion of this offering. See “Executive Compensation—Post Offering Compensation—2020 Omnibus Incentive Compensation Plan.”



 

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Summary Consolidated Financial Data

The summary consolidated statements of income data and summary consolidated statements of cash flow data for fiscal years 2019 and 2018 and the consolidated balance sheet data as of September 30, 2019 have been derived from our Consolidated Financial Statements included elsewhere in this prospectus. The summary consolidated statement of income data and summary consolidated statement of cash flow data for fiscal year 2017 have been derived from our Consolidated Financial Statements not included in this prospectus. The summary consolidated statements of income data and summary consolidated statements of cash flow data for the six months ended March 31, 2020 and 2019 and the summary consolidated balance sheet data as of March 31, 2020 have been derived from our unaudited Consolidated Financial Statements included elsewhere in this prospectus. In the opinion of management, our unaudited Consolidated Financial Statements were prepared on the same basis as our audited Consolidated Financial Statements and include all adjustments necessary for a fair presentation of the financial information set forth in those statements.

Our historical results are not necessarily indicative of future operating results and our results for the six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year or any other period. Because this table is a summary and does not provide all of the data contained in our Consolidated Financial Statements, it should be read together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization” and our Consolidated Financial Statements and related notes included elsewhere in this prospectus.

 

    Six Months Ended March 31,     Years Ended September 30,  
(In thousands, except unit/share and per unit/
share data)
  2020     2019     2019     2018     2017  

Consolidated Statements of Income Data(1):

         

Net Sales

  $ 411,628     $ 357,362     $ 794,203     $ 681,805     $ 632,631  

Cost of Sales

    (280,965     (249,051     (541,006     (479,769     (463,643
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    130,663       108,311       253,197       202,036       168,988  

Selling, general and administrative expenses

    (93,166     (86,803     (183,572     (144,688     (147,003

Impairment of goodwill

    —         —         —         —         (32,200

Impairment of property, plant and equipment

    —         —         —         —         (11,380

Other general expenses

    (5,093     (4,158     (9,076     (4,182     —    

Gain (loss) on disposal of property, plant and equipment

    (28     (1,436     (1,495     (791     (4,288
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    32,376       15,914       59,054       52,375       (25,883

Interest expense

    (39,734     (41,773     (83,205     (68,742     (61,577

Loss before income taxes

    (7,358     (25,859     (24,151     (16,367     (87,460

Income tax (provision) benefit

    1,600       5,072       3,955       23,112       20,049  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (5,758   $ (20,787   $ (20,196   $ 6,745     $ (67,411
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings (loss) attributable to units outstanding

  $ (0.05   $ (0.19   $ (0.19   $ 0.06     $ (0.62
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted weighted-average units outstanding

    108,162,741       108,162,741       108,162,741       108,162,741       108,162,741  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted pro forma earnings (loss) per share attributable to common stockholders(2) (unaudited)

  $ (0.05   $ (0.18   $ (0.18   $ 0.06     $ (0.61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted pro forma weighted-average common shares outstanding(2) (unaudited)

    114,333,513       112,397,744       113,458,316       111,520,639       109,972,961  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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     Six Months Ended
March 31,
    Years Ended September 30,  
(In thousands, except unit/share and per unit/share data)    2020     2019     2019     2018     2017  

Consolidated Statements of Cash Flow Data:

          

Net cash provided by (used in) operating activities

   $ (68,032   $ (48,521   $ 94,872     $ 67,302     $ 57,368  

Net cash provided by (used in) investing activities

     (60,240     (33,208     (62,935     (335,682     (22,511

Net cash provided by (used in) financing activities

     117,023       19,802       (8,273     248,742       (12,104

Purchases of property, plant and equipment

     (42,606     (33,233     (63,006     (42,758     (22,511

Other Financial Data:

          

Adjusted Gross Profit(3)

   $ 161,755     $ 137,681     $ 314,858     $ 254,075     $ 224,516  

Adjusted Net Income(4)

     37,916       24,067       72,277       59,226       42,812  

Adjusted EBITDA(5)

     89,624       74,294       179,566       150,065       131,266  

Adjusted EBITDA Margin(6)

     21.8     20.8     22.6     22.0     20.7

 

(1)

In connection with the completion of this offering, based on an assumed public offering price of $20.00 per share, which is the mid-point of the price range set forth on the cover of this prospectus, we estimate that we will incur aggregate equity compensation expense in the range of $114 million to $134 million as a result of the recognition of previously unrecognized compensation expense and one-time grants of options and restricted stock units to our directors, executive officers and employees. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-Based Compensation.”

(2)

Pro forma to reflect the Corporate Conversion, without giving effect to the issuance of shares of Class A common stock in this offering. The pro forma information also includes the effects of the vested shares of Class A common stock issued in exchange for vested Profits Interests of the Partnership.

(3)

We define Adjusted Gross Profit as gross profit before depreciation and amortization, business transformation costs and acquisition costs. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

(4)

We define Adjusted Net Income as net income (loss) before depreciation and amortization, share-based compensation costs, asset impairment costs, business transformation costs, acquisition costs, initial public offering costs, capital structure transaction costs and certain other costs. In addition, Adjusted Net Income for fiscal 2018 excludes the net benefit related to the remeasurement of our deferred tax assets and deferred tax liabilities as a result of the Tax Act. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

(5)

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 certain items of expense and income. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

(6)

Adjusted EBITDA Margin is equal to Adjusted EBITDA divided by net sales. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

 

     2015-2019
CAGR
    Years Ended
September 30,
 
    2019     2018     2017  

Net Sales Growth:

        

Residential Segment

     12.3     20.9     7.9     7.2

Deck, Rail and Accessories

     11.2     9.4     7.6     8.3

Exteriors

     15.1     60.3     9.1     3.4

Commercial Segment

     1.4     (0.8 )%      7.1     (0.8 )% 


 

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     As of March 31, 2020  
     Actual      Pro forma(1)      Pro forma
as adjusted(2)(3)(4)
 
(In thousands)                     

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 94,698        99,298        105,027  

Working capital

     261,052        270,202        270,202  

Total assets

     1,886,071        1,890,671        1,888,959  

Total current liabilities

     120,163        115,613        113,901  

Total long-term debt – less current portion

     1,229,844        1,241,105        705,850  

Total member’s/stockholders’ equity

     485,406        483,295        1,018,550  

 

(1)

Pro forma consolidated balance sheet data reflects (i) our redemption of all outstanding 2013 Notes, including a loss on extinguishment of approximately $2 million to be recorded in the three months ending June 30, 2020; (ii) the issuance of the Senior Notes and our receipt of $16.5 million of gross proceeds from the offering of the Senior Notes after the redemption of the 2013 Notes (excluding amounts applied to accrued interest) and our repayment of $15.0 million of the outstanding principal amount under our Revolving Credit Agreement on May 14, 2020; (iii) our payment of $4.6 million of accrued and unpaid interest on the 2013 Notes on May 12, 2020 in connection with their redemption described in clause (i); and (iv) our payment of the initial purchasers’ discount and other fees and expenses of $7.4 million in connection with the offering of the Senior Notes.

(2)

Pro forma as adjusted consolidated balance sheet data reflects, in addition to the pro forma adjustments described in footnote (1), (i) the sale of 31,250,000 shares of our Class A common stock in this offering, assuming an initial public offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus; (ii) our redemption of all outstanding Senior Notes, including an estimated loss on extinguishment of approximately $36 million to be recorded in the three months ending June 30, 2020; (iii) our receipt of $0.0 million of gross proceeds from this offering after the redemption of the Senior Notes (excluding amounts applied to accrued interest) at a redemption price of 107.125% of the aggregate principal amount of the Senior Notes and our prepayment of $198.3 million of the outstanding principal amount under our Term Loan Credit Agreement; (iv) our payment of $3.8 million of accrued and unpaid interest on the Senior Notes in connection with their redemption described in clause (ii) assuming a redemption date of June 23, 2020; and (v) our payment of the estimated underwriting discount and commissions and other fees and expenses of this offering of $47.9 million. Pro forma as adjusted consolidated balance sheet data also reflects compensation expense expected to be recognized upon the consummation of this offering as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-Based Compensation”.

(3)

A $1.00 increase (decrease) in the assumed initial public offering price of $20.00 per share of Class A common stock (the midpoint of the estimated price range set forth on the cover page of this prospectus) would increase (decrease) total stockholders’ equity by $29.5 million and would decrease (increase) total long-term debt—less current portion by $29.5 million, assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of Class A common stock offered by us would increase (decrease) total stockholders’ equity by $18.9 million and would decrease (increase) total long-term debt—less current portion by $18.9 million, assuming the assumed initial public offering price of $20.0 per share remains the same, and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us.

(4)

Pro forma as adjusted cash and cash equivalents reflects $5.7 million of deferred offering costs that have been paid as of March 31, 2020 and $6.3 million of other deferred offering costs.



 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all of the other information contained in this prospectus, including our Consolidated Financial Statements and related notes included elsewhere in this prospectus, before making an investment decision. In addition to the risks relating to the COVID-19 pandemic that are specifically described in these Risk Factors, the effects of the COVID-19 pandemic may also have the effect of significantly heightening many of the other risks associated with our business and an investment in our Class A common stock, including the other risks described in this prospectus. The occurrence of any of the following risks, or additional risks not presently known to us or that we currently believe to be immaterial, could materially and adversely affect our business, financial condition, results of operations and prospects. In such case, the trading price of our Class A common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business and Industry

Our business, financial condition and results of operations are being, and are expected to continue to be, adversely affected by the current COVID-19 public health pandemic.

Any outbreaks of contagious diseases, public health epidemics or pandemics and other adverse public health developments could have a material adverse effect on our business, financial condition and results of operations. The COVID-19 pandemic, and the reactions of governmental and other authorities to contain, mitigate or combat the pandemic, which have severely restricted the level of economic activity around the world, have impacted, and are expected to continue to impact, our operations, and the nature, extent and duration of the impact of COVID-19 or any future disease or adverse health condition is highly uncertain and beyond our control. In response to the COVID-19 pandemic, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations.

Although we have implemented measures to mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations, including reducing our production and expenses, these measures may not fully mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations. We cannot predict the degree to, or the period over, which we will be affected by the COVID-19 pandemic and resulting governmental and other measures.

We expect that the economic effects of the COVID-19 pandemic will likely continue to adversely affect demand for our products over the balance of fiscal 2020. To address the anticipated reduction in demand for our products, we are engaging directly with our distributors to share information on market demand and ensure supply and inventory levels are appropriate. We are also reducing production across our manufacturing sites to align our output with potential reductions in demand during the balance of the year. We anticipate that distributors and dealers may choose to delay the purchase of our products, and homeowners and our industrial and commercial customers may choose to delay new construction or repair and remodeling activity, in response to the COVID-19 pandemic and the measures to contain its spread.

In addition, our supply chain is largely concentrated in the United States, and although it has not been significantly affected by the COVID-19 pandemic to date, we may experience disruptions or delays in our supply chain in connection with the pandemic in the future, which may result in the need to seek alternate suppliers. Alternate suppliers may be more expensive, may not be available or may encounter delays in shipments to us, which would affect our business, financial condition and results of operations. We cannot estimate the extent and duration of the disruption to our supply chain, or the significance of the related financial impact. Should any such disruption continue for an extended period of time, the impact could have a material adverse effect on our business, financial condition and results of operations.

 

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On March 16, 2020, we borrowed $89.0 million under the Revolving Credit Agreement to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic in addition to our other borrowings under the Revolving Credit Agreement of $40.0 million in the aggregate during the three months ended March 31, 2020. 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. We cannot assure you if our access to capital would continue to satisfy our needs under the impacts of the COVID-19 pandemic.

We expect that the COVID-19 pandemic will adversely affect many aspects of our business, including, but not limited to, the following:

 

   

We expect to experience reductions in demand for many of our products due to the economic uncertainty resulting from the COVID-19 pandemic, an increase in unemployment rates, and distributors’, dealers’ suppliers’, homeowners’ and other third parties’ diminished financial condition or financial distress.

 

   

Our distributors and dealers may be unable to meet their payment obligations to us in a timely manner. Further, other third parties, such as suppliers and other outside business partners, may experience significant disruptions in their ability to satisfy their obligations with respect to us, or they may be unable to do so altogether.

 

   

Measures that we have taken to address the COVID-19 pandemic, including, among other things, providing additional safety equipment, reducing our production, encouraging our employees who are able to work remotely to do so, enacting and enforcing employee physical distancing protocols in our factories and reducing the need for face-to-face interactions, are reducing the efficiency of our operations.

 

   

Additionally, we may be exposed to increased cybersecurity risks as a result of remote working requirements.

 

   

Illness, travel restrictions or other workforce disruptions could negatively affect our supply chain, our ability to timely and satisfactorily meet our customers’ demands or our other business processes. Even after the COVID-19 pandemic subsides, we could experience a longer-term impact on our operating expenses, including as a result of, among other things, the need for enhanced health and hygiene requirements in our manufacturing facilities and in our corporate offices or the periodic revival of physical or social distancing or other measures in one or more regions, including the states where our manufacturing facilities are located, in attempts to counteract or prevent future outbreaks.

 

   

We have reduced the number of employees that we employ in order to reduce our operating expenses. We may experience difficulties associated with hiring additional employees or replacing employees. Increased turnover rates of our employees could increase operating costs and create challenges for us in maintaining high levels of employee awareness of, and compliance with, our internal procedures and external regulatory compliance requirements, in addition to increasing our recruiting, training and supervisory costs.

 

   

In addition to existing travel restrictions implemented in response to the COVID-19 pandemic, states and other jurisdictions may continue to close borders, impose prolonged quarantines and further restrict travel and business activity, which could materially impair our ability to support our operations and customers, to source supplies through our supply chain and to identify, pursue and capture new business opportunities, and which could continue to restrict the ability of our employees to access their workplaces. We also face the possibility of increased overhead or other expenses resulting from compliance with any future government orders or other measures enacted in response to the COVID-19 pandemic.

 

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Our management of the impact of COVID-19 has required, and will continue to require, significant investment of time by our management and employees as well as other resources. The focus on managing and mitigating the impacts of COVID-19 on our business will likely cause us to divert or delay the application of our resources toward new initiatives, including the development of new products, which may adversely impact our financial condition and results of operations in future periods.

The timing for us resuming operations at or near the levels of operations experienced before the COVID-19 pandemic depends on numerous factors beyond our control, including, among other things: (1) the duration of, and any revisions in, governmental quarantine, shelter-in-place or similar social distancing orders or guidelines; (2) the occurrence and magnitude of future outbreaks; (3) the availability of vaccines or other medical remedies and preventive measures; and (4) broader economic conditions, including unemployment levels and the reaction of consumers to potentially longer-term economic uncertainty, which may adversely impact our financial condition and results of operations in future periods.

Additionally, although we are reviewing any available benefits under the federal and state relief and stimulus legislation and programs, including, among other things, those under the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, at this time, we do not know whether we will be able to access any such benefits in a manner that is advantageous to us or at all.

Demand for our products is significantly influenced by general economic conditions and trends in consumer spending on outdoor living and home exteriors, and adverse trends in, among other things, the health of the economy, repair and remodel and new construction activity, industrial production, consumer confidence and discretionary spending and institutional funding constraints could have a material adverse effect on our business.

Demand for our products is significantly influenced by a number of economic factors affecting our customers, including distributors, dealers, contractors, architects, builders, homeowners and institutional and commercial consumers. Demand for our products depends on the level of residential and commercial improvement and renovation and new construction activity, and, in particular, the amount of spending on outdoor living spaces and home exteriors. Home and commercial renovation and improvement and new construction activity are affected by, among other things, interest rates, consumer confidence and spending habits, demographic trends, housing affordability levels, unemployment rates, institutional funding constraints, industrial production levels, tariffs and general economic conditions.

For example, in our Residential segment, sales of our products depend primarily on the level of repair and remodel activity and, to a lesser extent, new construction activity. Accordingly, increases in interest rates or the reduced availability of financing can reduce the level of home improvement and new construction activity and the demand for our products. In addition, the residential repair and remodel market depends in part on home equity financing, and accordingly, the level of equity in homes will affect consumers’ ability to obtain a home equity line of credit and engage in renovations that would result in purchases of our products. Accordingly, a weakness in home prices may result in a decreased demand for our residential products.

Many of our residential products are impacted by consumer demand for, and spending on, outdoor living spaces and home exteriors. For example, sales of our deck and rail products depend on lifestyle and architectural trends and the extent to which consumers prioritize spending to enhance outdoor living spaces for their homes. While we believe consumer preferences have increased spending on outdoor living and home exteriors in recent years, the level of spending could decrease in the future. Decreased spending on outdoor living spaces and home exteriors generally or as a percentage of home improvement activity may decrease demand for our deck, railing and trim products.

Demand for our products in our Commercial segment is affected by the level of commercial and governmental construction and renovation activity. The levels of commercial and governmental construction and

 

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renovation activity are affected by the levels of interest rates, availability of financing for commercial and industrial projects, the general business environment and the availability of governmental funding. Sales of products by our Commercial segment include sales for use in institutions, such as universities and schools, and in federal, state and local government buildings, which depend on federal, state and local funding for construction and renovation projects. Sales to institutions that depend on public funding are affected by factors that may impose constraints on funding availability for construction and renovation projects, including increased operational costs, budget cuts by federal, state and local governments, including as a result of lower than anticipated tax revenues, increased limitations on federal spending or government shutdowns. Sales to commercial establishments depend on, among other things, general levels of industrial production and business growth and the performance of the various markets in which our commercial end customers operate.

Adverse trends in any of the foregoing factors could reduce our sales and have a material adverse effect on our business, financial condition and results of operations. Such factors could also alter the balance of our Residential and Commercial sales or the balance of our product sales within either such segment. In light of differing margins, changes in the relative amount and type of residential and commercial industrial activity or the mix of products sold may have an impact on our business and cause our revenues and profitability to fluctuate from period to period.

We operate in a competitive business environment. If we are unable to compete effectively our sales would suffer and our business, financial condition and operating results would be adversely affected.

We operate in a competitive business environment, and we compete with multiple companies with respect to each of our products. While we have longstanding business relationships with many of our distributors, dealers and contractors, we generally do not have long-term contracts with these customers. Accordingly, any failure to compete effectively, including as a result of the various factors described below, could cause our customers to cease purchasing our products or rapidly decrease our sales.

Our residential products compete primarily with wood products that comprise the majority of decking, railing, trim and related market sales. We also compete with metal products and with engineered products sold by other companies. In our Commercial segment, we compete in several highly fragmented markets. Our Vycom products compete with products sold into narrow market segments with a wide range of end uses through specialized distribution networks that vary depending on the particular end use. Products made by Scranton Products compete with bathroom partitions, lockers and storage solutions sold at a wide range of prices and manufactured using a variety of materials.

Our business model relies on the continued conversion in demand from traditional wood products to our engineered products, and our business could suffer if this conversion does not continue in the future. A number of suppliers of wood and wood composite deck, trim and rail products have established relationships with contractors, builders and large home improvement retailers, and, to compete successfully, we must expand and strengthen our relationships with those parties. We must also compete successfully with products from other manufacturers that offer alternatives to wood and wood composite products, including by developing competitive new products and by responding successfully to new products introduced, and pricing and other competitive actions taken, by competitors.

Some of our competitors have financial, production, marketing and other resources that are significantly greater than ours. Consolidation by industry participants could further increase their resources and result in competitors with expanded market share, larger customer bases, greater diversified product offerings and greater technological and marketing expertise, which may allow them to compete more effectively against us. Moreover, our competitors may develop products that are superior to our products (on a price-to-value basis or otherwise) or may adapt more quickly to new technologies or evolving customer requirements. Technological advances by our competitors may lead to new manufacturing techniques and make it more difficult for us to compete.

 

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Our quarterly operating results may fluctuate as a result of seasonality, changes in weather conditions and changes in product mix.

Our quarterly operating results during the fiscal year ending September 30, 2020 and in future fiscal years may fluctuate or otherwise be significantly affected as a result of the COVID-19 pandemic. The effect of the pandemic may exceed the quarterly changes in our operating results that we have typically experienced from seasonality, weather conditions and product mix.

We have typically experienced moderately higher levels of sales of our residential products in the second fiscal quarter of the year as a result of our “early buy” sales and extended payment terms typically available during the second fiscal quarter of the year. As a result of these extended payment terms, our accounts receivable have typically reached seasonal peaks at the end of the second fiscal quarter of the year, and our net cash provided by operating activities has typically been lower in the second fiscal quarter relative to other quarters. Our sales are also generally impacted by the number of days in a quarter or a year that contractors and other professionals are able to install our products. We have generally experienced lower levels of sales of residential products during the first fiscal quarter due to adverse weather conditions in certain markets, which typically reduces the construction and renovation activity during the winter season. Although our products can be installed year-round, unusually adverse weather conditions can negatively impact the timing of the sales of certain of our products, causing reduced sales and negatively impacting profitability when such conditions exist. Our residential products are generally purchased shortly before installation and used in outdoor environments. As a result, there is a correlation between the amount of products we sell and weather conditions during the time they are to be installed. Adverse weather conditions may interfere with ordinary construction, delay projects or lead to cessation of construction involving our products. Prolonged adverse weather conditions could significantly reduce our sales in one or more periods. These conditions may shift sales to subsequent reporting periods or decrease overall sales, given the limited outdoor construction season in many locations. In addition, we have experienced higher levels of sales of our engineered bathroom partition products and our locker products during the second half of our fiscal year, which includes the summer months during which schools are typically closed and therefore more likely to be undergoing remodel activities. These factors can cause our operating results to fluctuate on a quarterly basis.

Our operating results may also fluctuate due to changes in the mix of products sold. We sell products at different prices, composed of different materials and involving varying levels of manufacturing complexity. Changes in the mix of products sold from period to period may affect our average selling price, cost of sales and gross margins.

If we fail to develop new and improved products successfully, or fail to effectively manage the introduction of new products, our business will suffer.

Our continued success depends on our ability to predict the products that will be demanded by our customers and consumers, such as homeowners or commercial or industrial purchasers, and to continue to innovate and introduce improved products in our existing product lines and products in new product categories. We may not be successful in anticipating these needs or preferences or in developing new and improved products. If we do not respond effectively to changing market trends, demands and preferences and to actions by competitors by introducing competitive new products, our business, financial condition and results of operations would suffer.

Even if we do introduce new products in the market, consumers may not choose our new products over existing products. In addition, competitors could introduce new or improved products that would replace or reduce demand for our products or develop proprietary changes in manufacturing technologies that may render our products obsolete or too expensive to compete effectively. In addition, when we introduce new products, we must effectively anticipate and manage the effect of new product introductions on sales of our existing products. If new products displace sales of existing products more broadly or rapidly than anticipated, we may have excess inventory of existing products and be required to reduce prices on existing products, which could adversely affect our results of operations. As we continue to introduce new products at varying price points to broaden our

 

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product offerings to compete with products made with wood or other traditional materials across a wide range of prices, our overall gross margins may vary from period to period as a result of changes in product mix. Moreover, we may introduce new products with initially lower gross margins with the expectation that the gross margins associated with those products may improve over time as we improve our manufacturing efficiency for those products, and our results of operations would be adversely affected if we are unable to realize the anticipated improvements.

Although we are reducing our expansion and capital expenditures in response to the COVID-19 pandemic, in the past we have devoted, and in the future we expect to continue to devote, significant resources to developing new products. However, we cannot be sure that we will successfully complete the development and testing of new products and be able to release the products when anticipated or at all. From time to time, we may make investments in the development of products we ultimately determine not to release resulting in write-downs of inventory and related assets.

Our business would suffer if we do not effectively manage changes in our manufacturing processes resulting from growth of our business, cost savings and integration initiatives and the introduction of new technologies and products.

We continually review our manufacturing operations in an effort to achieve increased manufacturing efficiencies, integrate new technologies and to address changes in our product lines and in market demand. Periodic manufacturing integrations, realignments and cost savings programs and other changes have adversely affected, and could in the future adversely affect, our operating efficiency and results of operations during the periods in which such programs are being implemented. Such programs may include the addition of manufacturing lines and the consolidation, integration and upgrading of facilities, functions, systems and procedures, including the introduction of new manufacturing technologies and product innovations. These programs involve substantial planning, often require capital investments, and may result in charges for fixed asset impairments or obsolescence and substantial severance costs. Our ability to achieve cost savings or other benefits within the time frames we anticipate is subject to many estimates and assumptions, a number of which are subject to significant economic, competitive and other uncertainties. For example, we have made substantial investments to expand our recycling capabilities and to increase the use of reclaimed materials in our manufacturing processes. While we anticipate that enhancing these capabilities will ultimately decrease our costs, the introduction of these capabilities has required significant initial investment, and we cannot be certain we will realize the benefits of this initiative when anticipated or at all. If these investments and other changes are not effectively integrated into our manufacturing processes, we may suffer from production delays, lower efficiency and manufacturing yields, increased costs and reduced net sales.

We must also effectively address changes to our manufacturing operations resulting from growth of our business generally and introduction of new products. As we increase our manufacturing capacity to meet market demand or begin to manufacture new products at scale, we may face unanticipated manufacturing challenges as production volumes increase, new processes are implemented and new supplies of raw materials used in these products are secured. New products may initially be more costly and less efficient to produce than our existing products. In addition, we could experience delays in production as we increase our manufacturing capacity or begin to manufacture new products that may result in the products ordered by our customers being on back-order as initial production issues are addressed. As a result, increases in manufacturing capacity or the introduction of new products may initially be associated with lower efficiency and manufacturing yields and increased costs, including shipping costs to fill back-orders.

If we experience production delays or inefficiencies, a deterioration in the quality of our products or other complications in managing changes to our manufacturing processes, including those that are designed to increase capacity, enhance efficiencies and reduce costs or that relate to new products or technologies, we may not achieve the benefits that we anticipate from these actions when expected, or at all, and our operations could experience disruptions, our manufacturing efficiency could suffer and our business, financial condition and results of operations could be materially and adversely affected.

 

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Our sales and results of operations may suffer if we do not maintain our relationships with, forecast the demand of and make timely deliveries to our key distributors or other customers.

Our operations depend upon our ability to maintain our strong relationships with our network of distributors and dealers. Our top ten distributors collectively accounted for a majority of our net sales for the year ended September 30, 2019. Our largest distributor, Parksite Inc., accounted for approximately 20% of our net sales for the year ended September 30, 2019. While we have long-standing business relationships with many of our key distributors and our distribution contracts generally provide for exclusive relationships with respect to certain products within certain geographies, these contracts typically permit the distributor to terminate for convenience on several months’ notice. The loss of, or a significant adverse change in, our relationships with one or more of our significant distributors could materially reduce our net sales.

Distributors and dealers that sell our products, are sensitive to meeting the demands of their end customers on a timely basis. Dealers that sell our products typically place orders with our distributors that need to be filled in a short time frame and these dealers typically do not have an exclusive relationship with us. Purchases by our distributors and dealers are affected by their individual decisions on the levels of inventory they carry, their views on product demand, their financial condition and the manner in which they choose to manage inventory risk. In addition, purchases by distributors and dealers are affected by a variety of other factors, including product pricing, increases in the number of competitive producers and the production capacity of other producers, new product introductions, changes in levels of home renovation and new construction activity, and weather-related fluctuations in demand. As a result, demand for our products can be difficult to predict. If we do not forecast and plan production effectively to manufacture sufficient products to meet demand or if we experience delays in our ability to manufacture products, dealers may seek alternative products, including those of our competitors. Failure to meet demand requirements on a timely basis, may cause distributors or dealers to build up inventory as a precautionary measure, rapidly shift their product mix away from our products, harm our long-term relationships with distributors and dealers, harm our brand and reduce, or increase the variability of, our net sales.

We must continue to provide product offerings at price points that meet the needs of distributors and dealers and that they perceive to be competitive with the products on the market. If our key distributors or dealers are unwilling to continue to sell our products at existing or higher levels, or if they desire to sell competing products alongside our products, our ability to maintain or increase our sales could suffer. In addition, mergers or acquisitions involving our distributors or dealers and one of our competitors, or a distributor or dealer with a relationship with one of our competitors, could decrease or eliminate purchases of our product by that distributor or dealer. If a key distributor or dealer were to terminate its relationship with us or reduce purchases of our products, we may not be able to replace that relationship with a relationship with a new distributor or dealer in a timely manner or at all. In addition, any such new relationship may take time to develop and may not be as favorable to us as the relationship it is replacing. The loss of, or a reduction in orders from, any significant distributor or dealer, may have a material adverse effect on our business, financial condition or results of operations.

Shortages in supply, price increases or deviations in the quality of the raw materials used to manufacture our products could adversely affect our sales and operating results.

The primary raw materials used in our products are various petrochemical resins, including polyethylene, polypropylene and PVC resins, reclaimed polyethylene and PVC material, waste wood fiber and aluminum. We also utilize other additives including modifiers, titanium dioxide, or TiO2, and pigments. Our contracts with key suppliers are typically short term in nature, with terms generally ranging from one to three years. While we do not rely on any single supplier for the majority of our raw materials, we do obtain certain raw materials from single or a limited number of suppliers. In particular, we rely on a single supplier for certain critical capped compounds used in our deck and railing products. We do not currently have arrangements in place for a redundant or second-source supply for those compounds. If one or more suppliers were unable to satisfy our requirements for particular raw materials, we believe alternative sources of supply would be available. However,

 

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we could experience a disruption to our operations as alternative suppliers are identified and qualified and new supply arrangements are entered into, and we cannot be sure we will be able to identify alternative sources of supply rapidly, without incurring significant costs or at all.

In the event of an industry-wide general shortage of our raw materials, a shortage affecting or discontinuation in providing any such raw materials by one or more of our suppliers or a supplier’s declaration of force majeure, we may not be able to arrange for alternative sources of such materials on a timely basis or on equally favorable terms. We have also recently significantly increased the use of reclaimed polyethylene and PVC material in our products. As we increase our use of such materials and introduce new materials into our manufacturing processes, we may be unable to obtain adequate quantities of such new raw materials in a timely manner. Any such shortage may materially adversely affect our production process as well as our competitive position as compared to companies that are able to source their raw materials more reliably or at lower cost.

In addition, significant increases in the cost of the raw materials used to manufacture our products could adversely affect our operating results. 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. We have not entered into hedges of our raw material costs, and our supply contracts with our major vendors do not contain obligations to sell raw materials to us at a fixed price. Accordingly, we are exposed to the risk of increases in the market prices of raw materials used in the manufacture of our products. Our results of operations have been affected in the past by changes in the cost of resins, and we expect that our results of operations in the future will continue to be affected by changes in resin costs. In the event of an increase in the cost of resins or other raw materials, we may not be able to recover the increases through corresponding increases in the prices of our products. Even if we are able to increase prices over time, we may not be able to increase prices as rapidly as the increase in our costs. If we are unable to increase our prices or experience a delay in our ability to increase our prices or to recover such increases in our costs, our gross profit will suffer. In addition, increases in the price of our products to compensate for increased costs of raw materials may reduce demand for our products and adversely affect our competitive position as compared to products made of other materials, such as wood and metal, that are not affected by changes in the price of resins and some of the other raw materials that we use in the manufacture of our products.

We are dependent upon the ability of our suppliers to consistently provide raw materials that meet our specifications, quality standards and other applicable criteria. Our suppliers’ failure to provide raw materials that meet such criteria could adversely affect production schedules and our product quality, which in turn could materially adversely affect our business, financial condition and results of operations.

An interruption of our production capability at one or more of our manufacturing facilities from pandemics, accident, calamity or other causes, or events affecting the global economy, could adversely affect our business.

We manufacture our products at a limited number of manufacturing facilities, and we generally do not have redundant production capabilities that would enable us to shift production of a particular product rapidly to another facility in the event of a loss of one of or a portion of one of our manufacturing facilities. A catastrophic loss of the use of one or more of our manufacturing facilities due to pandemics, including the COVID-19 pandemic, accident, fire, explosion, labor issues, tornado, other weather conditions, natural disasters, condemnation, cancellation or non-renewals of leases, terrorist attacks or other acts of violence or war or otherwise could have a material adverse effect on our production capabilities. In addition, unexpected failures, including as a result of power outages or similar disruptions outside of our control, of our equipment and machinery could result in production delays or the loss of raw materials or products in the equipment or machinery at the time of such failures. Any of these events could result in substantial revenue loss and repair costs. An interruption in our production capabilities could also require us to make substantial capital expenditures to replace damaged or destroyed facilities or equipment. There are a limited number of manufacturers that make some of the equipment we use in our manufacturing facilities, and we could experience significant delay in

 

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replacing manufacturing equipment necessary to resume production. An interruption in our production capability, particularly if it is of significant duration, could result in a permanent loss of customers who decide to seek alternate products.

Our business operations could be adversely affected by the loss of the services from members of our senior management team and other key employees.

Our success depends in part on the continued contributions of our senior management and other key employees. Our senior operating management members have extensive sales and marketing, engineering, product development, manufacturing and finance backgrounds. The loss of any member of our senior management team or other key employees in the future could significantly impede our ability to successfully implement our business strategy, financial plans, product development goals, marketing initiatives and other objectives. Should we lose the services of any member of our senior management team or key personnel, replacing such personnel could involve a prolonged search and divert management time and attention and we may not be able to locate and hire a qualified replacement. We do not carry key man insurance to mitigate the financial effect of losing the services of any member of our management team.

Acquisitions or joint ventures we may pursue in the future may be unsuccessful.

We may consider the acquisition of other manufacturers or product lines of other businesses that either complement or expand our existing business, or may enter into joint ventures. We cannot assure you that we will be able to consummate any such acquisitions or joint ventures or that any future acquisitions or joint ventures will be able to be consummated at acceptable prices and on acceptable terms. Any future acquisitions or joint ventures we pursue may involve a number of risks, including some or all of the following:

 

   

difficulty in identifying acceptable acquisition candidates;

 

   

the inability to consummate acquisitions or joint ventures on favorable terms and to obtain adequate financing, which financing may not be available to us at times, in amounts or on terms acceptable to us, if at all;

 

   

the diversion of management’s attention from our core businesses;

 

   

the disruption of our ongoing business;

 

   

entry into markets in which we have limited or no experience;

 

   

the inability to integrate our acquisitions or enter into joint ventures without substantial costs, delays or other problems;

 

   

unexpected liabilities for which we may not be adequately indemnified;

 

   

inability to enforce indemnification and non-compete agreements;

 

   

failing to successfully incorporate acquired product lines or brands into our business;

 

   

the failure of the acquired business or joint venture to perform as well as anticipated;

 

   

the failure to realize expected synergies and cost savings;

 

   

the loss of key employees or customers of the acquired business;

 

   

increasing demands on our operational systems and the potential inability to implement adequate internal controls covering an acquired business or joint venture;

 

   

any requirement that we make divestitures of operations or property in order to comply with applicable antitrust laws;

 

   

possible adverse effects on our reported operating results, particularly during the first several reporting periods after the acquisition is completed; and

 

   

impairment of goodwill relating to an acquired business, which could reduce reported income.

 

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Any of these risks could have a material adverse effect on our business, financial condition or results of operations.

In addition, acquisitions or joint ventures could result in significant increases in our outstanding indebtedness and debt service requirements or could involve the issuance of preferred stock or common stock that would be dilutive to existing stockholders. Incurring additional debt to fund an acquisition may result in higher debt service and a requirement to comply with additional financial and other covenants, including potential restrictions on future acquisitions and distributions. Funding an acquisition with our existing cash would reduce our liquidity. The terms of our existing and future debt agreements may limit the size and/or number of acquisitions we can pursue or our ability to enter into a joint venture.

Our business could be adversely affected if we fail to maintain product quality and product performance at an acceptable cost or if we incur significant losses, increased costs or harm to our reputation or brand as a result of product liability claims or product recalls.

In order to maintain and increase our net sales and sustain profitable operations we must produce high-quality products at acceptable manufacturing costs and yields. If we are unable to maintain the quality and performance of our products at acceptable costs, our brand, the market acceptance of our products and our results of operations would suffer. As we regularly modify our product lines and introduce changes to our manufacturing processes or incorporate new raw materials, we may encounter unanticipated issues with product quality or production delays. For example, we have recently introduced products that incorporate larger proportions of reclaimed raw materials, primarily reclaimed polyethylene and PVC. While we engage in product testing in an effort to identify and address any product quality issues before we introduce products to market, unanticipated product quality or performance issues may be identified after a product has been introduced and sold.

In addition, we face the risk of exposure to product liability or other claims, including class action lawsuits, in the event our products are, or are alleged to be, defective or have resulted in harm to persons or to property. We may in the future incur significant liabilities if product liability lawsuits against us are successful. We may also have to recall and/or replace defective products, which would also result in adverse publicity and loss of sales, and would result in us incurring costs connected with the recall, which could be material. Any losses not covered by insurance could have a material adverse effect on our business, financial condition and results of operations. Real or perceived quality issues, including those arising in connection with product liability lawsuits, warranty claims or recalls, could also result in adverse publicity, which could harm our brand and reputation and cause our sales to decline rapidly. In addition, any such issues may be seized on by competitors in efforts to increase their market share.

We provide product warranties and, if our product warranty obligations were significantly in excess of our reserves, our business, financial condition and results of operations could be materially and adversely affected.

We provide various warranties on our products, ranging from five years to lifetime warranties depending on the product and subject to various limitations. Management estimates warranty reserves, based in part upon historical warranty costs, as a proportion of sales by product line. Management also considers various relevant factors, including our stated warranty policies and procedures, as part of the evaluation of our warranty liability. Because warranty issues may surface later in the life cycle of a product, management continues to review these estimates on a regular basis and considers adjustments to these estimates based on actual experience compared to historical estimates. Estimating the required warranty reserves requires a high level of judgment, especially as many of our products are at a relatively early stage in their product life cycles, and we cannot be sure that our warranty reserves will be adequate for all warranty claims that arise. We have recently increased our use of reclaimed materials in the manufacturing of our products. While we performed extensive testing in connection with the utilization of such materials, the use of reclaimed materials represents a recent and significant change in our business and the use of such materials may result in unanticipated product quality or performance issues and

 

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an increase in warranty claims for certain of our products. We have also recently introduced a new warranty that provides coverage for labor costs incurred in the replacement of products under warranty under specified circumstances. Although we have significant experience regarding warranty claims on our products generally, we do not have historical experience relating to warranty claims under the terms of this new warranty coverage. Warranty obligations in excess of our reserves could have a material adverse effect on our business, financial condition and results of operations.

We depend on third parties for transportation services, and the lack of availability of and/or increases in the cost of transportation could have a material adverse effect on our business and results of operations.

Our business depends on the transportation of both finished goods to our distributors and other customers and the transportation of raw materials to us primarily through the use of flatbed trucks and rail transportation. We rely on third parties for transportation of these items. The availability of these transportation services is subject to various risks, including those associated with supply shortages, change in fuel prices, work stoppages, operating hazards and interstate transportation regulations. In particular, a significant portion of our finished goods are transported by flatbed trucks, which are occasionally in high demand (especially at the end of calendar quarters) and/or subject to price fluctuations based on market conditions and the price of fuel.

If the required supply of transportation services is unavailable when needed, we may be unable to sell our products when they are requested by our customers. In that event, we may be required to reduce the price of the affected products, seek alternative and, potentially more costly, transportation services or be unable to sell the affected products. Similarly, if any of these transportation providers were unavailable to deliver raw materials to us in a timely manner, we may be unable to manufacture our products in response to customer demand. In addition, a significant increase in transportation rates or fuel surcharges could adversely affect our profitability. Any of these events could have a material adverse effect on our business and results of operations.

Increases in labor costs, potential labor disputes and work stoppages or an inability to hire skilled manufacturing, sales and other personnel could adversely affect our business.

Our financial performance is affected by the availability of qualified personnel and the cost of labor. As of April 30, 2020, we had approximately 1,540 employees. An increase in labor costs, work stoppages or disruptions at our facilities or those of our suppliers or transportation service providers, or other labor disruptions, could decrease our sales and increase our expenses. In addition, although our employees are not represented by a union, our labor force may become subject to labor union organizing efforts, which could cause us to incur additional labor costs and increase the related risks that we now face.

The competition for skilled manufacturing, sales and other personnel is intense in the regions in which our manufacturing facilities are located, including in Wilmington, Ohio and Scranton, Pennsylvania. A significant increase in the salaries and wages paid by competing employers could result in a reduction of our labor force, increases in the salaries and wages that we must pay or both. If we are unable to hire skilled manufacturing, sales and other personnel, our ability to execute our business plan, and our results of operations, would suffer.

If we are unable to collect accounts receivable from one or more of our significant distributors, dealers or other customers, our financial condition and operating results could suffer.

We extend credit to our distributors and, to a lesser extent, dealers and other customers, based on an evaluation of their financial condition, and we generally do not require collateral to secure these extensions of credit. The financial health of many of our customers is affected by changes in the economy and the cyclical nature of the building industry. The effects of the COVID-19 pandemic and the related economic downturn or protracted or severe economic declines and cyclical downturns from other causes in the building industry may cause our customers to be unable to satisfy their payment obligations, including their debts to us. While we maintain allowances for doubtful accounts, these allowances may not be adequate to provide for actual losses, and our financial condition and results of operation could be materially and adversely affected if our losses from doubtful accounts significantly exceed our estimates.

 

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We may incur goodwill and other intangible or long-lived asset impairment charges that adversely affect our operating results.

We review our goodwill and other intangibles not subject to amortization for impairment annually, or when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit could be lower than its carrying value. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill or long-lived assets. Although no impairments were recorded for the six months ended March 31, 2020 or the years ended September 30, 2019 or 2018, an impairment of $32.2 million was recorded as of September 30, 2017 with respect to one of our reporting units as a result of lower than anticipated sales revenue and operating margins due to manufacturing inefficiencies and service issues. In the event that we determine our goodwill or long-lived assets are impaired, we may be required to record a significant charge to earnings in our financial statements that could have a material adverse effect on our results of operations.

We have identified material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses is not effective, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our Class A common stock may decline.

As of September 30, 2019, we determined that we have three material weaknesses in our internal control over financial reporting. The first material weakness relates to the maintenance of an effective control environment as we lacked a sufficient complement of resources. This material weakness contributed to an additional material weakness relating to the design and maintenance of formal accounting policies, procedures and controls. The third relates to the design and maintenance of effective controls over certain information technology general controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The first material weakness relates to the fact that we did not design or maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient complement of resources with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. This material weakness contributed to the following additional three material weaknesses.

The second material weakness relates to the fact that we did not design and maintain adequate formal accounting policies, procedures and controls, or maintain documentary evidence of existing control activities. Specifically, we did not design and maintain adequate formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including adequate controls over the preparation and review of account reconciliations and journal entries. Additionally, we did not maintain adequate documentary evidence of existing control activities, and we did not design and maintain controls over the appropriate classification and presentation of accounts and disclosures in the financial statements.

We also had a previous material weakness, which was remediated during fiscal 2019, that related to the fact that we did not design and maintain formal accounting policies, procedures and controls to analyze, account for and disclose non-routine or complex transactions.

These two remaining material weaknesses and the previous material weakness resulted in revision of our consolidated financial statements as of September 30, 2018 and for the year then ended, and in immaterial audit adjustments to our consolidated financial statements as of September 30, 2019, 2018 and 2017 and for the years then ended.

 

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As of September 30, 2019, we also have a third material weakness as a result of the material weakness in our control environment in that we did not design and maintain effective controls over certain information technology, or IT, general controls for information systems and applications that are relevant to the preparation of the financial statements. Specifically, we did not design and maintain:

 

   

User access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel;

 

   

Program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately;

 

   

Computer operations controls to ensure that critical batch jobs are monitored, and data backups are authorized and monitored; and

 

   

Testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.

These IT control deficiencies did not result in a misstatement to our financial statements. However, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatements to one or more assertions, and IT controls and underlying data that support the effectiveness of IT system-generated data and reports).

Each of the remaining material weaknesses described above involve control deficiencies that could result in a misstatement of one or more account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected, and, accordingly, we determined that these control deficiencies constitute material weaknesses.

We are in the process of taking steps intended to address the underlying causes of the material weaknesses and to remediate the three remaining material weaknesses. Our efforts to date have included: (i) hiring additional qualified finance and accounting personnel, including the hiring of a new Chief Financial Officer and Chief Accounting Officer; (ii) the implementation of formal policies, procedures and controls, training on standards of documentary evidence, as well as implementation of controls designed to ensure the reliability of critical spreadsheets and system generated reports; and (iii) designing and engaging in the implementation of an IT general controls framework that addresses risks associated with user access and security, application change management and IT operations, focused training for control owners to help sustain effective control operations and comprehensive remediation efforts relating to segregation of duties to strengthen user access controls and security.

While we believe these efforts will improve our internal controls and address the underlying causes of the three remaining material weaknesses, such material weaknesses will not be fully remediated until our remediation plan has been fully implemented and we have concluded that our controls are operating effectively for a sufficient period of time. For more information on our efforts to remediate these material weaknesses, see “Management’s Discussion and Analysis of Financial Condition and Operations—Internal Control over Financial Reporting.”

We cannot be certain that the steps we are taking will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or prevent future material weaknesses or control deficiencies from occurring. In addition, we cannot be certain that we have identified all material weaknesses in our internal control over financial reporting, or that in the future we will not have additional material weaknesses in our internal control over financial reporting.

If we fail to effectively remediate the remaining material weaknesses in our internal control over financial reporting, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may be unable to accurately or timely report our financial condition

 

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or results of operations. We also could become subject to sanctions or investigations by the securities exchange on which our Class A common stock is listed, the SEC or other regulatory authorities. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets, and the trading price of our Class A common stock may decline.

If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations and the listing standards of the New York Stock Exchange, or the NYSE.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.

In addition to the material weaknesses in our internal control over financial reporting that we have identified, we may discover additional weaknesses in our disclosure controls and internal control over financial reporting in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which could have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material adverse effect on our business and operating results and could cause a decline in the price of our Class A common stock.

 

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Subjective estimates and judgments used by management in the preparation of our financial statements, including estimates and judgments that may be required by new or changed accounting standards, may impact our financial condition and results of operations.

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Due to the inherent uncertainty in making estimates, results reported in future periods may be affected by changes in estimates reflected in our financial statements for earlier periods. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. From time to time, there may be changes in the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some instances, we could be required to apply a new or revised standard retrospectively. If the estimates and judgments we use in preparing our financial statements are subsequently found to be incorrect or if we are required to restate prior financial statements, our financial condition or results of operations could be significantly affected.

The estimates and forecasts of market opportunity and market growth included in this prospectus may prove to be inaccurate, and we cannot assure you our business will grow at similar rates, or at all.

Estimates and forecasts of market size and opportunity and of market growth are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this prospectus of the size of the markets that we may be able to address and the growth in these markets are subject to many assumptions and may prove to be inaccurate. In particular, the market and industry estimates in this prospectus were prepared prior to the COVID-19 pandemic. We expect that the COVID-19 pandemic may materially reduce the growth of various of the markets discussed in this prospectus, and we cannot predict the extent to which these estimates will be affected. Further, we may not be able to address fully the markets that we believe we can address, and we cannot be sure that these markets will grow at historical rates or the rates we expect for the future. Even if we are able to address the markets that we believe represent our market opportunity and even if these markets experience the growth we expect, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the estimates and forecasts of market size and opportunity and of market growth included in this prospectus may not be indicative of our future growth.

We may be subject to significant compliance costs as well as liabilities under environmental, health and safety laws and regulations which could materially and adversely affect our business, financial condition and operations.

Our past and present operations, assets and products are subject to regulation by extensive environmental laws and regulations at the federal, state and local levels. These laws regulate, among other things, air emissions, the discharge or release of materials into the environment, the handling and disposal of wastes, remediation of contaminated sites, worker health and safety and the impact of products on human health and safety and the environment. Under some of these laws, liability for contaminated property may be imposed on current or former owners or operators of the property or on parties that generated or arranged for waste sent to the property for disposal. Liability under these laws may be joint and several and may be imposed without regard to fault or the legality of the activity giving rise to the contamination. Our facilities are located on sites that have been used for manufacturing activities for an extended period of time, which increases the possibility of contamination being present. Despite our compliance efforts, we may still face material liability, limitations on our operations or fines or penalties for violations of environmental, health and safety laws and regulations, including releases of regulated materials and contamination by us or previous occupants at our current or former properties or at offsite disposal locations we use.

 

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We are also subject to permitting requirements under environmental, health and safety laws and regulations applicable in the jurisdictions in which we operate. Those requirements obligate us to obtain permits from one or more governmental agencies in order to conduct our operations. Such permits are typically issued by state agencies, but permits and approvals may also be required from federal or local governmental agencies. The requirements for such permits vary depending on the location where our regulated activities are conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued and the conditions that may be imposed in connection with the granting of the permit. Any failure to obtain or delay in obtaining a permit required for our operations, or the imposition of onerous conditions in any such permits, could adversely affect our business, financial condition and operations.

Applicable environmental, health and safety laws and regulations, and any changes to them or in their enforcement, may require us to make material expenditures with respect to ongoing compliance with, or remediation under, these laws and regulations or require that we modify our products or processes in a manner that increases our costs and/or reduces our profitability. For example, additional pollution control equipment, process changes or other environmental control measures may be needed at our facilities to meet future requirements. In addition, discovery of currently unknown or unanticipated soil or groundwater contamination at our properties could result in significant liabilities and costs. Accordingly, we are unable to predict the future costs of compliance with, or liability under, environmental, health and safety laws and regulations.

Our business operations could suffer if we fail to adequately protect our intellectual property rights, and we may experience claims by third parties that we are violating their intellectual property rights.

We rely on trademark and service mark protection to protect our brands, and we have registered or applied to register many of these trademarks and service marks. In particular, we believe the AZEK and AZEK Exteriors brands, the TimberTech brand and the VERSATEX brand are significant to the success of our business. In the event that our trademarks or service marks are successfully challenged and we lose the rights to use those trademarks or service marks, or if we fail to prevent others from using them (or similar marks), we could be forced to rebrand our products, requiring us to devote resources to advertising and marketing new brands. In addition, we cannot be sure that any pending trademark or service mark applications will be granted or will not be challenged or opposed by third parties or that we will be able to enforce our trademark rights against counterfeiters.

We generally rely on a combination of unpatented proprietary know-how and trade secrets, and to a lesser extent, patents to preserve our position in the market. Because of the importance of our proprietary know-how and trade secrets, we employ various methods to protect our intellectual property, such as entering into confidentiality agreements with third parties, and controlling access to, and distribution of, our proprietary information. We may not be able to deter current and former employees, contractors and other parties from breaching confidentiality obligations and misappropriating proprietary information. It is difficult for us to monitor unauthorized uses of our products and technology. Accordingly, these protections may not be adequate to prevent competitors from copying, imitating or reverse engineering our products or from developing and marketing products that are substantially equivalent to or superior to our own.

In addition, we have applied for patent protection relating to certain existing and proposed products, processes and services or aspects thereof. We cannot be sure that any of our pending patent applications will be granted or that any patents issued as a result of our patent applications will be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage.

If third parties take actions that affect our rights or the value of our intellectual property or proprietary rights, or if we are unable to protect our intellectual property from infringement or misappropriation, other companies may be able to offer competitive products at lower prices, and we may not be able to effectively compete against these companies. In addition, if any third party copies or imitates our products in a manner that

 

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affects customer or consumer perception of the quality of our products, or of engineered products generally, our reputation and sales could suffer whether or not these violate our intellectual property rights.

In addition, we face the risk of claims that we are infringing third parties’ intellectual property rights. Any such claim, even if it is without merit, could be expensive and time-consuming to defend and could divert the time and attention of our management. An intellectual property claim against us that is successful could cause us to cease making or selling products that incorporate the disputed intellectual property, require us to redesign our products, which may not be feasible or cost effective, and require us to enter into costly royalty or licensing arrangements, any of which could have a material adverse effect on our business, financial condition and results of operations. Moreover, certain material technology and know-how we use to manufacture our products is licensed to us rather than owned by us, and our license is subject to termination in the event of uncured material breach, among other reasons.

Any major disruption or failure of our information technology systems or our website, or our failure to successfully implement new technology effectively, could adversely affect our business and operations.

We rely on various information technology systems, owned by us and third parties, to manage our operations, maintain books and records, record transactions, provide information to management and prepare our financial statements. In addition, we have made a significant investment in our website which we believe is critical for lead generation and is the primary forum through which we interact with end consumers. A failure of our information technology systems or our website to operate as expected could disrupt our business and adversely affect our financial condition and results of operations. These systems and our website are vulnerable to damage from hardware failure; fire; power loss; Internet; data network and telecommunications failure; loss or corruption of data and impacts of terrorism; natural disasters or other disasters. We may not have sufficient redundant operations to cover a loss or failure in a timely manner. In addition, the operation of these systems and our website is dependent upon third party technologies, systems and services, and support by third party vendors, and we cannot be sure that these third party systems, services and support will continue to be available to us without interruption, particularly in light of the disruptions stemming from the COVID-19 pandemic. Any damage to our information technology systems or website could cause interruptions to our operations that materially adversely affect our ability to meet customers’ requirements, resulting in an adverse impact to our business, financial condition and results of operations. Periodically, these systems and our website need to be expanded, updated or upgraded as our business needs change. We may not be able to successfully implement changes in our information technology systems and to our website without experiencing difficulties, which could require significant financial and human resources.

We face cybersecurity risks and risks arising from new regulations governing information security and privacy and may incur increasing costs in an effort to mitigate those risks.

We utilize systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding our customers, employees and others, including personal information. We may be vulnerable to, and unable to anticipate or detect, data security breaches and data loss, including rapidly evolving and increasingly sophisticated and prevalent cybersecurity attacks. In addition, data security breaches can also occur as a result of a breach by us or our employees or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. In addition to our own databases, we use third-party service providers to store, process and transmit confidential or sensitive information on our behalf. A data security breach could occur in the future either at their location or within their systems that could affect our personal or confidential information.

A data security breach may expose us to a risk of loss or misuse of this information, and could result in significant costs to us, which may include, among others, fines and penalties, costs related to remediation, potential costs and liabilities arising from governmental or third-party investigations, proceedings or litigation, diversion of management attention and harm to our reputation. We could also experience delays or interruptions

 

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in our ability to function in the normal course of business, including delays in the fulfillment of customer orders or disruptions in the manufacture and shipment of products. In addition, actual or anticipated attacks may cause us to incur costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our business, financial condition and reputation.

The regulatory environment surrounding information security and privacy is increasingly demanding, with frequent imposition of new and changing requirements, which could cause us to incur substantial costs. In the United States, various laws and regulations apply to the collection, processing, disclosure and security of certain types of data, including the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the Health Insurance Portability and Accountability Act of 1996, the Gramm Leach Bliley Act and various state laws relating to privacy and data security, including the California Consumer Privacy Act, which took effect on January 1, 2020.

Any failure or perceived failure by us to comply with laws, regulations, policies or regulatory guidance relating to privacy or data security may result in governmental investigations and enforcement actions, litigation, fines and penalties or adverse publicity, and could cause our customers and consumers to lose trust in us, which could have an adverse effect on our reputation and business.

Changes to legislative and regulatory policies related to home ownership may have a material adverse effect on our business, financial condition and results of operations.

Our markets are affected by legislative and regulatory policies that promote or do not promote home ownership, such as U.S. tax rules allowing for deductions of mortgage interest or interest on home equity loans. For example, the Tax Cuts and Jobs Act, or the Tax Act, which was enacted into law on December 22, 2017, imposes limitations on the deductibility of interest on mortgages qualifying of the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans, including home equity loans that are used to substantially improve the taxpayer’s home that secures the loan, a reduction from the prior limit of $1.0 million. As many consumers finance renovation projects that use our products with home equity loans, limitations on the deductibility of interest on those loans could reduce demand for our products. In addition, recent U.S. federal and state legislative and regulatory policies enacted in response to the COVID-19 pandemic provide various measures of relief for homeowners, primarily in the form of mortgage payment forbearance for homeowners with federally-backed mortgages and temporary moratoria on foreclosures and evictions. It remains uncertain whether or to what extent such relief measures could protect homeowners and what impact they will have on the U.S. real estate market and the U.S. and global economies generally, and our business, financial condition and results of operations may be materially and adversely affected as a result. Future changes to laws or policies relating to these or similar matters could reduce demand for our products and have a material adverse effect on our business, financial condition and results of operations.

Many of our products must comply with local building codes and ordinances and failure of our products to comply with such codes and ordinances may have an adverse effect on our business.

Many of our products must comply with local building codes and ordinances. These codes and ordinances are subject to future government review and interpretation. If our products fail to comply with such local building codes or ordinances, our ability to market and sell such products would be impaired. Also, should these codes and ordinances be amended or expanded, or should new laws and regulations be enacted, we could incur additional costs or become subject to requirements or restrictions that require us to modify our products or adversely affect our ability to market and sell our products. Furthermore, failure of our products to comply with such codes or ordinances could subject us to negative publicity or damage our reputation.

 

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Comprehensive tax reform legislation could adversely affect our business, financial condition and results of operations.

The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for business interest expense to 30% of “adjusted taxable income” (roughly defined as earnings before interest, taxes, depreciation and amortization in the case of taxable years beginning before January 1, 2022 and earnings before interest and taxes thereafter), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, current U.S. taxation on foreign earnings earned by certain foreign subsidiaries (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. On March 27, 2020, in response to the COVID-19 pandemic, the CARES Act was signed into law and modifies certain provisions under the Tax Act. The CARES Act, among other things, increased the limitation on the deductibility of business interest to 50% of “adjusted taxable income” for taxable years beginning after December 31, 2018 and before January 1, 2021 and allows taxpayers to elect to compute the limitation on business interest expense for 2020 by using its “adjusted taxable income” from 2019. The CARES Act also suspends the 80% limitation on the deduction of net operating losses for taxable years beginning before January 1, 2021 and enables taxpayers to carry back net operating losses generated in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five preceding taxable years. The CARES Act also contains provisions relating to refundable payroll tax credits, deferment of employer side social security payments, alternative minimum tax credit refunds and technical corrections to tax depreciation methods for qualified improvement property that may impact our business and financial results. The most significant impacts of the Tax Act on our financial results to date have included lowering of the U.S. federal corporate income tax rate and remeasurement of our net deferred tax liabilities. During the year ended September 30, 2018, we recorded a $22.5 million net income tax benefit for the remeasurement of certain deferred taxes, and our effective tax rate for the year was significantly reduced by the recognition of this remeasurement. We expect the limitation under the Tax Act on the tax deduction of interest expense will limit our annual deductions of interest expense as a result of our significant outstanding indebtedness until we reduce our outstanding indebtedness or our adjusted earnings increase by an amount sufficient to permit full deductibility of our interest expense. In the event we are subject to limitations on the deductibility of interest under the Tax Act, we will be permitted an indefinite carryforward, and disallowed interest expense will be deductible in later years, subject to the same 30% limitation (or 50% limitation under the CARES Act for taxable years beginning after December 31, 2018 and before January 1, 2021) and to ownership change limitations under Sections 382 of the Internal Revenue Code of 1986, as amended, or the Code, similar to net operating losses.

We continue to examine the impact that the Tax Act and the CARES Act may have on our business in the longer term. Accordingly, notwithstanding the reduction in the corporate income tax rate, the overall impact on us of the Tax Act and the CARES Act is uncertain.

Our insurance coverage may be inadequate to protect against the potential hazards incident to our business.

We maintain property, business interruption, product liability and casualty insurance coverage, but such insurance may not provide adequate coverage against potential claims, including losses resulting from interruptions in our production capability or product liability claims relating to the products we manufacture. Consistent with market conditions in the insurance industry, premiums and deductibles for some of our insurance policies have been increasing and may, in the future, increase substantially. In some instances, some types of insurance may become available only for reduced amounts of coverage, if at all. In addition, our insurers could deny coverage for claims. If we were to incur a significant liability for which we were not fully insured or that our insurers disputed, our business, financial condition or results of operations could be materially adversely affected.

 

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We are in the early stages of implementing strategic initiatives related to the use of recycled materials. If we fail to implement these initiatives as expected, our business, financial condition and results of operations could be adversely affected.

Our future financial performance depends in part on our management’s ability to successfully implement our strategic initiatives related to developing our recycling capabilities and other cost savings measures, with an aim to reduce our material costs, improve net manufacturing productivity and enhance our business operations. We are still in the early stages of material substitution across our manufacturing network and realizing the benefits of our investments in recycling. To achieve such benefits, we must recycle materials on a cost-effective basis and efficiently convert these materials into high-quality finished goods. This strategy involves significant risks, including the risks that:

 

   

Our profitability may be materially diminished. The variability of our raw material sources can result in considerable reduction in our operating rates and yields, which may more than offset any savings we realize from the low purchase price of the materials.

 

   

We may not produce a sustainable return on investment. Our plants must convert our raw materials at high rates and net yields to generate the profit margins and cash flows necessary to achieve sustainable returns.

Changes in trade policies, including the imposition of tariffs, could negatively impact our business, financial condition and results of operations.

The current U.S. administration has signaled support for, and in some instances has taken action with respect to, major changes to certain trade policies, such as the imposition of tariffs on imported products and the withdrawal from or renegotiation of certain trade agreements, including the North American Free Trade Agreement. For example, the United States has increased tariffs on certain imports from China, as well as on steel and aluminum products imported from various countries. We procure certain of the raw materials we use in the manufacturing of our products directly or indirectly from outside of the United States. The imposition of tariffs and other potential changes in U.S. trade policy could increase the cost or limit the availability of raw materials, which could hurt our competitive position and adversely impact our business, financial condition and results of operations.

We operate in select non-U.S. markets and are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, as well anti-corruption laws and regulations in other countries, in addition to laws and regulations relating to export controls and economic sanctions. Violations of these laws and regulations could have a material adverse effect on our business, financial condition and results of operations.

We are subject to various U.S. and non-U.S. anti-corruption laws, including the FCPA, collectively, the Anti-Corruption Laws. These laws generally prohibit companies and their intermediaries from engaging in bribery or making other improper payments of cash (or anything else of value) to government officials and other persons in order to obtain or retain business. Our business operations also must be conducted in compliance with applicable export control and economic sanctions laws and regulations, collectively, the Trade Controls, including rules administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the U.S. Department of State, the U.S. Department of Commerce, the United Nations Security Council, and other relevant authorities.

We strive to conduct our business activities in compliance with applicable Anti-Corruption Laws and Trade Controls, and we are not aware of issues of historical noncompliance. However, full compliance cannot be guaranteed. Further expansion outside the United States would likely increase our future legal exposure. Violations of Anti-Corruption Laws or Trade Controls, or even allegations of such violations, could result in civil or criminal penalties, as well as disrupt our business, operations, financial condition and results of operations. Further, changes to the applicable laws and regulations, and/or significant business growth, may result in the need for increased compliance-related resources and costs.

 

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Risks Relating to Our Indebtedness

Our substantial indebtedness could materially adversely affect our financial condition.

We have, and after this offering will continue to have, a significant amount of indebtedness. As of March 31, 2020, our total indebtedness was $1,248.3 million, including $804.3 million under our first lien credit facility, or the Term Loan Credit Agreement, $129.0 million outstanding under our revolving credit agreement, or the Revolving Credit Agreement, and $315.0 million of 2013 Notes. On May 12, 2020, we issued $350.0 million aggregate principal amount of Senior Notes and satisfied and discharged our obligations with respect to the 2013 Notes, and, on May 14, 2020, we repaid $15.0 million of the outstanding principal under the Revolving Credit Agreement. We refer to the Term Loan Credit Agreement and the Revolving Credit Agreement collectively as the Senior Secured Credit Facilities. During the three months ended March 31, 2020, we borrowed $129.0 million under the Revolving Credit Agreement, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. We intend to use net proceeds from this offering to redeem the Senior Notes and to prepay approximately $198.3 million of the outstanding principal amount under our Term Loan Credit Agreement, which currently bears interest at a rate of 5.93% per annum. After giving effect to this offering, on an as adjusted basis, as of March 31, 2020, our total indebtedness would have been approximately $720.0 million.

Our substantial indebtedness could have important consequences to the holders of our Class A common stock, including the following:

 

   

making it more difficult for us to satisfy our obligations with respect to our other debt;

 

   

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

 

   

requiring us to dedicate a substantial portion of our cash flows to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under the Senior Secured Credit Facilities, are at variable rates of interest;

 

   

limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

   

placing us at a disadvantage compared to other, less leveraged competitors; and

 

   

increasing our cost of borrowing.

In addition, the credit agreements that govern the Senior Secured Credit Facilities contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt. See “Description of Certain Indebtedness.”

After giving effect to the redemption of the Senior Notes using net proceeds from this offering, the Term Loan Credit Agreement will mature on May 5, 2024, and the Revolving Credit Agreement will mature on March 9, 2022. We may need to refinance all or a portion of our indebtedness on or before the maturity thereof. We may not be able to obtain such financing on commercially reasonable terms or at all. Failure to refinance our indebtedness could have a material adverse effect on us.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and

 

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to financial, business, legislative, regulatory and other factors, some of which are beyond our control. We cannot be sure that our business will generate sufficient cash flows from operating activities, or that future borrowings will be available, to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreements that govern the Senior Secured Credit Facilities restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due. See “Description of Certain Indebtedness.”

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would have a material adverse effect on our financial condition and results of operations.

If we cannot make scheduled payments on our debt, we will be in default, and the lenders under the Senior Secured Credit Facilities could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. Any of these events could result in you losing all or a portion of your investment in the Class A common stock.

Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described herein.

We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the credit agreements that govern the Senior Secured Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. As of March 31, 2020 and September 30, 2019, we had commitments available for borrowing under the Revolving Credit Agreement of up to $150.0 million. During the three months ended March 31, 2020, we borrowed $129.0 million under the Revolving Credit Agreement, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. We also have the option to increase the commitments under the Revolving Credit Agreement by up to $100.0 million, subject to certain conditions. Because our borrowing capacity under the Revolving Credit Agreement depends, in part, on inventory, accounts receivable and other assets that fluctuate from time to time, the amount of commitments may not reflect actual borrowing capacity. In addition, the Term Loan Credit Agreement provides for additional uncommitted incremental term loans of up to $150.0 million, with additional incremental term loans available if certain leverage ratios are maintained. All of those borrowings would be secured by first-priority liens on our property.

The terms of the credit agreements that govern the Senior Secured Credit Facilities restrict our current and future operations, including our ability to respond to changes or to take certain actions.

The credit agreements that govern the Senior Secured Credit Facilities contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest. See “Description of Certain Indebtedness.” The indebtedness under the Senior Secured Credit Facilities will continue to be outstanding following completion of this offering. The restrictive covenants under the Senior Secured Credit Facilities include restrictions on our ability to:

 

   

incur additional indebtedness and guarantee indebtedness;

 

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pay dividends or make other distributions or repurchase or redeem our capital stock;

 

   

prepay, redeem or repurchase junior debt;

 

   

issue certain preferred stock or similar equity securities;

 

   

make loans and investments;

 

   

sell assets or property, except in certain circumstances;

 

   

incur liens;

 

   

enter into transactions with affiliates;

 

   

modify or waive certain material agreements in a manner that is adverse in any material respect to the lenders;

 

   

enter into agreements restricting our subsidiaries’ ability to pay dividends; and

 

   

make fundamental changes in our business, corporate structure or capital structure, including, among other things, entering into mergers, acquisitions, consolidations and other business combinations or selling all or substantially all of our assets.

As a result of these restrictions, we may be:

 

   

limited in how we conduct our business;

 

   

unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

   

unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our strategy. If we incur indebtedness provided or guaranteed by the U.S. Government, including pursuant to the CARES Act, we may be subject to additional restrictions on our operations, including limitations on employee headcount and compensation reductions and other cost reduction activities.

A breach of the covenants or restrictions under the credit agreements that govern the Senior Secured Credit Facilities could result in a default or an event of default. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the Senior Secured Credit Facilities would permit the lenders under the Revolving Credit Agreement to terminate all commitments to extend further credit under such facility. Furthermore, if we were unable to repay the amounts due and payable under the Senior Secured Credit Facilities, those lenders under each facility could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders were to accelerate the repayment of our indebtedness, we and our subsidiaries may not have sufficient assets to repay that indebtedness. In exacerbated or prolonged circumstances, one or more of these events could result in our bankruptcy or liquidation.

We rely on available borrowings under the Revolving Credit Agreement for cash to operate our business, and the availability of credit under the Revolving Credit Agreement may be subject to significant fluctuation.

In addition to cash we generate from our business, our principal existing source of cash is borrowings available under the Revolving Credit Agreement. As of March 31, 2020 and September 30, 2019, we had commitments available to be borrowed under the Revolving Credit Agreement of up to $150.0 million. During the three months ended March 31, 2020, we borrowed $129.0 million under the Revolving Credit Agreement, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. We also have the option to increase the commitments under the Revolving Credit Agreement by up to $100.0 million, subject to certain conditions. There are limitations on our ability to incur the full $150.0 million of existing commitments under the Revolving Credit Agreement. Availability will be limited

 

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to the lesser of a borrowing base and $150.0 million. The borrowing base is calculated on a monthly (or more frequent under certain circumstances) valuation of our inventory, accounts receivable and certain cash balances. As a result, our access to credit under the Revolving Credit Agreement is potentially subject to significant fluctuation, depending on the value of the borrowing base-eligible assets as of any measurement date. On June 5, 2020, we entered into the RCA Amendment, which established $8.5 million of commitments for FILO Loans under the Revolving Credit Agreement. The FILO Loans are available to be drawn in a single disbursement on or prior to December 31, 2020. The availability of the FILO Loans will be subject to satisfaction of certain conditions at the time of borrowing, including the value of borrowing-base eligible assets at the time of borrowing. Under the terms of the Revolving Credit Agreement as amended by the RCA Amendment, FILO Loans may be borrowed against increased percentages of borrowing-base eligible assets (as compared to the percentages of borrowing-base eligible assets applicable to all other loans under the Revolving Credit Agreement). The RCA Amendment did not increase the total aggregate amount of commitments under the Revolving Credit Agreement. Borrowing of FILO Loans under the Revolving Credit Agreement will reduce the total aggregate commitments available for revolving loans for so long as the FILO Loans remain outstanding. If borrowed, the FILO Loans will mature on December 4, 2021. There is no assurance that we will be able to draw on the FILO Loans at any time. The inability to borrow under the Revolving Credit Agreement may adversely affect our liquidity, financial position and results of operations.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under the Senior Secured Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Based on amounts outstanding as of March 31, 2020 and September 30, 2019, each 100 basis point change in interest rates would result in a $9.3 million and $8.1 million change, respectively, in annual interest expense on our indebtedness under the Senior Secured Credit Facilities. See “Description of Certain Indebtedness.” We do not currently hedge the risk of changes in the interest rate under the Senior Secured Credit Facilities. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments or other instruments in order to reduce interest rate volatility. However, even if we do enter into interest rate swaps, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps or other instruments we enter into may not fully mitigate our interest rate risk.

Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR in the future may adversely affect our financing costs.

Currently, the Revolving Credit Agreement and the Term Loan Credit Agreement utilize the London Interbank Offered Rate, or LIBOR, or various alternative methods set forth in the Revolving Credit Agreement and the Term Loan Credit Agreement to calculate interest on any borrowings. National and international regulators and law enforcement agencies have conducted investigations into a number of rates or indices known as “reference rates.” Actions by such regulators and law enforcement agencies may result in changes to the manner in which certain reference rates are determined, their discontinuance or the establishment of alternative reference rates. In particular, on July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, or the FCA, which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. As a result, it appears highly likely that LIBOR will be discontinued or modified by 2021.

At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates may have on LIBOR, other benchmarks or LIBOR-based debt instruments. Uncertainty as to the nature of such

 

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potential discontinuance, modification, alternative reference rates or other reforms could cause the interest rate calculated for the Revolving Credit Agreement and the Term Loan Credit Agreement to be materially different than expected, which could have a material adverse effect on our financing costs.

A lowering or withdrawal of the ratings assigned to our debt by rating agencies may increase our future borrowing costs and reduce our access to capital.

Our debt currently has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing.

Risks Relating to This Offering and Ownership of Our Class A Common Stock

The market price of our Class A common stock may be volatile or may decline steeply or suddenly regardless of our operating performance. You may not be able to resell your shares at or above the initial public offering price and may lose all or part of your investment.

There has been no prior public market for our common stock prior to our initial public offering. The initial public offering price for our Class A common stock will be determined through negotiations among the underwriters and us, and may vary from the market price of our Class A common stock following this offering. If you purchase shares of Class A common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. The market price of our Class A common stock may fluctuate or decline significantly in response to numerous factors, many of which are beyond our control, including:

 

   

the impacts of the COVID-19 pandemic on us and the national and global economies;

 

   

actual or anticipated fluctuations in our revenues or other operating results;

 

   

variations between our actual operating results and the expectations of securities analysts, investors and the financial community;

 

   

any forward-looking financial or operating information we may provide to the public or securities analysts, any changes in this information or our failure to meet expectations based on this information;

 

   

actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow us or our failure to meet these estimates or the expectations of investors;

 

   

additional shares of Class A common stock being sold into the market by us or our existing stockholders, or the anticipation of such sales, including if existing stockholders sell shares into the market when the applicable “lock-up” periods end;

 

   

announcements by us or our competitors of significant products or features, innovations, acquisitions, strategic partnerships, joint ventures, capital commitments, divestitures or other dispositions;

 

   

loss of relationships with significant distributors, dealers or other customers;

 

   

changes in operating performance and stock market valuations of companies in our industry, including our competitors;

 

   

increases in interest rates or changes in tax laws that make it more costly for consumers to finance home renovation or purchases;

 

   

difficulties in integrating any new acquisitions we may make;

 

   

loss of services from members of management or employees or difficulty in recruiting additional employees;

 

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continued worsening of economic conditions in the United States and reduction in demand for our products;

 

   

price and volume fluctuations in the overall stock market, including as a result of general economic trends;

 

   

lawsuits threatened or filed against us, or events that negatively impact our reputation; and

 

   

developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies.

In addition, extreme price and volume fluctuations in the stock markets have affected and continue to affect the stock prices of many companies. Often, their stock prices have fluctuated in ways unrelated or disproportionate to their operating performance. In the past, stockholders have filed securities class action litigation against companies following periods of market volatility. Such securities litigation, if instituted against us, could subject us to substantial costs, divert resources and the attention of management from our business and seriously harm our business.

An active trading market for our Class A common stock may never develop or be sustained.

We have been approved to list our Class A common stock on the NYSE under the symbol “AZEK”. However, we cannot be certain that an active trading market for our Class A common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Furthermore, we cannot be certain that we will continue to satisfy the continued listing standards of the NYSE. If we fail to satisfy the continued listing standards, we could be de-listed, which would have a material adverse effect on the liquidity and price of our Class A common stock.

Future sales of our Class A common stock and other actions by existing stockholders could cause our stock price to decline.

If our existing stockholders, including employees, who have or obtain equity, sell or indicate an intention to sell, substantial amounts of our Class A common stock in the public market after the lock-up and legal restrictions on resale discussed in this prospectus lapse, the trading price of our Class A common stock could decline. Upon the completion of this offering, we will have outstanding a total of 113,575,687 shares of Class A common stock and 33,068,963 shares of Class B common stock (assuming the underwriters exercise their option to purchase additional shares in full). Of these shares, only the shares of Class A common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by persons who are not our “affiliates” as defined in Rule 144 under the Securities Act and who have complied with the holding period requirements of Rule 144 under the Securities Act.

Subject to certain exceptions described under “Underwriting,” we and all of our stockholders have entered into or will enter into agreements with the underwriters under which we and they have agreed or will agree, subject to certain exceptions, not to dispose of any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into or exchangeable for or that represent the right to receive shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus.

When the lock up period in these agreements expires, we and our stockholders will be able to sell shares in the public market. In addition, Barclays Capital Inc. and BofA Securities, Inc. may, together in their sole discretion, release all or some portion of the shares subject to the lock up agreements prior to the expiration of the lock-up period. See “Shares Eligible for Future Sale.” Sales of a substantial number of such shares, or the perception that such sales may occur, upon the expiration or early release of the securities subject to the lock up agreements could cause the price of our Class A common stock to decline or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.

 

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In addition, the Sponsors have demand and “piggy-back” registration rights with respect to our common stock that they will retain following this offering. See “Shares Eligible for Future Sale” for a discussion of the shares of our common stock that may be sold into the public market in the future, including our common stock held by the Sponsors.

We currently do not intend to pay dividends on our Class A common stock, and our indebtedness could limit our ability to pay dividends on our Class A common stock.

After completion of this offering, we currently do not anticipate paying any cash dividends for the foreseeable future. In addition, the terms of our indebtedness limit our ability to pay dividends or make other distributions on, or to repurchase or redeem, shares of our capital stock. See “Description of Certain Indebtedness.” Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our Class A common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our Class A common stock that will prevail in the market after this offering will ever exceed the price that you pay. For more information, see “Dividend Policy.” We cannot be sure that we will pay dividends in the future or continue to pay dividends if we do commence paying dividends.

If securities or industry analysts either do not publish research about us or publish inaccurate or unfavorable research about us, our business or our market, if they adversely change their recommendations regarding our Class A common stock, or if our operating results do not meet their expectations or any financial guidance we may provide, the trading price or trading volume of our Class A common stock could decline.

The trading market for our Class A common stock will be influenced in part by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If one or more of the analysts initiate research with an unfavorable rating or downgrade our Class A common stock, provide a more favorable recommendation regarding our competitors or publish inaccurate or unfavorable research about our business, our Class A common stock price would likely decline. If one or more analysts who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price or trading volume of our Class A common stock to decline.

In addition, if we do not meet any financial guidance that we may provide to the public or if we do not meet expectations of securities analysts or investors, the trading price of our Class A common stock could decline significantly. Our operating results may fluctuate significantly from period to period as a result of changes in a variety of factors affecting us or our industry, many of which are difficult to predict. As a result, we may experience challenges in forecasting our operating results for future periods.

Future issuances of our Class A common stock, including upon conversion of our Class B common stock, could result in significant dilution to our stockholders, dilute the voting power of our Class A common stock and depress the market price of our Class A common stock.

Future issuances of our Class A common stock could result in dilution to existing holders of our Class A common stock. Such issuances, or the perception that such issuances may occur, could depress the market price of our Class A common stock. We may issue additional equity securities from time to time, including equity securities that could have rights senior to those of our Class A common stock. As a result, purchasers of shares of Class A common stock in this offering bear the risk that future issuances of equity securities may reduce the value of their shares and dilute their ownership interests. Also, to the extent outstanding stock-based awards are issued or become vested, there will be further dilution to the holders of our Class A common stock.

We have a dual-class capitalization structure, which may pose a particular risk of dilution to the holders of our Class A common stock. Each share of our Class B common stock, which is not entitled to vote for the election, removal and replacement of our directors, is convertible at any time at the option of the holder of the

 

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Class B common stock into one share of Class A common stock, which is entitled to vote for the election, removal and replacement of our directors. Accordingly, conversion of shares of our Class B common stock into shares of our Class A common stock would dilute holders of Class A common stock, including holders of shares purchased in this offering, in terms of voting power in connection with the election, removal and replacement of our directors.

We will incur increased costs and devote substantial management time as a result of operating as a public company.

As a public company, we will incur significant legal, accounting, investor relations and other expenses that we did not incur as a private company. For example, we will be subject to the reporting requirements of the Exchange Act, and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and the NYSE, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that the requirements of operating as a public company will increase our legal and financial compliance and investor relations costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company, as defined by the JOBS Act. We will also need to establish an investor relations function. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of those costs.

Public company reporting and disclosure obligations and a broader shareholder base as a result of our status as a public company may expose us to a greater risk of claims by shareholders, and we may experience threatened or actual litigation from time to time. If claims asserted in such litigation are successful, our business and operating results could be adversely affected, and, even if claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them and the diversion of management resources, could adversely affect our business and operating results.

We are an “emerging growth company” and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, under the JOBS Act, emerging growth companies can delay the adoption of certain new or revised accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies or that have opted out of using such extended transition period, which may make comparison of our financial statements with those of other public companies more difficult. We cannot predict if investors will find our Class A common stock less attractive because we may rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

We may take advantage of these reporting exemptions until we are no longer an emerging growth company or, with respect to adoption of certain new or revised accounting standards, until we irrevocably elect to opt out

 

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of using the extended transition period. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

If you purchase shares of our Class A common stock in this offering, you will experience substantial and immediate dilution in net tangible book value per share.

The assumed initial public offering price of $20.00 per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, is substantially higher than the net tangible book value per share of our outstanding Class A common stock immediately after this offering. If you purchase shares of Class A common stock in this offering, you will experience substantial and immediate dilution in the pro forma net tangible book value per share of $21.72 per share as of March 31, 2020, based on the assumed initial public offering price of $20.00 per share. That is because the price that you pay will be substantially greater than the pro forma net tangible book value per share of Class A common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution to the extent that new securities are issued under our equity incentive plans or we issue additional shares of Class A common stock or Class B common stock in the future. See “Dilution.”

Risks Relating to Our Organizational Structure

Provisions in our certificate of incorporation and bylaws, each of which will be in effect upon the completion of this offering, could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our Class A common stock.

Our certificate of incorporation and bylaws, each of which will be in effect upon the completion of this offering, contain provisions that could depress the trading price of our Class A common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that our stockholders may deem advantageous. In particular, our certificate of incorporation and bylaws:

 

   

establish a classified board of directors so that not all members are elected at one time, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

   

permit our board of directors to establish the number of directors and fill any vacancies (including vacancies resulting from an expansion in the size of our board of directors), except in the case of the vacancy of a Sponsor-designated director (in which case the Sponsor that designated the director will be able to fill the vacancy);

 

   

establish limitations on the removal of directors;

 

   

authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

   

provide that our board of directors is expressly authorized to make, alter or repeal our bylaws;

 

   

restrict the forum for certain litigation against us to Delaware;

 

   

provide that stockholders may not act by written consent following the time when the Sponsors collectively cease to beneficially own at least a majority of the shares of our outstanding common stock, which time we refer to as the Trigger Date, which would require stockholder action to be taken at an annual or special meeting of our stockholders;

 

   

prohibit stockholders from calling special meetings following the Trigger Date, which would delay the ability of our stockholders to force consideration of a proposal or to take action, including with respect to the removal of directors; and

 

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establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

Section 203 of the Delaware General Corporation Law, or the DGCL, prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person, individually or together with any other interested stockholder, who owns or within the last three years has owned 15% of our voting stock, unless the business combination is approved in a prescribed manner. We have elected to opt out of Section 203 of the DGCL. However, our certificate of incorporation will contain a provision that is of similar effect, except that it will exempt from its scope the Sponsors, any of their affiliates and certain of their respective direct or indirect transferees as described under “Description of Capital Stock—Anti-Takeover Provisions.”

Any provision of our certificate of incorporation, our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of Class A common stock and could also affect the price that some investors are willing to pay for our Class A common stock. See “Description of Capital Stock—Anti-Takeover Provisions.”

Our certificate of incorporation, which will be in effect upon the completion of this offering, will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for a wide range of disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation, which will be in effect upon the completion of this offering, will provide that the Court of Chancery of the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:

 

   

any derivative action or proceeding brought on our behalf;

 

   

any action asserting a breach of fiduciary duty owed by any director or officer or other employee to us or our stockholders;

 

   

any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws (as they may be amended from time to time);

 

   

any action asserting a claim against us or any of our directors, officers or other employees governed by the internal-affairs doctrine;

 

   

any action or proceeding to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws (including any right, obligation or remedy under our certificate of incorporation or our bylaws); and

 

   

any action or proceeding as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware.

This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the exclusive-forum provisions in our certificate of incorporation.

The exclusive-forum provisions will also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the exclusive forum for the resolution of

 

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any complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such exclusive-forum provision. However, there is substantial uncertainty as to whether a court would enforce the exclusive-forum provisions relating to causes of action arising under the Securities Act. If a court were to find any of the exclusive-forum provisions in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.

These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or employees, which may discourage lawsuits against us and our directors, officers and employees, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder.

Our certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities.

Under our certificate of incorporation, neither of the Sponsors nor any of their respective portfolio companies, funds or other affiliates, nor any of their officers, directors, employees, agents, stockholders, members or partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities, or lines of business in which we operate. In addition, our certificate of incorporation provides that, to the fullest extent permitted by law, no officer or director of ours who is also an officer, director, employee, agent, stockholder, member, partner or affiliate of either of the Sponsors will be liable to us or our stockholders for breach of any fiduciary duty by reason of the fact that any such individual directs a corporate opportunity to a Sponsor, instead of to us, or does not communicate information regarding a corporate opportunity to us that the officer, director, employee, agent, stockholder, member, partner or affiliate has directed to such Sponsor. For example, a director of our company who also serves as an officer, director, employee, agent, stockholder, member, partner or affiliate of one of the Sponsors, or any of their respective portfolio companies, funds, or other affiliates may pursue certain acquisitions or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by either of the Sponsors to itself or themselves or their respective portfolio companies, funds or other affiliates instead of to us. A description of our obligations related to corporate opportunities under our certificate of incorporation are more fully described in “Description of Capital Stock—Corporate Opportunity.”

We are a holding company and rely on dividends, distributions, and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.

We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash distributions and other transfers from our direct and indirect subsidiaries to meet our obligations. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or other distributions to us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Each of our subsidiaries is a distinct legal entity, and under certain circumstances legal and contractual restrictions may limit our ability to obtain cash from them and we may be limited in our ability to cause any future joint ventures to distribute their earnings to us. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could impair their ability to make distributions to us.

We continue to be controlled by the Sponsors, and the Sponsors’ interests may conflict with our interests and the interests of other stockholders.

Following this offering, the Sponsors will beneficially own 75.1% of our common stock (or 72.7% if the underwriters exercise their option to purchase additional shares in full). Pursuant to the stockholders agreement, or the Stockholders Agreement, that will be entered into among the Sponsors and us in connection with this

 

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offering, the Sponsors will have the right to designate a number of individuals to be included in the slate of nominees for election to our board of directors equal to the greater of up to six directors and the number of directors comprising a majority of our board of directors for so long as the Sponsors collectively own 50% or more of the outstanding shares of our common stock. Except as otherwise described in this prospectus, for so long as the Sponsors collectively own less than 50% of the outstanding shares of our common stock, the Sponsors will have the right to designate that number of individuals to be included in the slate of nominees for election to our board of directors (rounded up to the nearest whole number or, if such rounding would cause the Sponsors to have the right to elect a majority of our board of directors, rounded to the nearest whole number) that is the same percentage of the total number of directors comprising our board as the collective percentage of common stock owned by the Sponsors. Because our board of directors will be divided into three staggered classes, the Sponsors may be able to influence or control our affairs and policies even after they cease to own a majority of our outstanding Class A common stock during the period in which the Sponsors’ nominees finish their terms as members of our board, but in any event no longer than would be permitted under applicable law and the NYSE listing requirements. Therefore, following the completion of this offering and for so long as the Sponsors continue to own 50% or more of our common stock, individuals affiliated with the Sponsors will have the power to elect a majority of our directors and will have effective control over the outcome of votes on all matters requiring approval by our board of directors or our stockholders regardless of whether other stockholders believe such matter is in our best interests.

In addition, following the completion of this offering, the Stockholders Agreement will provide that, for so long as the Sponsors collectively own at least 30% of the outstanding shares of our common stock, certain significant corporate actions will require the prior written consent of each of the Sponsors, subject to certain exceptions. If either Sponsor owns less than 10% of the outstanding shares of our common stock, such action will not be subject to the approval of such Sponsor and the shares of common stock owned by such Sponsor will be excluded in calculating the 30% threshold. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

These actions include:

 

   

merging or consolidating with or into any other entity, or transferring all or substantially all of our assets, taken as a whole, to another entity, or undertaking any transaction that would constitute a “Change of Control” as defined in our debt agreements;

 

   

acquiring or disposing of assets, in a single transaction or a series of related transactions, or entering into joint ventures, in each case with a value in excess of $75.0 million;

 

   

incurring indebtedness in a single transaction or a series of related transactions in an aggregate principal amount in excess of $100.0 million;

 

   

issuing our or our subsidiaries’ equity other than pursuant to an equity compensation plan approved by our stockholders or a majority of the directors designated by the Sponsors;

 

   

terminating the employment of our chief executive officer or hiring or designating a new chief executive officer;

 

   

entering into any transactions, agreements, arrangements or payments with either of the Sponsors or any other person who owns greater than or equal to 10% of our common stock then outstanding that are material or involve aggregate payments or receipts in excess of $500,000;

 

   

amending, modifying or waiving any provision of our organizational documents in a manner that adversely affects the Sponsors;

 

   

commencing any liquidation, dissolution or voluntary bankruptcy, administration, recapitalization or reorganization;

 

   

increasing or decreasing the size of our board of directors; and

 

   

entering into of any agreement to do any of the foregoing.

 

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The interests of the Sponsors and their affiliates, including funds affiliated with the Sponsors, could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership held by the Sponsors could delay, defer or prevent a change in control of our company or impede a merger, takeover or other business combination which may otherwise be favorable for us. Additionally, the Sponsors and their affiliates are in the business of making investments in companies and may, from time to time, acquire and hold interests in or provide advice to businesses that compete directly or indirectly with us, or are suppliers or customers of ours. Any such investment may increase the potential for the conflicts of interest discussed in this risk factor. So long as funds affiliated with the Sponsors continue to directly or indirectly own a significant amount of our equity, even if such amount is less than 50%, the Sponsors will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions.

We are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for and intend to rely on exemptions from certain corporate governance requirements.

Following this offering, affiliates of the Sponsors will continue to control a majority of the voting power of our outstanding voting stock, and as a result we will be a controlled company within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:

 

   

a majority of the board of directors consist of independent directors;

 

   

the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

We intend to utilize these exemptions as long as we remain a controlled company. As a result, we may not have a majority of independent directors and our nominating and corporate governance committee and compensation committee may not consist entirely of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

Pursuant to Rule 10C-1 under the Exchange Act, the NYSE has adopted amendments to its listing standards that require, among other things, that:

 

   

compensation committees be composed of fully independent directors, as determined pursuant to new independence requirements;

 

   

compensation committees be explicitly charged with hiring and overseeing compensation consultants, legal counsel, and other committee advisors; and

 

   

compensation committees be required to consider, when engaging compensation consultants, legal counsel, or other advisors, certain independence factors, including factors that examine the relationship between the consultant or advisor’s employer and us.

As a “controlled company,” we will not be subject to these compensation committee independence requirements.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Many statements included in this prospectus that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under “Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” “would” or the negative of these terms or other comparable terminology. In particular, statements about potential new products and product innovation, statements regarding the potential impact of the COVID-19 pandemic, statements about the markets in which we operate, including growth of our various markets and growth in the use of engineered products, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” are forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

   

our market opportunity and the potential growth of that market;

 

   

our strategy, outcomes and growth prospects;

 

   

trends in our industry and markets; and

 

   

the competitive environment in which we operate.

Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

 

   

our business, financial condition and results of operations are being, and are expected to continue to be, adversely affected by the current COVID-19 public health pandemic;

 

   

demand for our products is significantly influenced by general economic conditions and trends in consumer spending on outdoor living and home exteriors, and adverse trends in, among other things, the health of the economy, repair and remodel and new construction activity, industrial production and institutional funding constraints;

 

   

risks associated with us competing against other manufacturers of (i) engineered and composite products; and (ii) products made from wood, metal and other traditional materials;

 

   

risks related to the seasonal nature of certain of our products and the impact that changes in weather conditions and product mix may have on our sales;

 

   

our ability to develop new and improved products and effectively manage the introduction of new products;

 

   

our ability to effectively manage changes in our manufacturing process resulting from cost savings and integration initiatives and the introduction of new products;

 

   

risks related to our ability to accurately predict demand for our products and risks related to our ability to maintain relationships with key distributors or other customers;

 

   

risks related to shortages in supply, price increases or deviation in the quality of raw materials;

 

   

our ability to retain management;

 

   

risks related to acquisitions or joint ventures we may pursue;

 

   

our ability to maintain product quality and product performance at an acceptable cost, and potential exposures resulting from our product warranties;

 

   

our ability to ensure that our products comply with local building codes and ordinances;

 

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risks arising from the material weaknesses we have identified in our internal control over financial reporting and any failure to remediate these material weaknesses;

 

   

our ability to maintain an effective system of internal controls and produce timely and accurate financial statements or comply with applicable regulations;

 

   

our ability to protect our intellectual property rights;

 

   

the increased expenses associated with being a public company;

 

   

risks associated with our substantial indebtedness and debt service including our ability to incur substantially more indebtedness, which could further exacerbate the risks associated with our substantial indebtedness;

 

   

risks associated with a lowering or withdrawal of the ratings assigned to our debt by rating agencies;

 

   

our need to generate cash to service our indebtedness;

 

   

restrictions in our debt agreements that limit our flexibility in operating our business;

 

   

our reliance on dividends, distributions and other payments from our subsidiaries to meet our obligations; and

 

   

other risks and uncertainties, including those described under “Risk Factors.”

We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described under “Risk Factors” and elsewhere in this prospectus. These risks are not exhaustive. Other sections of this prospectus include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot be sure that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in, or implied by, the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe that information forms a reasonable basis for such statements, that information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.

The forward-looking statements made in this prospectus relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this prospectus or to conform such statements to actual results or revised expectations, except as required by law.

 

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MARKET AND INDUSTRY DATA

We obtained the industry and market and competitive position data used throughout this prospectus from our own internal estimates and research, as well as from industry and general publications. Internal estimates are derived from information released by industry analysts and third-party sources, our internal research and our industry experience, and are based on assumptions made by us based on that information and our knowledge of our industry and market, which we believe to be reasonable. Certain industry and market data and forecasts in this prospectus are based on the independent research of Principia and Freedonia. In addition, while we believe the industry and market data included in this prospectus were based on reasonable assumptions when prepared, the industry and market data involve risks and uncertainties and are subject to change based on various factors, including those discussed in “Risk Factors.” In particular, the market and industry estimates in this prospectus were prepared prior to the COVID-19 pandemic. The data provided by Principia is as of October 2019 and presents final data for 2018. Principia’s 2019 data is expected to be released in the second half of 2020. We expect that the COVID-19 pandemic may materially reduce the growth of various of the markets discussed in this prospectus, and we cannot predict the extent to which these estimates will be affected. These and other factors could cause results to differ materially from those expressed in, or implied by, the estimates made by independent parties and by us. Furthermore, we cannot assure you that a third party using different methods to assemble, analyze or compute industry and market data would obtain the same results.

Information based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. In some cases, we do not expressly refer to the sources from which data is derived.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $577.1 million (or approximately $665.4 million if the underwriters exercise their option to purchase additional shares of Class A common stock from us in full) based upon an assumed initial public offering price of $20.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $20.00 per share of Class A common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $29.5 million, assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of Class A common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $18.9 million, assuming the assumed initial public offering price of $20.00 per share remains the same, and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use net proceeds received by us from this offering first to redeem the Senior Notes, plus accrued and unpaid interest thereon, and then to prepay approximately $198.3 million of the outstanding principal amount under our Term Loan Credit Agreement. As of May 28, 2020, $350.0 million aggregate principal amount of the Senior Notes was outstanding. We intend to redeem the Senior Notes at a redemption price equal to 107.125% of the aggregate principal amount outstanding plus accrued and unpaid interest to the redemption date; see “Description of Certain Indebtedness—Senior Notes.” As of March 31, 2020, we had $804.3 million of principal outstanding under our Term Loan Credit Agreement. The Senior Notes mature on May 15, 2025 and bear interest at an annual rate of 9.500%. After giving effect to the redemption of the Senior Notes using net proceeds from this offering, the Term Loan Credit Agreement will mature on May 5, 2024 and currently bears interest at a rate of 5.93% per annum. To the extent the proceeds we receive in this offering are lower than currently estimated, we may, if necessary, elect not to prepay any amounts under our Term Loan Credit Agreement. If the net proceeds we receive in this offering are insufficient to redeem the Senior Notes in full, we may redeem up to 40% of the outstanding principal amount of the Senior Notes.

We will use any additional net proceeds raised in this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of any additional net proceeds we receive from this offering for acquisitions or other strategic investments, although we do not currently have any specific plans to do so.

We intend to invest the net proceeds to us from this offering that are not used as described above (or pending such use) in investment-grade, interest-bearing instruments. The precise allocation of funds among these uses will depend upon future developments in or affecting our business and the emergence of future opportunities.

 

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CORPORATE CONVERSION

We currently operate as a Delaware limited liability company under the name CPG Newco LLC. CPG Newco LLC is a holding company which holds all of the limited liability company interests in CPG International LLC, the entity which directly and indirectly holds all of the equity interests in our operating subsidiaries. Prior to the effectiveness of the registration statement of which this prospectus forms a part, CPG Newco LLC will convert into a Delaware corporation pursuant to a statutory conversion and will change its name to The AZEK Company Inc. In addition, a special purpose entity, CPG Holdco LLC, which was formed at the time of the acquisition of CPG Newco LLC solely for the purpose of holding membership interests in CPG Newco LLC and that will continue to hold such interests until the Corporate Conversion, will be merged with and into us. In this prospectus, we refer to all of the transactions related to our conversion into a corporation and the merger described above as the Corporate Conversion.

The purpose of the Corporate Conversion is to reorganize our corporate structure so that the entity that is offering Class A common stock to the public in this offering is a corporation rather than a limited liability company.

In conjunction with the Corporate Conversion, all of our outstanding membership interests will be converted into an aggregate of 108,162,741 shares of our common stock. 75,093,778 shares of common stock will be designated Class A common stock and 33,068,963 shares of common stock will be designated Class B common stock. The number of shares of Class A common stock and Class B common stock issuable in connection with the Corporate Conversion will be determined pursuant to the applicable provisions of the plan of conversion.

As a result of the Corporate Conversion, The AZEK Company Inc. will succeed to all of the property and assets of CPG Newco LLC and will succeed to all of the debts and obligations of CPG Newco LLC. The AZEK Company Inc. will be governed by a certificate of incorporation filed with the Delaware Secretary of State and bylaws, the material provisions of which are described under the heading “Description of Capital Stock.” On the effective date of the Corporate Conversion, each of our directors and officers will be as described elsewhere in this prospectus. See “Management.”

Except as otherwise noted herein, the Consolidated Financial Statements included elsewhere in this prospectus are those of CPG Newco LLC and its consolidated operations. We do not expect that the Corporate Conversion will have an effect on our results of operations.

 

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DIVIDEND POLICY

We did not declare any dividends in fiscal years 2019 and 2018, and we currently do not anticipate paying any cash dividends after this offering and for the foreseeable future. Instead, we anticipate that all of our earnings on our common stock in the foreseeable future will be used to repay debt, for working capital, to support our operations and to finance the growth and development of our business. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including restrictions in our current and future debt instruments, our future earnings, capital requirements, financial condition, prospects, and applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits.

As a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries. Our ability to pay dividends will therefore be restricted as a result of restrictions on their ability to pay dividends to us, including under the agreements governing our existing and any future indebtedness. See “Risk Factors—Risks Relating to This Offering and Ownership of Our Class A Common Stock,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Description of Certain Indebtedness.”

 

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CAPITALIZATION

The following table describes our cash, cash equivalents and available-for-sale securities and capitalization as of March 31, 2020:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the Corporate Conversion, the issuance of the Senior Notes, including the use of proceeds therefrom to redeem the 2013 Notes at par, plus accrued and unpaid interest, to repay $15.0 million of outstanding principal amount under the Revolving Credit Agreement and to pay fees and expenses associated with the issuance of the Senior Notes, and the distribution by the Partnership of shares of Class A common stock and shares of Class B common stock to the Sponsors and the other holders of partnership interests in the Partnership as described in “Corporate Structure” and “Corporate Conversion”; and

 

   

on a pro forma as adjusted basis to additionally give effect to (i) the sale of 31,250,000 shares of our Class A common stock in this offering, assuming an initial public offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the application of the estimated net proceeds from this offering as described under “Use of Proceeds.”

You should read the following information together with the information contained under the headings “Use of Proceeds,” “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the related Notes appearing at the end of this prospectus.

 

    As of March 31, 2020  
    Actual     Pro forma(2)     Pro forma
as adjusted(3)(4)
 
(In thousands, except unit/share and per share data)      

Cash and Cash Equivalents

  $ 94,698       99,298       105,027  
 

 

 

   

 

 

   

 

 

 

Total Debt:

     

Revolving Credit Agreement

  $ 129,000       114,000       114,000  

Term Loan Credit Agreement

    804,345       804,345       606,007  

Senior Notes

    —         350,000       —    

2013 Notes

    315,000       —         —    
 

 

 

   

 

 

   

 

 

 

Total debt

  $ 1,248,345       1,268,345       720,007  
 

 

 

   

 

 

   

 

 

 

Member’s Equity:

     

75,093,778 Class A units outstanding, 33,068,963 Class B units outstanding and 0 Preferred units outstanding, actual, pro forma and pro forma as adjusted (1)

  $ —         —         —    

Additional paid-in capital(1)

    652,406       —         —    

Accumulated deficit(1)

    167,000       —         —    
 

 

 

   

 

 

   

 

 

 

Total member’s equity(1)

  $ 485,406       —         —    
 

 

 

   

 

 

   

 

 

 

Stockholders’ Equity:

     

Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 1,000,000 shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted

    —         —         —    

Class A common stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 1,100,000,000 shares authorized, 77,638,187 shares issued and outstanding, pro forma; 1,100,000,000 shares authorized, 108,888,187 shares issued and outstanding, pro forma as adjusted(1)

    —         78       109  

Class B common stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 100,000,000 shares authorized, 33,068,963 shares issued and outstanding, pro forma; 100,000,000 shares authorized, 33,068,963 shares issued and outstanding, pro forma as adjusted(1)

    —         33       33  

Additional paid-in capital(1)

    —         483,184       1,018,408  
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    —         483,295       1,018,550  
 

 

 

   

 

 

   

 

 

 

Total Capitalization

  $ 1,733,751       1,751,640       1,738,556  
 

 

 

   

 

 

   

 

 

 

 

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(1)

In connection with the Corporate Conversion, the membership interests and member’s accumulated deficit will be reduced to zero to reflect the elimination of all outstanding interests in CPG Newco LLC and corresponding adjustments will be reflected as Class A common stock, Class B common stock, additional paid-in capital and total stockholders’ equity in CPG Newco LLC.

(2)

Reflects (i) our redemption of all outstanding 2013 Notes, including a loss on extinguishment of approximately $2 million to be recorded in the three months ending June 30, 2020; (ii) the issuance of the Senior Notes and our receipt of $16.5 million of gross proceeds from the offering of the Senior Notes after the redemption of the 2013 Notes (excluding amounts applied to accrued interest) and our repayment of $15.0 million of the outstanding principal amount under our Revolving Credit Agreement on May 14, 2020; (iii) our payment of $4.6 million of accrued and unpaid interest on the 2013 Notes on May 12, 2020 in connection with their redemption described in clause (i); and (iv) our payment of the initial purchasers’ discount and other fees and expenses of $7.4 million in connection with the offering of the Senior Notes.

(3)

Reflects, in addition to the pro forma adjustments described in footnote (2) above, (i) our receipt of $0.0 million of gross proceeds from this offering after the redemption of $350.0 million in aggregate principal amount of the Senior Notes (excluding amounts applied to accrued interest) at a redemption price of 107.125% of such aggregate principal amount and our prepayment of $198.3 million of the outstanding principal amount under our Term Loan Credit Agreement; (ii) our payment of $3.8 million of accrued and unpaid interest on the Senior Notes in connection with their redemption described in clause (i) assuming a redemption date of June 23, 2020; and (iii) our payment of the estimated underwriting discount and commissions and other fees and expenses of this offering of $47.9 million. We estimate that the redemption of the Senior Notes will result in an estimated loss on extinguishment of approximately $36 million to be recorded in the three months ending June 30, 2020. Also reflects compensation expense expected to be recognized upon the consummation of this offering as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-Based Compensation”.

(4)

Pro forma as adjusted cash and cash equivalents reflects $5.7 million of deferred offering costs that have been paid as of March 31, 2020 and $6.3 million of other deferred offering costs.

Assuming no change in the number of shares offered by us as set forth on the cover page of this prospectus, a $1.00 increase (decrease) in the assumed initial public offering price of $20.00 per share of Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) each of additional paid-in capital and total equity by $29.5 million and would decrease (increase) total debt by $29.5 million, after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us.

Similarly, a 1.0 million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) each of additional paid-in capital and total equity by $18.9 million and would decrease (increase) total debt by $18.9 million, after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us, based on the assumed initial public offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, remained the same.

The table above gives effect to: (1) the split of our single unit, representing all of our limited liability company interests, into 108,162,741 units, consisting of 75,093,778 Class A units and 33,068,963 Class B units; (2) the completion of the Corporate Conversion, including our merger with CPG Holdco LLC, our direct parent entity, following which we will be the surviving entity and a one-for-one conversion of our Class A units into shares of Class A common stock and a one-for-one conversion of our Class B units into shares of Class B common stock; (3) the distribution by the Partnership of shares of Class A common stock and shares of Class B common stock to the Sponsors and the other holders of partnership interests in the Partnership as described in “Corporate Structure” and “Corporate Conversion;” (4) no exercise of the underwriters’ option to purchase additional shares of our common stock; and (5) the effectiveness of our certificate of incorporation and bylaws in connection with the completion of this offering.

The table above does not give effect to or reflect the following shares (all of which are calculated based on an assumed initial public offering price of $20.00 per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus): (1) 5,144,202 unvested shares of Class A common stock issued in exchange for unvested Profits Interests; (2) 4,710,177 shares of Class A common stock issuable upon exercise of options, with an exercise price that will be equal to the initial public offering price per share, which options will be issued in connection with the exchange of Profits Interests for shares of Class A common stock (1,030,833 shares will be issuable in respect of vested options and 3,679,344 shares will be issuable in respect of unvested options); (3) 236,843 shares of Class A common stock issuable upon the vesting of restricted stock units and 968,423 shares of Class A common stock issuable upon exercise of options, with an exercise price that will be equal to the initial public offering price per share, in each case that will be granted to certain directors, officers and employees in connection with this offering; and (4) 4,555,642 shares of Class A common stock available for further issuance under our 2020 Omnibus Incentive Plan. See “Executive Compensation—Post Offering Compensation—2020 Omnibus Incentive Compensation Plan.”

 

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DILUTION

If you invest in our Class A common stock, your ownership interest in us will be diluted to the extent of the difference between the initial public offering price in this offering per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our common stock upon consummation of this offering. Pro forma net tangible book value per share represents the book value of our total tangible assets less the book value of our total liabilities divided by the total number of shares of common stock then issued and outstanding, on a pro forma basis after giving effect to the Corporate Conversion and our redemption of all outstanding 2013 Notes, including a loss on extinguishment of approximately $2 million to be recorded in the three months ending June 30, 2020.

Pro forma net tangible book deficit as of March 31, 2020 was $787.3 million, or $6.80 per share based on 115,851,352 shares of our common stock outstanding. After giving effect to (i) our sale of 31,250,000 shares of Class A common stock in this offering, at an assumed initial public offering price of $20.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the application of the estimated net proceeds from this offering as described under “Use of Proceeds,” including the write-off of deferred financing costs and debt discount in connection therewith, and (iii) compensation expense expected to be recognized upon the consummation of this offering, our pro forma as adjusted net tangible book deficit as of March 31, 2020 would have been $252.0 million, or $1.72 per share (assuming no exercise of the underwriters’ option to purchase additional shares of our Class A common stock). This amount represents an immediate increase in pro forma net tangible book value of $5.08 per share of Class A common stock to our existing investors before this offering and an immediate dilution of $21.72 per share to new investors purchasing Class A common stock in this offering. The following table illustrates this dilution per share:

 

Assumed initial public offering price per share

     $ 20.00  

Pro forma net tangible book value (deficit) per share as of March 31, 2020

   $ (6.80  

Increase (decrease) in pro forma net tangible book value (deficit) per share attributable to this offering

   $ 5.08    
  

 

 

   

Pro forma as adjusted net tangible book value (deficit) per share after giving effect to this offering

     $ (1.72
    

 

 

 

Dilution per share to new investors in this offering

     $ 21.72  
    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease (increase) our pro forma as adjusted net tangible book deficit per share after this offering by $0.20 and increase (decrease) dilution per share to new investors purchasing Class A common stock in this offering by $0.80, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting assumed underwriting discounts and commissions and estimated offering expenses by us. An increase (decrease) of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease (increase) our pro forma as adjusted net tangible book deficit after this offering by $18.9 million and $0.14 per share and decrease (increase) the dilution per share to new investors purchasing Class A common stock in this offering by $0.14, assuming no change in the assumed initial public offering price per share and after deducting assumed underwriting discounts and commissions and estimated offering expenses by us.

If the underwriters exercise in full their option to purchase 4,687,500 additional shares of Class A common stock in this offering, our pro forma as adjusted net tangible book deficit per share after this offering would be $1.66 and the dilution in pro forma as adjusted net tangible book deficit per share to new investors purchasing Class A common stock in this offering would be $21.66, assuming no change in the initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The following table summarizes, on a pro forma as adjusted basis as of March 31, 2020, the differences between the number of shares of Class A common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and to be paid by the new investors purchasing shares of Class A common stock in this offering, at an assumed initial public offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discounts and commissions and offering expenses payable by us in connection with this offering.

 

     Shares purchased     Total consideration     Average
price per share
 
     Number      Percent     Amount      Percent  

Existing investors

     107,291,480        77.4   $ 635,043,168        50.4   $ 5.92  

New investors in this offering

     31,250,000        22.6   $ 625,000,000        49.6   $ 20.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     138,541,480        100.0   $ 1,260,043,168        100.0  

A $1.00 increase (decrease) in the assumed initial public offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors in this offering by $31.3 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by 1.2 percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by 1.3 percentage points, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting the underwriting discounts and commissions and offering expenses payable by us in connection with this offering. An increase (decrease) of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors by $20.0 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by 0.8 percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by 0.8 percentage points, assuming no change in the assumed initial public offering price per share and before deducting the underwriting discounts and commissions and offering expenses payable by us in connection with this offering.

The table above assumes no exercise of the underwriters’ option to purchase additional shares in this offering. If the underwriters’ option to purchase additional shares is fully exercised, the number of shares of our common stock held by existing stockholders would be reduced to 74.9% of the total number of shares of our common stock outstanding after this offering, and the number of shares of Class A common stock held by new investors purchasing common stock in this offering would be increased to 25.1% of the total number of shares of our common stock outstanding after this offering.

The discussion and tables above gives effect to: (1) the split of our single unit, representing all of our limited liability company interests, into 108,162,741 units, consisting of 75,093,778 Class A units and 33,068,963 Class B units; (2) the completion of the Corporate Conversion, including our merger with CPG Holdco LLC, our direct parent entity, following which we will be the surviving entity and a one-for-one conversion of our Class A units into shares of Class A common stock and a one-for-one conversion of our Class B units into shares of Class B common stock; (3) the distribution by the Partnership of shares of Class A common stock and shares of Class B common stock to the Sponsors and the other holders of partnership interests in the Partnership as described in “Corporate Structure” and “Corporate Conversion”, including the issuance of 5,144,202 unvested shares of Class A common stock issued in exchange for unvested Profits Interests, and (4) the effectiveness of our certificate of incorporation and bylaws in connection with the completion of this offering.

The discussion and tables above do not give effect to or reflect the following shares (all of which are calculated based on an assumed initial public offering price of $20.00 per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus): (1) 4,710,177 shares of Class A common stock issuable upon exercise of options, with an exercise price that will be equal to the initial public offering price per share, which options will be issued in connection with the exchange of Profits Interests for

 

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shares of Class A common stock (1,030,833 shares will be issuable in respect of vested options and 3,679,344 shares will be issuable in respect of unvested options); (2) 236,843 shares of Class A common stock issuable upon the vesting of restricted stock units and 968,423 shares of Class A common stock issuable upon exercise of options, with an exercise price that will be equal to the initial public offering price per share, in each case that will be granted to certain directors, officers and employees in connection with this offering; and (3) 4,555,642 shares of Class A common stock available for further issuance under our 2020 Omnibus Incentive Plan. See “Executive Compensation—Post Offering Compensation—2020 Omnibus Incentive Compensation Plan.”

We expect to require additional capital to fund our current and future operating plans. To the extent additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders. See “Risk Factors—Risks Relating to This Offering and Ownership of Our Class A Common Stock—Future issuances of our Class A common stock, including upon conversion of our Class B common stock, could result in significant dilution to our stockholders, dilute the voting power of our Class A common stock and depress the market price of our Class A common stock.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statements of income data and selected consolidated statements of cash flow data for fiscal years 2019 and 2018 and the selected consolidated balance sheet data as of September 30, 2019 and September 30, 2018 have been derived from our Consolidated Financial Statements included elsewhere in this prospectus. The selected consolidated statement of income data and summary consolidated statement of cash flow data for fiscal year 2017 have been derived from our Consolidated Financial Statements not included in this prospectus. The selected consolidated statements of income data and selected consolidated statements of cash flow data for the six months ended March 31, 2020 and 2019 and the selected consolidated balance sheet data as of March 31, 2020 have been derived from our unaudited Consolidated Financial Statements included elsewhere in this prospectus. In the opinion of management, our unaudited Consolidated Financial Statements were prepared on the same basis as our audited Consolidated Financial Statements and include all adjustments necessary for a fair presentation of the financial information set forth in those statements.

Our historical results are not necessarily indicative of future operating results and our results for the six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year or any other period. The selected financial data set forth below should be read together with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related Notes included elsewhere in this prospectus.

 

    Six Months Ended March 31,     Years Ended September 30,  
(In thousands, except unit/share and per unit/
share data)
  2020     2019     2019     2018     2017  

Consolidated Statements of Income Data(1):

         

Net Sales

  $ 411,628     $ 357,362     $ 794,203     $ 681,805     $ 632,631  

Cost of Sales

    (280,965     (249,051     (541,006     (479,769     (463,643
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    130,663       108,311       253,197       202,036       168,988  

Selling, general and administrative expenses

    (93,166     (86,803     (183,572     (144,688     (147,003

Impairment of goodwill

    —         —         —         —         (32,200

Impairment of property, plant and equipment

    —         —         —         —         (11,380

Other general expenses

    (5,093    
(4,158

    (9,076     (4,182     —    

Gain (loss) on disposal of property, plant and equipment

    (28     (1,436 )       (1,495     (791     (4,288
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    32,376       15,914       59,054       52,375       (25,883

Interest expense

    (39,734     (41,773     (83,205     (68,742     (61,577

Loss before income taxes

    (7,358     (25,859     (24,151     (16,367     (87,460

Income tax benefit

    1,600       5,072       3,955       23,112       20,049  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (5,758   $ (20,787   $ (20,196   $ 6,745     $ (67,411
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings (loss) attributable to units outstanding

  $ (0.05   $ (0.19   $ (0.19   $ 0.06     $ (0.62
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted weighted-average units outstanding

    108,162,741       108,162,741       108,162,741       108,162,741       108,162,741  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted pro forma earnings (loss) per share attributable to common stockholders(2) (unaudited)

  $ (0.05   $ (0.18   $ (0.18   $ 0.06     $ (0.61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted pro forma weighted-average common shares outstanding(2) (unaudited)

    114,333,513       112,397,744       113,458,316       111,520,639       109,972,961  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Statements of Cash Flow Data:

         

Net cash provided by (used in) operating activities

  $ (68,032   $ (48,521   $ 94,872     $ 67,302     $ 57,368  

Net cash provided by (used in) investing activities

    (60,240     (33,208     (62,935     (335,682     (22,511

Net cash provided by (used in) financing activities

    117,023       19,802       (8,273     248,742       (12,104

Purchases of property, plant and equipment

    (42,606     (33,233     (63,006     (42,758     (22,511

 

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     As of
March 31,
     As of September 30,  
     2019      2018  
     2020      Actual      Actual  
(In thousands)                     

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 94,698      $ 105,947      $ 82,283  

Working capital

     261,052        150,593        138,870  

Total assets

     1,886,071        1,788,263        1,779,180  

Total current liabilities

     120,163        139,997        109,799  

Total long-term debt—less current portion

     1,229,844        1,103,313        1,107,989  

Total member’s/stockholders’ equity

     485,406        490,023        505,553  

 

(1)

In connection with the completion of this offering, based on an assumed public offering price of $20.00 per share, which is the mid-point of the price range set forth on the cover of this prospectus, we estimate that we will incur aggregate equity compensation expense in the range of $114 million to $134 million as a result of the recognition of previously unrecognized compensation expense and one-time grants of options and restricted stock units to our directors, executive officers and employees. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity-Based Compensation.”

(2)

Pro forma to reflect the Corporate Conversion, without giving effect to the issuance of shares of Class A common stock in this offering. The pro forma information also includes the effects of the vested shares of Class A common stock issued in exchange for vested Profits Interests of the Partnership.

Non-GAAP Financial Measures

To supplement our 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 are not 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 Consolidated Financial Statements prepared and presented in accordance with GAAP.

 

     Six Months Ended
March 31,
    Years Ended September 30,  
     2020     2019     2019     2018     2017  
(In thousands)                               

Non-GAAP financial measures:

          

Adjusted Gross Profit

   $ 161,755     $ 137,681     $ 314,858     $ 254,075     $ 224,516  

Adjusted Net Income

     37,916       24,067       72,277       59,226       42,812  

Adjusted EBITDA

     89,624       74,294       179,566       150,065       131,266  

Adjusted EBITDA Margin

     21.8     20.8     22.6     22.0     20.7

Adjusted Gross Profit, Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted Gross Profit as gross profit before depreciation and amortization, business transformation costs and acquisition costs as described below. We define Adjusted Net Income as net income (loss) before depreciation and amortization, share-based compensation costs, asset impairment costs, business

 

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transformation costs, acquisition costs, initial public offering costs, capital structure transaction costs and certain other costs as described below. In addition, Adjusted Net Income for fiscal 2018 excludes the net benefit related to the remeasurement of our deferred tax assets and deferred tax liabilities as a result of the Tax Act. We define Adjusted EBITDA as net income (loss) before interest expense, net, income tax (benefit) expense and depreciation and amortization and by adding to or subtracting therefrom items of expense and income as described above. Adjusted EBITDA Margin is equal to Adjusted EBITDA divided by net sales. We believe Adjusted Gross Profit, Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain expenses that can vary from company to company depending on, among other things, its financing, capital structure and the method by which its assets were acquired, and can also vary significantly from period to period. We also add back depreciation and amortization and share-based compensation because we do not consider them indicative of our core operating performance. We believe their exclusion facilitates comparisons of our operating performance on a period-to-period basis. Therefore, we believe that showing gross profit and net income, as adjusted to remove the impact of these expenses, is helpful to investors in assessing our gross profit and net income performance in a way that is similar to the way management assesses our performance. Additionally, EBITDA and EBITDA margin are common measures of operating performance in our industry, and we believe they facilitate operating comparisons. Our management also uses Adjusted Gross Profit, Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with other GAAP financial measures for planning purposes, including as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance. Management considers Adjusted Gross Profit and Adjusted Net Income as useful measures because our cost of sales includes the depreciation of property, plant and equipment used in the production of products and the amortization of various intangibles related to our manufacturing processes.

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

 

   

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

 

   

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

 

   

Other companies in our industry may calculate Adjusted Gross Profit, Adjusted Net Income, 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.

 

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

Adjusted EBITDA and Adjusted EBITDA Margin Reconciliation

 

     Six Months Ended
March 31,
    Years Ended
September 30,
 
         2020             2019             2019             2018             2017      
(In thousands)                               

Net income (loss)

   $ (5,758   $ (20,787   $ (20,196   $ 6,745     $ (67,411

Interest expense

     39,734       41,773       83,205       68,742       61,577  

Depreciation and amortization

     48,628       46,391       93,929       77,665       77,657  

Tax benefit

     (1,600     (5,072     (3,955     (23,112     (20,049

Share-based compensation costs

     1,845       2,020       3,682       3,099       1,459  

Asset impairment costs(1)

     —         —         —         920       48,846  

Business transformation costs(2)

     326       9,777       16,560       5,822       8,562  

Capital structure transaction costs(3)

     —         —         —         367       295  

Acquisition costs(4)

     1,356       3,135       4,110       7,361       —    

Initial public offering costs

     5,093       4,158       9,076       789       —    

Other costs(5)

     —         (7,101     (6,845     1,667       20,330  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     95,382       95,081       199,762       143,320       198,677  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 89,624     $ 74,294     $ 179,566     $ 150,065     $ 131,266  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin

     21.8     20.8     22.6     22.0     20.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Asset impairment costs reflect tangible and intangible asset impairment costs of $0.9 million and $48.8 million for fiscal 2018 and 2017, respectively. The tangible asset impairment costs for fiscal 2017 include the write off of $1.1 million of inventory relating to certain products determined not to be commercially viable.

(2)

Business transformation costs reflect consulting costs related to repositioning of our brands of $0.0 million and $3.2 million for the six months ended March 31, 2020 and 2019, respectively, and $4.3 million, $0.0 million and $2.0 million in fiscal 2019, 2018 and 2017, respectively, compensation costs related to the transformation of the senior management team of $0.3 million and $1.7 million for the six months ended March 31, 2020 and 2019, respectively, and $2.3 million, $0.2 million and $4.3 million in fiscal 2019, 2018 and 2017, respectively, costs related to the relocation of our corporate headquarters of $0.0 million and $1.9 million for the six months ended March 31, 2020 and 2019, respectively, and $2.0 million in fiscal 2019, startup costs of our new recycling facility of $0.0 million and $1.5 million for the six months ended March 31, 2020 and 2019, respectively, and $5.3 million in fiscal 2019, and other integration-related costs of $0.0 million and $1.5 million for the six months ended March 31, 2020 and 2019, respectively, and $2.7 million, $5.6 million and $2.3 million in fiscal 2019, 2018 and 2017, respectively.

(3)

Capital structure transaction costs reflect non-capitalizable debt and equity issuance costs.

(4)

Acquisition costs reflect costs directly related to completed acquisitions of $0.8 million and $3.1 million for the six months ended March 31, 2020 and 2019, respectively, and $4.1 million and $4.9 million in fiscal 2019 and 2018, respectively, and inventory step-up adjustments related to recording the inventory of acquired businesses at fair value on the date of acquisition of $0.6 million and $0.0 million for the six months ended March 31, 2020 and 2019, respectively, and $2.4 million in fiscal 2018.

(5)

Other costs reflect costs for legal defense of $0.0 million and $0.6 million for the six months ended March 31, 2020 and 2019, respectively, and $0.9 million, $1.5 million and $5.2 million in fiscal 2019, 2018 and 2017, respectively, insurance reimbursement of ($7.7) million in the six months ended March 31, 2019, and in fiscal 2019, settlement costs of $0.0 million and $15.0 million in fiscal 2018 and 2017, respectively, and other miscellaneous adjustments of $0.0 million, $0.2 million and $0.1 million in fiscal 2019, 2018 and 2017, respectively.

Adjusted Gross Profit Reconciliation

 

     Six Months Ended
March 31,
     Years Ended
September 30,
 
         2020              2019              2019              2018              2017      
(In thousands)                                   

Gross profit

   $ 130,663      $ 108,311      $ 253,197      $ 202,036      $ 168,988  

Depreciation and amortization(1)

     30,538        27,861        56,398        49,611        53,917  

Business transformation costs(2)

     —          1,509        5,263        —          1,611  

Acquisition costs(3)

     554        —          —          2,428        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Gross Profit

   $ 161,755      $ 137,681      $ 314,858      $ 254,075      $ 224,516  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1)

Depreciation and amortization for the six months ended March 31, 2020 and 2019, and fiscal 2019, 2018 and 2017 consists of $18.1 million, $14.1 million, $28.9 million, $23.0 million and $27.2 million, respectively, of depreciation and $12.4 million, $13.8 million, $27.5 million, $26.6 million and $26.7 million, respectively, of amortization of intangibles, comprised of intangibles relating to our manufacturing processes.

(2)

Business transformation costs reflect startup costs of our new recycling facility of $5.3 million in fiscal 2019 and other integration-related expenses for the six months ended March 31, 2019 and in fiscal 2017.

(3)

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

Adjusted Net Income Reconciliation

 

     Six Months Ended
March 31,
    Years Ended
September 30,
 
         2020             2019             2019             2018             2017      
(In thousands)                               

Net income (loss)

   $ (5,758   $ (20,787   $ (20,196   $ 6,745     $ (67,411

Depreciation and amortization(1)

     48,628       46,391       93,929       77,665       77,657  

Share-based compensation costs

     1,845       2,020       3,682       3,099       1,459  

Asset impairment costs(2)

     —         —         —         920       48,846  

Business transformation costs(3)

     326       9,777       16,560       5,822       8,562  

Capital structure transaction costs(4)

     —         —         —         367       295  

Acquisition costs(5)

     1,356       3,135       4,110       7,361       —    

Initial public offering costs

     5,093       4,158       9,076       789       —    

Other costs(6)

     —         (7,101     (6,845     1,667       20,330  

Tax impact of adjustments(7)

     (13,574     (13,526     (28,039     (22,702     (46,926

Tax Act remeasurement(8)

     —         —         —         (22,507     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

   $ 37,916     $ 24,067     $ 72,277     $ 59,226     $ 42,812  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Depreciation and amortization reflects depreciation of $20.9 million and $16.0 million for the six months ended March 31, 2020 and 2019, respectively, and $33.7 million, $26.3 million and $30.0 million in fiscal 2019, 2018 and 2017, respectively, and amortization of $27.7 million and $30.4 million for the six months ended March 31, 2020 and 2019, respectively, and $60.2 million, $51.4 million and $47.6 million in fiscal 2019, 2018 and 2017, respectively.

(2)

Asset impairment costs reflect tangible and intangible asset impairment costs of $0.9 million and $48.8 million in fiscal 2018 and 2017. The tangible asset impairment costs for fiscal 2017 include the write off of $1.1 million of inventory relating to certain products determined not to be commercially viable.

(3)

Business transformation costs reflect consulting costs related to repositioning of our brands of $0.0 million and $3.2 million for the six months ended March 31, 2020 and 2019, respectively, and $4.3 million, $0.0 million and $2.0 million in fiscal 2019, 2018 and 2017, respectively, compensation costs related to the transformation of the senior management team of $0.3 million and $1.7 million for the six months ended March 31, 2020 and 2019, respectively, and $2.3 million, $0.2 million and $4.3 million in fiscal 2019, 2018 and 2017, respectively, costs related to the relocation of our corporate headquarters of $0.0 million and $1.9 million for the six months ended March 31, 2020 and 2019, respectively, and $2.0 million in fiscal 2019, startup costs of our new recycling facility of $0.0 million and $1.5 million for the six months ended March 31, 2020 and 2019, respectively, and $5.3 million in fiscal 2019, and other integration-related costs of $0.0 million and $1.5 million for the six months ended March 31, 2020 and 2019, respectively, and $2.7 million, $5.6 million and $2.3 million in fiscal 2019, 2018 and 2017, respectively.

(4)

Capital structure transaction costs reflect non-capitalizable debt and equity issuance costs.

(5)

Acquisition costs reflect costs directly related to completed acquisitions of $0.8 million and $3.1 million for the six months ended March 31, 2020 and 2019, respectively, and $4.1 million and $4.9 million in fiscal 2019 and 2018, respectively, and inventory step-up adjustments related to recording the inventory of acquired businesses at fair value on the date of acquisition of $0.6 million and $0.0 million for the six months ended March 31, 2020 and 2019, respectively, and $2.4 million in fiscal 2018.

(6)

Other costs reflect costs for legal defense of $0.0 million and $0.6 million for the six months ended March 31, 2020 and 2019, respectively, and $0.9 million, $1.5 million and $5.2 million in fiscal 2019, 2018 and 2017, respectively, insurance reimbursement of ($7.7) million in the six months ended March 31, 2019, and in fiscal 2019, settlement costs of $0.0 million and $15.0 million in fiscal 2018 and 2017, respectively, and other miscellaneous adjustments of $0.0 million, $0.2 million and $0.1 million in fiscal 2019, 2018 and 2017, respectively.

(7)

Tax impact of adjustments is based on applying a combined U.S. federal and state statutory tax rate of 24.5%, 24%, 24% and 38% for fiscal 2020, 2019, 2018 and 2017, respectively, except that a tax rate of 0% was applied to the adjustments for share-based compensation costs and for goodwill impairment in fiscal 2017 as those items did not give rise to income tax deductions.

(8)

Tax Act remeasurement is a one-time tax benefit of $22.5 million as a result of the remeasurement of certain deferred taxes due to the enactment of the Tax Act.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our Consolidated Financial Statements and related Notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements.

Overview

We are an industry-leading designer and manufacturer of beautiful, low-maintenance and environmentally sustainable products focused on the highly attractive, fast-growing Outdoor Living market. Homeowners are continuing to invest in their outdoor spaces and are increasingly recognizing the significant advantages of long-lasting products, which are converting demand away from traditional materials, particularly wood. Our products transform those outdoor spaces by combining highly appealing aesthetics with significantly lower maintenance costs compared to traditional materials. Our innovative portfolio of Outdoor Living products, including deck, rail, trim and accessories, inspires consumers to design outdoor spaces tailored to their unique lifestyle needs. We are well known in the industry, and, according to data provided by Principia, we generally hold one of the top two market share positions by revenue in our product categories. 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, lockers and storage solutions. One of our core values is to “always do the right thing”. We make decisions according to what is right, not what is the cheapest, fastest or easiest, and we strive to always operate with integrity, transparency and the customer in mind. In furtherance of that value, we are focused on sustainability across our operations and have adopted strategies to enable us to meet the growing demand for environmentally-friendly products. Our businesses leverage a shared technology and U.S.-based manufacturing platform to create products that convert demand from traditional materials to those that are long lasting and low-maintenance, fulfilling our brand commitment to deliver products that are “Beautifully Engineered to Last”.

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. In our Commercial segment, we manufacture engineered sheet products and 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.

Basis of Presentation

Our Consolidated Financial Statements in this prospectus have been derived from our accounts and those of our wholly-owned subsidiaries. Our Consolidated Financial Statements are based on a fiscal year ending September 30.

In June 2018, we acquired Versatex Holdings, LLC, or Versatex. The assets acquired and liabilities assumed in connection with this acquisition were included in our consolidated balance sheet as of September 30, 2018 and in our consolidated statement of comprehensive income (loss) and statement of cash flow beginning from the effective date of the acquisition in June 2018. The results of operations of Versatex are included in our Residential segment.

 

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Key Factors Affecting Our Results of Operations

Our results of operations and financial condition are affected by the following factors, which reflect our operating philosophy and continued focus on driving material conversion to our low-maintenance, engineered products in each of our markets.

Volume of Products Sold

Our net sales depend primarily on the volume of products we sell during any given period, and volume is affected by the following items:

 

   

Economic conditions: Demand for our products is significantly affected by a number of economic factors impacting our customers and consumers. For example, demand for products sold by our Residential segment is driven primarily by home repair and remodeling activity and, to a lesser extent, new home construction activity. The residential repair and remodeling market depends in part on home equity financing, and accordingly, the level of equity in homes will affect consumers’ ability to obtain a home equity line of credit and engage in renovations that would result in purchases of our products. Demand for our products is also affected by the level of interest rates and the availability of credit, consumer confidence and spending, housing affordability, demographic trends, employment levels and other macroeconomic factors that may influence the extent to which consumers engage in repair and remodeling projects to enhance the outdoor living spaces of their homes. Sales by our Commercial segment in the institutional construction market are affected by amounts available for expenditures in school construction, military bases and other public institutions, which depend in part on the availability of government funding and budgetary priorities. Sales of our engineered polymer materials in our industrial OEM markets are also affected by macroeconomic factors, in particular gross domestic product levels and levels of industrial production. Changes in these economic conditions can impact the volume of our products sold during any given period.

 

   

Material conversion: We have continued to increase sales of our products through our focused efforts to drive material conversion and market penetration of our products. We believe that there is a long-term trend toward material conversion from traditional materials, such as wood, to the low-maintenance, engineered materials we produce. We believe that our products offer a compelling value proposition due to their enhanced durability and lower maintenance costs compared to products manufactured from traditional materials, and we anticipate that sales of our products will continue to benefit from material conversion. The success of our efforts to drive conversion during any given period will impact the volume of our products sold during that period.

 

   

Product innovation: We continue to develop and introduce innovative products to accelerate material conversion and expand our markets. We believe that new products will enhance our ability to compete with traditional materials at a variety of price points, and we expect to continue to devote significant resources to developing innovative new products. The volume of our products sold during a given period will depend in part on our successfully introducing new products that generate additional demand as well as the extent to which new products may impact our sales of existing products.

 

   

Marketing and distribution: Demand for our products is influenced by our efforts to expand and enhance awareness of our premium brands and the benefits of our products as well as to drive continued material conversion. Within our Residential segment, we sell our products through a national network of more than 4,200 dealers, more than 35 distributors and multiple home improvement retailers providing extensive geographic coverage enabling us to effectively serve contractors across the United States and Canada. Within our Commercial segment, we sell our products through a widespread distribution network as well as directly to OEMs. Our customer-focused sales organization generates pull-through demand for our products by driving increased downstream engagement with consumers and key influencers such as architects, builders and contractors and by focusing on strengthening our position with dealers and growing our presence in retail. Our volume of product sales in a given period will be impacted by our ability to raise awareness of our brands and products.

 

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Pricing

In general, our pricing strategy is to price our products at a premium relative to competing materials based on the value proposition they provide, including lower maintenance and lifetime costs. Our pricing strategy differs as between our two operating segments as follows:

 

   

Residential: Prices for our residential products are typically set annually, taking into account anticipated changes in input costs, market dynamics and new product introductions by us or our competitors.

 

   

Commercial: A number of our commercial product sales, such as those related to our partitions and lockers product lines, are customized by order, and, therefore, these products are typically priced based on the nature of the particular specifications ordered. For other commercial products, such as various Vycom product lines, we maintain standard pricing lists that we review and change periodically.

Cost of Materials

Raw material costs, including costs of petrochemical resins, reclaimed polyethylene and PVC material, waste wood fiber and aluminum, represent a majority of our cost of sales. 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. 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. We seek to mitigate the effects of increases in raw material costs by broadening our supplier base, increasing our use of recycled material and scrap, reducing waste and exploring options for material substitution without sacrificing quality. We have long-standing relationships as well as guaranteed supply contracts with some of our key suppliers but, other than certain contracts with prices determined based on the current index price, we have no fixed-price contracts with any of our major vendors. Under our guaranteed supply contracts, the prices are either established annually based on a discount to the then-current market prices or, for purchase orders, based on market rates in effect when the orders become effective. 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. For additional information, see “—Quantitative and Qualitative Disclosures about Market Risk—Raw Materials; Commodity Price Risk.”

Product Mix

We offer a wide variety of products across numerous product lines within our Residential and Commercial segments, and these products are sold at different prices, are composed of different materials and involve varying levels of manufacturing complexity. In any particular period, changes in the volume of particular products sold and the prices of those products relative to other products will impact our average selling price and our cost of sales. For example, the gross margins of our Residential segment significantly exceed the gross margins of our Commercial segment. In addition to the impacts attributable to product mix as between the Residential and Commercial segments, our results of operations are impacted by the relative margins associated with individual products within our Residential and Commercial segments, which vary among products. As we continue to introduce new products at varying price points to compete with products made with wood or other traditional materials across a wide range of prices, our overall gross margins may vary from period to period as a result of changes in product mix and different margins for our higher and lower price point offerings. We may choose to introduce new products with initially lower gross margins with the expectation that those margins will improve over time as we improve our manufacturing efficiency for those products. In addition, our product mix and our gross margins may be impacted by our marketing decisions in a particular period as well as the rebates and incentives that we may extend to our customers in a particular period. We also continue to seek to enhance our gross margins by improving manufacturing efficiency across our operations, including by investing in, and expanding, our recycling capabilities and implementing initiatives to more efficiently use scrap and to reduce waste. Our success in achieving margin improvements through these initiatives may vary due to changes in product mix as different products benefit to different degrees from these initiatives.

 

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Seasonality

Although we generally have demand for our products throughout the year, our sales have historically experienced some seasonality. We have typically experienced moderately higher levels of sales of our residential products in the second fiscal quarter of the year as a result of our “early buy” sales and extended payment terms typically available during the second fiscal quarter of the year. As a result of these extended payment terms, our accounts receivable have typically reached seasonal peaks at the end of the second fiscal quarter of the year, and our net cash provided by operating activities has typically been lower in the second fiscal quarter relative to in other quarters. Our sales are also generally impacted by the number of days in a quarter or a year that contractors and other professionals are able to install our products. This can vary dramatically based on, among other things, weather events such as rain, snow and extreme temperatures. We have generally experienced lower levels of sales of our residential products in the first fiscal quarter due to adverse weather conditions in certain markets, which typically reduce the construction and renovation activity during the winter season. In addition, we have experienced higher levels of sales of our bathroom partition products and our locker products during the second half of our fiscal year, which includes the summer months when schools are typically closed and therefore are more likely to undergo remodel activities.

COVID-19

Since the onset of the COVID-19 pandemic, we have been focused on protecting our employees’ health and safety, meeting our customers’ needs as they navigate an uncertain financial and operating environment, working closely with our suppliers to protect our ongoing business operations and rapidly adjusting our short-, medium- and long-term operational plans to proactively and effectively respond to the current and potential future public health crises. While the COVID-19 pandemic presents very serious concerns for our business and operations, our employees and their families, our customers and our suppliers, we believe that we are adapting well to the wide-ranging changes that the global economy is currently undergoing, and we remain confident that we will continue to maintain business continuity, produce and sell our products safely and in compliance with applicable laws and governmental orders and mandates, maintain our robust and flexible supply chains and be in a strong position to maintain financial flexibility even in the event of a potentially extended economic downturn. This discussion and analysis is with respect to periods prior to the outbreak of the COVID-19 pandemic. For further discussion of the steps we have taken to respond to and mitigate the effects of the COVID-19 pandemic, see “Recent Developments—COVID-19.”

Although we have implemented measures to mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations, including reducing our production and expenses, we expect that these measures may not fully mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations. We cannot predict the degree to, or the period over, which we will be affected by the pandemic and resulting governmental and other measures. We expect that the economic effects of the COVID-19 pandemic will likely continue to adversely affect demand for our products over the balance of fiscal 2020. The global impact of the COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the situation closely. As the COVID-19 pandemic continues, it may also have the effect of heightening many of the risks described in “Risk Factors” in this prospectus. See “Risk Factors” for a further discussion of the adverse impacts of the COVID-19 pandemic on our business.

Acquisitions

Throughout our history, we have made selected acquisitions, and we expect to continue to strategically pursue acquisitions to enhance our market position, supplement our product and technology portfolios and increase the diversity of our business.

Acquisition of Versatex, WES, LLC (Ultralox) and Return Polymers

During the year ended September 30, 2018, we acquired two businesses, Versatex and WES, LLC and its wholly owned subsidiary Ultralox Technology, LLC, which, together with WES, LLC, we collectively refer to as

 

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Ultralox. Versatex is a leading producer of premium, low-maintenance engineered products with a focus on PVC trim and moulding products. Ultralox is a manufacturer of innovative aluminum railing systems and assembly machines. On January 31, 2020, we acquired Return Polymers Inc., or Return Polymers. Return Polymers is a leader in the development, implementation and delivery of recycled PVC compound solutions.

The acquisitions were accounted for as business combinations, and Versatex and Ultralox were acquired for aggregate consideration of $297.9 million, including $3.2 million for cash acquired. The cash purchase price for Versatex was financed with incremental borrowings under the Term Loan Credit Agreement in the amount of $225.0 million, through an equity contribution from the Sponsors in the amount of $40.0 million and with cash on hand. The Ultralox acquisition was paid for with cash on hand. Return Polymers was acquired for aggregate consideration of $18.1 million, including $0.2 million of cash on hand.

Results of Operations

The following tables summarize certain financial information relating to our operating results that have been derived from our audited Consolidated Financial Statements for the years ended September 30, 2019 and 2018 and unaudited Consolidated Financial Statements for the six months ended March 31, 2020 and 2019.

 

    Six Months Ended
March 31,
     $ Variance
Increase/
(Decrease)
    % Variance
Increase/
(Decrease)
    Years Ended
September 30,
    $ Variance
Increase/
(Decrease)
    % Variance
Increase/
(Decrease)
 
(Dollars in thousands)   2020     2019     2019     2018  

Net sales

  $ 411,628     $ 357,362      $ 54,266       15.2   $ 794,203     $ 681,805     $ 112,398       16.5

Cost of sales

    (280,965     (249,051      (31,914     12.8       (541,006     (479,769     (61,237     12.8  
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    130,663       108,311        22,352       20.6       253,197       202,036       51,161       25.3  

Selling, general and administrative expenses

    (93,166     (86,803      (6,363     7.3       (183,572     (144,688     (38,884     26.9  

Other general expenses

    (5,093     (4,158      (935     22.5       (9,076     (4,182     (4,894     N/M (1) 

Gain (loss) on disposal of property, plant and equipment

    (28     (1,436      1,408       (98.1     (1,495     (791     (704     89.0  
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    32,376       15,914        16,462       103.4       59,054       52,375       6,679       12.8  

Interest expense, net

    (39,734     (41,773      2,039       (4.9     (83,205     (68,742     (14,463     21.0  

Income tax benefit

    1,600       5,072        (3,472     (68.5     3,955       23,112       (19,157     (82.9
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (5,758   $ (20,787    $ 15,029       (72.3 )%    $ (20,196   $ 6,745     $ (26,941     N/M (1) 
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

Six Months Ended March 31, 2020, Compared with Six Months ended March 31, 2019

Net Sales

Net sales for the six months ended March 31, 2020 increased by $54.3 million, or 15.2%, to $411.6 million from $357.4 million during the six months ended March 31, 2019. The increase was primarily attributable to organic sales volume growth, including the expansion of our west coast distribution network in the first quarter. Net sales for the six months ended March 31, 2020 increased for our Residential segment by 17.7% and increased for our Commercial segment by 3.5%, as compared to the prior year.

Cost of Sales

Cost of sales for the six months ended March 31, 2020 increased by $31.9 million, or 12.8%, to $281.0 million from $249.1 million during the six months ended March 31, 2019, primarily due to $31.0 million of costs related to higher organic sales volumes, partially offset by net manufacturing productivity improvements as well as declining amortization expenses.

 

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Gross Profit

Gross profit for the six months ended March 31, 2020 increased by $22.4 million, or 20.6%, to $130.7 million from $108.3 million during the six months ended March 31, 2019. Gross profit as a percent of net sales increased by 140 basis points to 31.7% during the six months ended March 31, 2020 compared to the six months ended March 31, 2019. The increase in gross profit as a percent of net sales was primarily driven by manufacturing productivity improvements, as well as declining amortization expense as a percentage of net sales and favorable price and mix.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended March 31, 2020 increased by $6.4 million, or 7.3%, primarily due to an insurance recovery received in the six months ended March 31, 2019 related to a litigation settlement of $7.7 million, in addition to higher employee costs in the six months ended March 31, 2020, partially offset by reduced marketing spend.

Interest Expense, net

Interest expense, net, decreased by $2.0 million, or 4.9%, during the six months ended March 31, 2020 compared to the six months ended March 31, 2019, primarily due to lower average interest rates during the six months ended March 31, 2020, when compared to the six months ended March 31, 2019, partially offset by the interest on the increased principal amount outstanding under our Revolving Credit Agreement during the six months ended March 31, 2020.

Income Taxes

Income tax benefit decreased by $3.5 million to $1.6 million for the six months ended March 31, 2020, from $5.1 million for the six months ended March 31, 2019, primarily due to a lower loss before income taxes during the six months ended March 31, 2020.

Net Income (Loss)

Net loss decreased by $15.0 million, or 72.3%, to a net loss of $5.8 million for the six months ended March 31, 2020 from a net loss of $20.8 million for the comparable period in 2019 for the reasons described above.

Year Ended September 30, 2019, Compared with Year Ended September 30, 2018

Net Sales

Net sales for the year ended September 30, 2019 increased by $112.4 million, or 16.5%, to $794.2 million from $681.8 million for the year ended September 30, 2018. The increase was primarily attributable to an increase in organic sales volume and $50.8 million from the Versatex and Ultralox acquisitions. Net sales for the year ended September 30, 2019 increased for our Residential segment by 20.9% and decreased for our Commercial segment by 0.8%, as compared to the prior year. Organic net sales, which excludes sales that are attributable to acquisitions, increased 8.3% for the year ended September 30, 2019 as compared to the year ended September 30, 2018.

Cost of Sales

Cost of sales for the year ended September 30, 2019 increased by $61.2 million, or 12.8%, to $541.0 million from $479.8 million for the year ended September 30, 2018, primarily due to $43.4 million of costs related to higher organic sales volumes, $35.7 million of costs related to higher acquisition sales volumes and $5.3 million of startup costs of our recycling facility. These increases were partially offset by net manufacturing productivity of $11.4 million in fiscal 2019 and no revaluation of off-specification finished goods in fiscal 2019, as compared to an $11.8 million revaluation in fiscal 2018, of which $2.0 million related to our Residential segment and $9.8 million related to our Commercial segment.

 

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Gross Profit

Gross profit for the year ended September 30, 2019 increased by $51.2 million, or 25.3%, to $253.2 million from $202.0 million for the year ended September 30, 2018. Gross profit as a percent of net sales increased to 31.9% for the year ended September 30, 2019 compared to 29.6% for the year ended September 30, 2018. The increase in gross profit as a percent of net sales was primarily driven by net manufacturing productivity improvements, as well as by the absence in fiscal 2019 of revaluation of off-specification finished goods. The increase was partially offset by the startup costs of our recycling facility.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $38.9 million, or 26.9%, to $183.6 million, or 23.1% of net sales, for the year ended September 30, 2019 from $144.7 million, or 21.2% of net sales, for the year ended September 30, 2018. The increase was primarily attributable to $18.2 million resulting from our acquisitions of Versatex and Ultralox, $9.3 million in increased marketing spending related to our rebranding initiative, $9.2 million primarily related to increased headcount in our sales organization and professional fees of $3.4 million as we continue to invest in selling, marketing and R&D, partially offset by a $7.7 million insurance recovery received related to a previous litigation settlement.

Other General Expenses

Other general expenses increased by $4.9 million to $9.1 million during fiscal 2019 from $4.2 million during fiscal 2018. Fiscal 2019 expenses related to costs associated with our initial public offering, while fiscal 2018 expenses related to transaction costs in connection with the aforementioned fiscal 2018 acquisitions.

Loss on Disposal of Property, Plant and Equipment

Loss on disposal of property, plant and equipment increased by $0.7 million to $1.5 million for the year ended September 30, 2019 from $0.8 million during the year ended September 30, 2018 due to disposal of fixed assets in the normal course of business.

Interest Expense, net

Interest expense, net, increased by $14.5 million, or 21.0%, to $83.2 million for the year ended September 30, 2019 from $68.7 million for the year ended September 30, 2018. Interest expense increased primarily due to an increase of $225.0 million in borrowing under the Term Loan Credit Agreement relating to the acquisition of Versatex in fiscal 2018, as well as, higher rates on amounts borrowed under the Term Loan Credit Agreement.

Income Tax Benefit

Income tax benefit decreased by $19.1 million to $4.0 million for the year ended September 30, 2019 compared to $23.1 million for the year ended September 30, 2018. The decrease was primarily driven by the impact of remeasuring our deferred tax assets and liabilities as a result of the Tax Act in 2018, which lowered our statutory federal tax rate to 21% in the year ended September 30, 2018 from 35% in the year ended September 30, 2017. As a result of remeasuring our deferred tax assets and liabilities, we recorded a net benefit of approximately $22.5 million in fiscal 2018.

Net Income (Loss)

Net income decreased by $26.9 million to a net loss of $20.2 million for the year ended September 30, 2019 compared to net income of $6.7 million for the year ended September 30, 2018 primarily as a result of the changes described above.

 

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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. Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin are calculated differently than our Adjusted EBITDA and Adjusted EBITDA Margin, which are further discussed under the heading “Selected Consolidated Financial Data—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 Consolidated Financial Statements included elsewhere in this prospectus consistent with the requirements of the Financial Accounting Standards Board’s, or FASB, Accounting Standards Codification, or ASC, 280. We define Segment Adjusted EBITDA as a segment’s net income (loss) before income tax (benefit) expense and by adding to or subtracting therefrom interest expense, net, depreciation and amortization, share-based compensation costs, asset impairment and inventory revaluation costs, business transformation costs, capital structure transaction costs, acquisition costs, initial public offering costs and certain other costs. Segment Adjusted EBITDA Margin is equal to a segment’s Segment Adjusted EBITDA divided by such segment’s net sales. Corporate expenses, which include selling, general and administrative costs related to our corporate offices, including payroll and other professional fees, are not included in computing Segment Adjusted EBITDA. Such corporate expenses increased by $1.9 million to $42.3 million during the year ended September 30, 2019, from $40.4 million during the year ended September 30, 2018, and increased by $6.5 million to $27.0 million for the six months ended March 31, 2020 from $20.5 million for the six months ended March 31, 2019.

Residential

The following table summarizes certain financial information relating to the Residential segment results that have been derived from our Consolidated Financial Statements for the years ended September 30, 2019 and 2018 and unaudited Consolidated Financial Statements for the six months ended March 31, 2020 and 2019.

 

    Six Months Ended     Years Ended  
    March 31,     September 30,  
    2020     2019     $
Variance
    %
Variance
    2019     2018     $
Variance
     %
Variance
 
(Dollars in thousands)                                                 

Net Sales

  $ 345,915     $ 293,888     $ 52,027       17.7%     $ 655,445     $ 541,942     $ 113,503        20.9%  

Segment Adjusted EBITDA

    101,721       80,728       20,993       26.0%       188,742       168,438       20,304        12.1%  

Segment Adjusted EBITDA Margin

    29.4     27.5     N/A       N/A       28.8     31.1     N/A        N/A  

Net Sales

Net sales of the Residential segment for the six months ended March 31, 2020 increased by $52.0 million, or 17.7%, to $345.9 million from $293.9 million for the six months ended March 31, 2019. The increase was primarily attributable to an increase in organic sales volume, including the benefit from the expansion of our west coast distribution network during the first quarter of fiscal 2020.

Net sales of the Residential segment for the year ended September 30, 2019 increased by $113.5 million, or 20.9%, to $655.4 million from $541.9 million for the year ended September 30, 2018. The increase was primarily attributable to an increase in organic sales volume and $50.8 million from acquisitions. Organic net sales increased 10.9% for the year ended September 30, 2019 as compared to the year ended September 30, 2018.

 

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Segment Adjusted EBITDA

Segment Adjusted EBITDA of the Residential segment for the six months March 31, 2020 increased by $21.0 million, or 26.0% to $101.7 million from $80.7 million for the six months ended March 31, 2019. The increase was mainly driven by higher net sales and net manufacturing productivity improvements, partially offset by investments in our sales organization and other operational investments.

Segment Adjusted EBITDA of the Residential segment for the year ended September 30, 2019 increased by $20.3 million, or 12.1%, to $188.7 million from $168.4 million for the year ended September 30, 2018. The increase was mainly driven by higher net sales, acquisitions and net manufacturing productivity improvements, partially offset by investments in selling, marketing and R&D.

Commercial

The following table summarizes certain financial information relating to the Commercial segment results that have been derived from our Consolidated Financial Statements for the years ended September 30, 2019 and 2018 and unaudited Consolidated Financial Statements for the six months ended March 31, 2020 and 2019.

 

    Six Months Ended      Years Ended  
    March 31,      September 30,  
    2020     2019     $
Variance
    %
Variance
     2019     2018     $
Variance
    %
Variance
 
(Dollars in thousands)                                                 

Net Sales

  $ 65,713     $ 63,474     $ 2,239       3.5%      $ 138,758     $ 139,863     $ (1,105     (0.8)%  

Segment Adjusted EBITDA

    6,155       7,483       (1,328     (17.7)%        21,493       21,669       (176     (0.8)%  

Segment Adjusted EBITDA Margin

    9.4     11.8     N/A       N/A        15.5     15.5     N/A       N/A  

Net Sales

Net sales of the Commercial segment for the six months ended March 31, 2020 increased by $2.2 million, or 3.5%, to $65.7 million from $63.5 million for the six months ended March 31, 2019. The increase in sales was driven by growth in partition and locker sales partially offset by lower sales in the Vycom business.

Net sales of the Commercial segment for the year ended September 30, 2019 decreased by $1.1 million, or 0.8%, to $138.8 million from $139.9 million for the year ended September 30, 2018. The slight decrease was driven by weakness in certain end-user markets offset by growth in partitions and locker sales.

Segment Adjusted EBITDA

Segment Adjusted EBITDA of the Commercial segment for the six months ended March 31, 2020 decreased by $1.3 million, or 17.7%, to $6.2 million from $7.5 million for the six months ended March 31, 2019. The decrease was primarily driven by higher costs related to sales.

Segment Adjusted EBITDA of the Commercial segment was $21.5 million for the year ended September 30, 2019 compared to $21.7 million for the year ended September 30, 2018. A slight decrease in net sales was largely offset by improved net manufacturing productivity.

Quarterly Results of Operations

The following tables set forth our historical unaudited consolidated statements of income and operating results expressed as a dollar amount and as a percentage of net sales for each of the quarters indicated. The information for each quarter has been prepared on the same basis as our audited Consolidated Financial

 

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Statements included elsewhere in this prospectus and reflects, in the opinion of management, all adjustments necessary for a fair presentation of the financial information presented. Our historical results are not necessarily indicative of future operating results, and our interim results are not necessarily indicative of the results to be expected for the full year or any other period. The quarterly financial data set forth below should be read together with our Consolidated Financial Statements and related Notes included elsewhere in this prospectus.

 

    Three Months Ended  
    March 31,
   2020   
    December 31
   2019   
    September 30
   2019   
    June 30
   2019   
    March 31
   2019   
    December 31
   2018   
    September 30
   2018   
    June 30
   2018   
    March 31
   2018   
    December 31
   2017   
 

Net sales(1)

  $ 245,585     $ 166,043     $ 215,534     $ 221,307     $ 219,931     $ 137,431     $ 191,137     $ 184,406     $ 200,863     $ 105,399  

Cost of sales

    (166,213     (114,752     (146,058     (145,897     (152,526     (96,525     (135,134     (133,045     (135,652     (75,938
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Gross profit     79,372       51,291       69,476       75,410       67,405       40,906       56,003       51,361       65,211       29,461  

Selling, general and administrative expenses

    (49,693     (43,473     (46,584     (50,185     (44,336     (42,467     (38,058     (42,040     (37,023     (27,567

Other general expenses

    (3,115     (1,978     (2,921     (1,997     (2,348     (1,810     —         (3,857     —         (325

Gain (loss) on disposal of property

    (101     73       (23     (36     (189     (1,247     (465     (215     16       (127
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    26,463       5,913       19,948       23,192       20,532       (4,618     17,480       5,249       28,204       1,442  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

                   

Interest expense

    (19,975     (19,759     (19,992     (21,440     (21,283     (20,490     (20,256     (17,477     (15,732     (15,277

Total other expenses

    (19,975     (19,759     (19,992     (21,440     (21,283     (20,490     (20,256     (17,477     (15,732     (15,277
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    6,488       (13,846     (44     1,752       (751     (25,108     (2,776     (12,228     12,472       (13,835

Income tax provision (benefit)(2)

    2,400       4,000       (876     (241     (765     5,837       (1,788     2,000       (3,400     26,300  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 4,088     $ (9,846   $ (920   $ 1,511     $ (1,516   $ (19,271   $ (4,564   $ (10,228   $ 9,072     $ 12,465  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Net sales are impacted by seasonality as we have typically experienced moderately higher levels of sales of our residential products in the second fiscal quarter of the year as a result of our “early buy” sales. Net sales are also generally impacted by the number of days in a quarter or a year that contractors and other professionals are able to install our products. This can vary dramatically based on, among other things, weather events such as rain, snow and extreme temperatures. We have generally experienced lower levels of sales of our residential products in the first fiscal quarter due to adverse weather conditions in certain markets, which typically reduce the construction and renovation activity during the winter season. In addition, we have experienced higher levels of sales of our bathroom partition products and our locker products during the second half of our fiscal year, which includes the summer months when schools are typically closed and therefore are more likely to undergo remodel activities.

(2)

On December 22, 2017, the President of the United States signed and enacted the Tax Act. This lowered our federal corporate tax rate, and, as a result, we recorded a $22.5 million net income tax benefit in three months ended December 31, 2017 for the remeasurement of our deferred tax assets and liabilities.

 

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    Three Months Ended  
    March 31,
2020
    December 31
2019
    September 30
2019
    June 30
2019
    March 31
2019
    December 31
2018
    September 30
2018
    June 30
2018
    March 31
2018
    December 31
2017
 

Net sales(1)

    100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Cost of sales

    (67.7 )%      (69.1 )%      (67.8 )%      (65.9 )%      (69.4 )%      (70.2 )%      (70.7 )%      (72.1 )%      (67.5 )%      (72.0 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Gross profit     32.3     30.9     32.2     34.1     30.6     29.8     29.3     27.9     32.5     28.0

Selling, general and administrative expenses

    (20.2 )%      (26.2 )%      (21.6 )%      (22.7 )%      (20.2 )%      (30.9 )%      (19.9 )%      (22.8 )%      (18.4 )%      (26.2 )% 

Other general expenses

    (1.3 )%      (1.2 )%      (1.4 )%      (0.9 )%      (1.1 )%      (1.3 )%      0.0     (2.1 )%      0.0     (0.3 )% 

Gain (loss) on disposal of property

    (0.0 )%      0.0     0.0     0.0     (0.1 )%      (0.9 )%      (0.2 )%      (0.1 )%      0.0     (0.1 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Operating (loss) income     10.8     3.6     9.3     10.5     9.3     (3.4 )%      9.1     2.8     14.0     1.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

                   

Interest expense

    (8.1 )%      (11.9 )%      (9.3 )%      (9.7 )%      (9.7 )%      (14.9 )%      (10.6 )%      (9.5 )%      (7.8 )%      (14.5 )% 
Total other expenses     (8.1 )%      (11.9 )%      (9.3 )%      (9.7 )%      (9.7 )%      (14.9 )%      (10.6 )%      (9.5 )%      (7.8 )%      (14.5 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    2.6     (8.3 )%      0.0     0.8     (0.3 )%      (18.3 )%      (1.5 )%      (6.6 )%      6.2     (13.1 )% 

Income tax provision (benefit)(2)

    1.0     2.4     (0.4 )%      (0.1 )%      (0.3 )%      4.2     (0.9 )%      1.1     (1.7 )%      25.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    1.7     (5.9 )%      (0.4 )%      0.7     (0.7 )%      (14.0 )%      (2.4 )%      (5.5 )%      4.5     11.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Net sales are impacted by seasonality as we have typically experienced moderately higher levels of sales of our residential products in the second fiscal quarter of the year as a result of our “early buy” sales. Net sales are also generally impacted by the number of days in a quarter or a year that contractors and other professionals are able to install our products. This can vary dramatically based on, among other things, weather events such as rain, snow and extreme temperatures. We have generally experienced lower levels of sales of our residential products in the first fiscal quarter due to adverse weather conditions in certain markets, which typically reduce the construction and renovation activity during the winter season. In addition, we have experienced higher levels of sales of our bathroom partition products and our locker products during the second half of our fiscal year, which includes the summer months when schools are typically closed and therefore are more likely to undergo remodel activities.

(2)

On December 22, 2017, the President of the United States signed and enacted the Tax Act. This lowered our federal corporate tax rate, and, as a result, we recorded a $22.5 million net income tax benefit in three months ended December 31, 2017 for the remeasurement of our deferred tax assets and liabilities.

Liquidity and Capital Resources

Liquidity Outlook

Our primary cash needs are to fund working capital, capital expenditures, debt service and any acquisitions we may undertake. We have, and, after this offering will continue to have, significant debt and debt service requirements. As of March 31, 2020, we had cash and cash equivalents of $94.7 million and total indebtedness of $1,248.3 million. CPG International LLC had approximately $16.0 million available under the borrowing base for future borrowings as of March 31, 2020. CPG International LLC also has the option to increase the commitments under the Revolving Credit Agreement by up to $100.0 million, subject to certain conditions. In the year ended September 30, 2019, we had interest expense of $83.2 million.

During the three months ended March 31, 2020, we borrowed $129.0 million under the Revolving Credit Agreement, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic.

On June 5, 2020, we entered into the RCA Amendment, which established $8.5 million of commitments for FILO Loans under the Revolving Credit Agreement. The FILO Loans are available to be drawn in a single disbursement on or prior to December 31, 2020. The availability of the FILO Loans will be subject to satisfaction of certain conditions at the time of borrowing, including the value of borrowing-base eligible assets at the time of borrowing. Under the terms of the Revolving Credit Agreement as amended by the RCA Amendment, FILO

 

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Loans may be borrowed against increased percentages of borrowing-base eligible assets (as compared to the percentages of borrowing-base eligible assets applicable to all other loans under the Revolving Credit Agreement). The RCA Amendment did not increase the total aggregate amount of commitments under the Revolving Credit Agreement. Borrowing of FILO Loans under the Revolving Credit Agreement will reduce the total aggregate commitments available for revolving loans for so long as the FILO Loans remain outstanding. If borrowed, the FILO Loans will mature on December 4, 2021. There is no assurance that we will be able to draw on the FILO Loans at any time.

We expect to redeem the $350.0 million in aggregate principal amount of outstanding Senior Notes issued on May 12, 2020 with the net proceeds from this offering at a redemption price of 107.125% of the outstanding principal amount, plus accrued and unpaid interest to the redemption date. We also intend to use a portion of the net proceeds received by us from this offering to repay $198.3 million of the outstanding principal amount under our Term Loan Credit Agreement.

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 Agreement 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. See “Description of Certain Indebtedness.”

CPG International LLC is party to the Senior Secured Credit Facilities. The obligations under the Senior Secured Credit Facilities are secured by specified assets as described under “Description of Certain Indebtedness.” The obligations under the Senior Secured Credit Facilities are guaranteed by CPG Newco LLC and the wholly owned domestic subsidiaries of CPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries.

The Senior Secured Credit Facilities contain covenants restricting payments of dividends by CPG International 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 Credit Agreement generally prohibit the payment of dividends unless the fixed charge coverage ratio of CPG International LLC, on a pro forma basis, for the four quarters preceding the declaration or payment of such dividend would be at least 2.00 to 1.00 and such restricted payments do not exceed an amount based on the sum of $40 million plus 50% of consolidated net income for the period commencing October 1, 2013 to the end of the most recent fiscal quarter for which internal consolidated financial statements of CPG International LLC are available at the time of such restricted payment, plus certain customary addbacks. Based on the general restrictions in our Term Loan Credit Agreement as of September 30, 2019, CPG International LLC would not have been permitted to declare or pay dividends, except for the specific purposes specified in the Senior Secured Credit Facilities, and, accordingly, $490.0 million of the assets of CPG International LLC were restricted pursuant to the terms of the Senior Secured Credit Facilities.

 

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Since the restricted net assets of CPG Newco LLC and its subsidiaries exceed 25% of our consolidated net assets, in accordance with Rule 12-04, Schedule 1 of Regulation S-X, refer to our Consolidated Financial Statements included elsewhere in this prospectus for condensed parent company financial statements of CPG Newco LLC.

Cash Sources

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

On September 30, 2013, our subsidiary, CPG International LLC (as successor-in-interest to CPG Merger Sub LLC, a limited liability company formed to effect the acquisition of CPG International LLC), Deutsche Bank AG New York Branch, as administrative agent and collateral agent, or the Revolver Administrative Agent, and the lenders party thereto entered into the Revolving Credit Agreement. On March 9, 2017, the Revolving Credit Agreement 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. On June 5, 2020, we entered into the RCA Amendment, which established $8.5 million of commitments for FILO Loans under the Revolving Credit Agreement. Under the terms of the Revolving Credit Agreement as amended by the RCA Amendment, FILO Loans may be borrowed against increased percentages of borrowing-base eligible assets (as compared to the percentages of borrowing-base eligible assets applicable to all other loans under the Revolving Credit Agreement). The RCA Amendment did not increase the total aggregate amount of commitments under the Revolving Credit Agreement. FILO Loans may be borrowed in a single disbursement on or prior to December 31, 2020. Borrowing of FILO Loans under the Revolving Credit Agreement will reduce the total aggregate commitments available for revolving loans for so long as the FILO Loans remain outstanding. If borrowed, the FILO Loans will mature on December 4, 2021. There is no assurance that we will be able to draw on the FILO Loans at any time. As of March 31, 2020 and September 30, 2019 and 2018, CPG International LLC had $129.0 million, $0.0 million and $0.0 million, respectively, of outstanding borrowings under the Revolving Credit Agreement and had $5.0 million, $3.0 million and $3.1 million, respectively, of outstanding letters of credit held against the Revolving Credit Agreement. As of March 31, 2020 and September 30, 2019, CPG International LLC had approximately $16.0 million and $113.7 million, respectively, available under the borrowing base for future borrowings in addition to cash and cash equivalents on hand of $94.7 million and $105.9 million, respectively. Because our borrowing capacity under the Revolving Credit Agreement 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 Agreement.

Cash Uses

Our principal cash requirements have included working capital, capital expenditures, payments of principal and interest on our debt, 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.

 

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Cash Flows

 

    Six Months Ended
March 31,
    $ Variance     % Variance     Years Ended
September 30,
    $ Variance     % Variance  
    2020     2019     Increase/
(Decrease)
    Increase/
(Decrease)
    2019     2018     Increase/
(Decrease)
    Increase/
(Decrease)
 

Net cash provided by (used in) operating activities

  $ (68,032   $ (48,521   $ 19,511       40.2   $ 94,872     $ 67,302     $ 27,570       41.0

Net cash provided by (used in) investing activities

    (60,240     (33,208     27,032       81.4     (62,935     (335,682     272,747       81.3

Net cash provided by (used in) financing activities

    117,023       19,802       97,221       491.0     (8,273     248,742       (257,015     (103.3 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash

  $ (11,249   $ (61,927   $ (50,678     (81.8 )%    $ 23,664     $ (19,638   $ 43,302       N/M (1) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

Six Months Ended March 31, 2020, Compared with Six Months Ended March 31, 2019

Cash Provided by (Used in) Operating Activities

Net cash used in operating activities was $68.0 million and $48.5 million for the six months ended March 31, 2020 and 2019, respectively. During the first half of our fiscal year, we operate programs to prepare for increased purchases during the building season, and as a result, we typically experience an increase in cash used in operating activities relative to the second half of our fiscal year. The $19.5 million increase is a result of a net increase in working capital as we built inventory during the period and reduced certain payables in accrued expenses.

Cash Provided by (Used in) Investing Activities

Net cash used in investing activities was $60.2 million and $33.2 million for the six months ended March 31, 2020 and 2019, respectively, primarily representing purchases of property, plant and equipment in the normal course of business and the acquisition of Return Polymers for $18.1 million.

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $117.0 million and $19.8 million for the six months ended March 31, 2020 and 2019, respectively. Net cash provided by financing activities for the six months ended March 31, 2020 consisted of proceeds from our Revolving Credit Agreement, offset by debt payments, redemptions of equity interests in the Partnership and payments of costs related to our initial public offering, as compared to the six months ended March 31, 2019, which consisted of proceeds from our Revolving Credit Agreement, offset by payments for debt and contingent consideration related to the acquisition of Ultralox.

Year Ended September 30, 2019, Compared with Year Ended September 30, 2018

Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities was $94.9 million and $67.3 million for the years ended September 30, 2019 and 2018, respectively. Cash provided by operating activities for fiscal 2019 increased by approximately $27.6 million over fiscal 2018 as the decrease in net income in fiscal 2019 compared to fiscal 2018 was more than offset by increased deferred tax expense and depreciation and amortization in fiscal 2019

 

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compared to fiscal 2018 and a net increase in working capital in fiscal 2019 primarily related to the timing of payments.

Cash Provided by (Used in) Investing Activities

Net cash used in investing activities was $62.9 million and $335.7 million for the years ended September 30, 2019 and 2018, respectively. In fiscal 2019, cash used in investing activities related to $63.0 million for purchases of property, plant and equipment. In fiscal 2018, cash used in investing activities primarily related to $293.0 million used to complete acquisitions as well as $42.8 million for purchases of property, plant and equipment. A majority of the $42.8 million of property, plant and equipment purchased in fiscal 2018 related to the purchase of manufacturing equipment in connection with the establishment of a recycling plant that was opened in 2019.

Cash Provided by (Used in) Financing Activities

Net cash provided by (used in) financing activities was $(8.3) million and $248.7 million for the years ended September 30, 2019 and 2018, respectively. Net cash used in financing activities in fiscal 2019 consisted primarily of payments of $8.3 million on long-term debt. In fiscal 2018, we received $224.4 million of proceeds from incremental borrowings under the Term Loan Credit Agreement as well as $40.0 million of aggregate proceeds from capital contributions by the Sponsors and certain of the other limited partners of the Partnership, made in connection with acquisitions. We expect to redeem the $350 million in aggregate principal amount of outstanding Senior Notes with the net proceeds from this offering at a redemption price of 107.125% of the outstanding principal amount, plus accrued and unpaid interest to the redemption date. We also intend to use a portion of the net proceeds received by us from this offering to repay $198.3 million of the outstanding principal amount under our Term Loan Credit Agreement. As a result of the expected redemption of the Senior Notes and the prepayment of principal under the Term Loan Credit Agreement with net proceeds of this offering, our annual cash interest payments are expected to be reduced by approximately $45.0 million.

Indebtedness

Revolving Credit Agreement

The Revolving Credit Agreement provides for maximum aggregate borrowings of up to $150.0 million, subject to an asset-based borrowing base. Outstanding revolving loans under the Revolving Credit Agreement will bear interest at a rate which equals, at our option, either (i) for alternative base rate, or ABR, borrowings, the highest of (a) the Federal Funds Rate plus 50 basis points, (b) the prime rate and (c) the LIBOR, as of such date for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, plus, in each case, a spread of 50 to 100 basis points based on average historical availability, or (ii) for Eurocurrency borrowings, adjusted LIBOR plus a spread of 150 to 200 basis points, based on average historical availability. On June 5, 2020, we entered into the RCA Amendment, which established $8.5 million of commitments for FILO Loans. The commitments for the FILO Loans do not increase the total aggregate amount of commitments under the Revolving Credit Agreement, as the total aggregate amount of revolving commitments under the Revolving Credit Agreement will be reduced by the amount of any FILO loans outstanding. The FILO Loans are available to be drawn in a single disbursement on or prior to December 31, 2020. Outstanding FILO Loans under the Revolving Credit Agreement will bear interest at a rate which equals, at our option, either (i) for alternative base rate, or ABR, borrowings, the highest of (a) the Federal Funds Rate plus 50 basis points, (b) the prime rate and (c) the LIBOR, as of such date for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, plus, in each case, a spread of 250 basis points based on average historical availability, or (ii) for Eurocurrency borrowings, adjusted LIBOR plus a spread of 350 basis points.

A “commitment fee” accrues on any unused portion of the revolving commitments under the Revolving Credit Agreement 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. After giving effect to the redemption of the

 

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Senior Notes using net proceeds from this offering, the Revolving Credit Agreement will mature on March 9, 2022. During the three months ended March 31, 2020, we borrowed $129.0 million under the Revolving Credit Agreement, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. On May 14, 2020, following the issuance of the Senior Notes on May 12, 2020, we repaid $15.0 million of outstanding principal amount under the Revolving Credit Agreement.

The obligations under the Revolving Credit Agreement 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 CPG Newco LLC, CPG International LLC and the subsidiaries of CPG International LLC that are guarantors under the Revolving Credit Agreement, 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 Agreement are guaranteed by CPG Newco LLC and the wholly owned domestic subsidiaries of CPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries.

Revolving loans under the Revolving Credit Agreement may be voluntarily prepaid in whole, or in part, in each case without premium or penalty. Other than in the case of a mandatory prepayment, FILO Loans under the Revolving Credit Agreement may not be repaid prior to maturity unless all revolving loans have been repaid. CPG International 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 Agreement is less than the greater of (i) $12.5 million and (ii) 10% of the lesser of (x) $150.0 million and (y) the borrowing base, for five consecutive business days or (b) certain events of default have occurred and are continuing.

The Revolving Credit Agreement 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 Agreement 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 Agreement 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 Agreement 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 Agreement) 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, 2020 and September 30, 2019, CPG International LLC was in compliance with the financial and nonfinancial covenants imposed by the Revolving Credit Agreement. The Revolving Credit Agreement also includes customary events of default, including the occurrence of a change of control.

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

Term Loan Credit Agreement

The Term Loan Credit Agreement is a first lien term loan. As of March 31, 2020 and September 30, 2019, CPG International LLC had $804.3 million and $808.5 million, respectively, outstanding under the Term Loan Credit Agreement. After giving effect to the redemption of the Senior Notes using net proceeds from this offering, the Term Loan Credit Agreement will mature on May 5, 2024.

The interest rate applicable to the outstanding principal under the Term Loan Credit Agreement equals, at our option, either, (i) in the case of ABR borrowings, the highest of (a) the Federal Funds Rate as of such day plus 50 basis points, (b) the prime rate and (c) the LIBOR as of such day for a deposit in U.S. dollars with a

 

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maturity of one month plus 100 basis points, provided that in no event will the alternative base rate be less than 200 basis points, plus, in each case, the applicable margin of 275 basis points per annum; or (ii) in the case of Eurocurrency borrowings, the greater of (a) the LIBOR in effect for such interest period divided by one, minus the statutory reserves applicable to such Eurocurrency borrowing, if any, and (b) 100 basis points, plus the applicable margin of 375 basis points per annum.

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

The Term Loan Credit Agreement may be voluntarily prepaid in whole, or in part, in each case without premium or penalty (other than the Prepayment Premium, as defined in the Term Loan Credit Agreement, if applicable), subject to certain customary conditions. CPG International LLC is also required to make mandatory prepayments in an amount equal to (i) 100% of the net cash proceeds from casualty events or the disposition of property or assets, subject to customary reinvestment rights, (ii) 100% of the net cash proceeds from the incurrence or issuance of indebtedness (other than permitted indebtedness) by CPG International LLC or any restricted subsidiary and (iii) 50% of excess cash flow, with such percentage subject to reduction (to 25% and to 0%) upon achievement of specified leverage ratios and which prepayment may be declined by the lenders under the Term Loan Credit Agreement. The estimated prepayment from excess cash flow was $6.4 million at September 30, 2019. Additionally, CPG International LLC is required to pay the outstanding principal amount of the Term Loan Credit Agreement in quarterly installments of 0.25253% of the aggregate principal amount under the Term Loan Credit Agreement outstanding, and such quarterly payments may be reduced as a result of prepayments.

The Term Loan Credit Agreement contains affirmative covenants, negative covenants and events of default, which are broadly consistent with those in the Revolving Credit Agreement (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 Credit Agreement does not have any financial maintenance covenants. As of March 31, 2020 and September 30, 2019, CPG International LLC was in compliance with the covenants imposed by the Term Loan Credit Agreement. The Term Loan Credit Agreement also includes customary events of default, including the occurrence of a change of control.

We have the right to arrange for incremental term loans under the Term Loan Credit Agreement of up to an aggregate principal amount of $150.0 million, plus the amounts incurred under Incremental Amendment No. 1 thereto, plus any amounts previously voluntarily prepaid, with additional incremental term loans available if certain leverage ratios are achieved.

Senior Notes

On May 12, 2020, CPG International LLC issued $350.0 million aggregate principal amount of 9.500% senior notes due May 15, 2025. The Senior Notes are obligations of CPG International LLC and are guaranteed by its subsidiaries that also guarantee the Revolving Credit Agreement and the Term Loan Credit Agreement.

At any time, CPG International LLC may redeem the Senior Notes in whole or in part, subject to specified make-whole obligations or redemption prices. CPG International LLC may, prior to May 15, 2022, at its option, redeem up to 40% of the aggregate principal amount or 100% of the aggregate principal amount of the Senior Notes with the proceeds of a Qualified IPO (as defined in the indenture governing the Senior Notes) at a redemption price equal to 107.125% of the principal amount of the Senior Notes, plus accrued and unpaid

 

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interest to the redemption date. This offering will constitute a Qualified IPO, and we intend to use net proceeds received by us from this offering to redeem all of the aggregate principal amount of the Senior Notes, plus accrued and unpaid interest.

2013 Notes

On September 30, 2013, CPG International LLC issued $315.0 million aggregate principal amount of 8.000% senior notes due October 1, 2021. On May 12, 2020, in conjunction with the issuance of the Senior Notes, CPG International LLC satisfied and discharged its obligations with respect to the 2013 Notes, and the 2013 Notes will be redeemed in full on June 6, 2020 at a redemption price equal to par plus accrued and unpaid interest to the redemption date.

Restrictions on Dividends

The Senior Secured Credit Facilities each restrict payments of dividends unless certain conditions, as provided in the Revolving Credit Agreement or the Term Loan Credit Agreement, as applicable, are met. For more information on our outstanding indebtedness, see “Description of Certain Indebtedness.”

Off-Balance Sheet Arrangements

In addition to our debt guarantees, 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. We have no other material non-cancelable guarantees or commitments, and no material special purpose entities or other off-balance sheet debt obligations.

Contractual Obligations

The following table summarizes our contractual cash obligations as of September 30, 2019. This table does not include information on our recurring purchases of materials for use in production, as our raw materials purchase contracts do not require fixed or minimum quantities.

 

     Payments Due by Period  
     Total      Less than 1
year
     1-3 years      3-5 years      More than 5
years
 
(In thousands)       

Long-term indebtedness, excluding interest(1)

   $ 1,124,612      $ 8,304      $ 331,608      $ 784,700      $ —    

Interest on long-term indebtedness(2)

     271,185        72,948        119,219        79,018        —    

Capital lease obligations

     8,457        1,510        2,725        1,433        2,789  

Finance lease obligations

     8,258        459        1,557        1,635        4,607  

Raw material purchase commitments(3)

     5,631        5,631        —          —          —    

Operating lease obligations

     3,045        1,097        1,485        463        —    

Fixed asset purchase commitments(4)

     670        670        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 1,421,858      $ 90,619      $ 456,594      $ 867,249      $ 7,396  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

As of September 30, 2019, long-term indebtedness, excluding interest, consisted of $808.5 million under the Term Loan Credit Agreement and $315.0 million of outstanding 2013 Notes. During the three months ended March 31, 2020, we borrowed $129.0 million under the Revolving Credit Agreement, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. On May 12, 2020, we issued the Senior Notes in an aggregate principal amount of $350.0 million, and we satisfied and discharged our obligations with respect to the 2013 Notes. The 2013 Notes will be redeemed on June 6, 2020. On May 14, 2020, following the issuance of the Senior Notes, we also repaid $15.0 million of the outstanding principal amount under our Revolving Credit Agreement. Giving effect to our borrowings under the Revolving Credit Agreement during the three months ended March 31, 2020, the issuance of the Senior Notes, the redemption of the 2013 Notes, the repayment of $15.0 million of outstanding principal amount under our Revolving Credit Agreement, the redemption of the Senior Notes with net proceeds of this offering and the prepayment of $198.3 million of outstanding principal amount under our Term Loan Credit Agreement with net proceeds of this offering, our long-term indebtedness, excluding interest, under “Due in less than 1 year” is expected to be reduced by

 

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  $8.3 million, our long-term indebtedness, excluding interest under “Due in 1—3 years” is expected to be reduced by $217.6 million and our long-term indebtedness, excluding interest, under “Due in 3-5 years” is expected to be reduced by $173.4 million, in each case with a corresponding decrease in “Total contractual obligations.” After giving effect to the redemption of the Senior Notes, the Term Loan Credit Agreement will mature on May 5, 2024, and the Revolving Credit Agreement will mature on March 9, 2022.
(2)

Interest on long-term indebtedness includes interest of 8.000% on the $315.0 million outstanding 2013 Notes and interest on our outstanding borrowings of $808.5 million under the Term Loan Credit Agreement equal to, at our option, either, (i) in the case of ABR borrowings, the highest of (a) the Federal Funds Rate as of such day plus 50 basis points, (b) the prime rate and (c) the LIBOR as of such day for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, provided that in no event will the alternative base rate be less than 200 basis points, plus, in each case, the applicable margin of 275 basis points per annum; or (b) in the case of the Eurocurrency borrowings, the greater of (a) the LIBOR in effect for such interest period divided by one, minus the statutory reserves applicable to such Eurocurrency borrowing, if any, and (b) 100 basis points, plus the applicable margin of 375 basis points per annum. For purposes of this table, we have assumed an interest rate of 5.93% on the Term Loan Credit Agreement for all future periods, which is the rate as of September 30, 2019. Giving effect to our borrowings under the Revolving Credit Agreement during the three months ended March 31, 2020, the issuance of the Senior Notes, the redemption of the 2013 Notes, the repayment of $15.0 million of outstanding principal amount under our Revolving Credit Agreement, the redemption of the Senior Notes with net proceeds of this offering and the prepayment of $198.3 million of outstanding principal amount under our Term Loan Credit Agreement with net proceeds of this offering, our interest on long-term indebtedness “Due in less than 1 year” is expected to be reduced by $15.1 million, our interest on long-term indebtedness “Due in 1—3 years” is expected to be reduced by $43.7 million and our interest on long-term indebtedness “During 3—5 years” is expected to be reduced by $20.2 million, in each case with corresponding reductions in “Total contractual obligations.”

(3)

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. As of September 30, 2019, we had purchase commitments under material supply contracts of $5.6 million for the year ending December 31, 2019.

(4)

Primarily related to purchases of equipment for the recycling plant opened in the first half of fiscal 2019.

The following is a summary of outstanding letter of credit arrangements as of September 30, 2019:

 

     Amount of commitment expiration per period  
     Total
amount
     Less than 1
year
     1-3
years
     3-5
years
     After 5
years
 
(In thousands)                                   

Letters of credit

   $ 3,040      $ —        $ 3,040      $ —        $ —    

Critical Accounting Policies, Estimates and Assumptions

A discussion of our significant accounting policies and significant accounting estimates and judgments is presented in the Summary of Significant Accounting Policies in the Notes to our Consolidated Financial Statements included elsewhere in this prospectus. Throughout the preparation of the financial statements, we employ significant judgments in the application of accounting principles and methods. These judgments are primarily related to the assumptions used to arrive at various estimates. These significant accounting estimates and judgments include:

Revenue Recognition

Our Residential segment generates revenue from the sale of our innovative, low-maintenance, sustainable Outdoor Living products, including decking, railing, trim, moulding, pavers products and accessories. Our Commercial segment generates revenue from the sale of sustainable low-maintenance privacy and storage solution products and highly engineered plastic sheet products.

On October 1, 2018, we early adopted ASC 606, using the modified retrospective method with an adjustment to the opening balance of equity of $0.2 million, due to the cumulative impact of adopting Topic 606. The adoption of ASC 606 did not have a material impact on the Consolidated Financial Statements, and the timing and amounts of our revenue recognition is substantially unchanged as a result of this new guidance. We did not restate comparative period amounts. Therefore, the comparative information continues to be reported under ASC 605, Revenue Recognition.

ASC 606 includes a five-step model for contracts with customers as follows: