THE AZEK COMPANY INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with other sections of this Annual Report, including "Item 1. Business," and our audited Consolidated Financial Statements and related Notes for the three years endedSeptember 30, 2021 , 2020 and 2019, included elsewhere in this Annual Report.
Forward-Looking Statements
This Annual Report contains forward-looking statements. All statements other than statements of historical facts contained in this Annual Report, including statements regarding future operations are forward-looking statements. In some cases, forward looking statements may be identified by words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "could," "would," "expect," "objective," "plan," "potential," "seek," "grow," "target," "if," or the negative of these terms and similar expressions intended to identify forward-looking statements. In particular, statements about potential new products and product innovation, statements regarding the potential impact of the COVID-19 pandemic, statements about the markets in which we operate and the economy more generally, including growth of our various markets and growth in the use of engineered products as well as our ability to share in such growth, statements about our ability to source our raw materials in line with our expectations, future pricing for our products or our raw materials and our ability to successfully manage market risk and control or reduce costs, statements with respect to our ability to meet future goals and targets, including our environmental, social and governance targets, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in the Annual Report are forward-looking statements. We have based these forward-looking statements primarily on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled "Risk Factors" set forth in Part I, Item 1A of this Annual Report and in our otherSEC filings. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report may not occur and actual results may differ materially and adversely from those anticipated or implied in the forward-looking statements. You should read this Annual Report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Annual Report. While we believe that such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements. Overview We are an industry-leading designer and manufacturer of beautiful, low-maintenance and environmentally sustainable 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 decking, railing, trim, siding, cladding and accessories, inspires consumers to design outdoor spaces tailored to their unique lifestyle needs. In addition to our leading suite of Outdoor Living products, we sell a broad range of highly engineered products that are sold in commercial markets, including partitions, 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 andU.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 andAZEK , 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 37
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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 Annual Report have been derived from our accounts and those of our wholly-owned subsidiaries. Our Consolidated Financial Statements are based on a fiscal year endingSeptember 30 . InJanuary 2020 , we acquiredReturn Polymers, Inc. The assets acquired and liabilities assumed in connection with this acquisition were included in our consolidated balance sheet as ofSeptember 30, 2020 and in our consolidated statement of comprehensive income (loss) and statement of cash flow beginning from the effective date of the acquisition inJanuary 2020 . The results of operations of Return Polymers are included in our Residential segment.
Initial Public Offering
OnJune 16, 2020 , we completed our IPO of our Class A common stock, in which we sold 38,237,500 shares, including 4,987,500 shares pursuant to the underwriters' over-allotment option. The shares began trading on theNew York Stock Exchange onJune 12, 2020 under the symbol "AZEK". The shares were sold at an IPO price of$23.00 per share for net proceeds to us of approximately$819.7 million , after deducting underwriting discounts and commissions of$50.6 million and offering expenses of approximately$9.2 million payable by us. In addition, we used the net proceeds to redeem$350.0 million in aggregate principal of our then-outstanding 2025 Senior Notes,$70.0 million of our then-outstanding principal amount under the Revolving Credit Facility and effected a$337.7 million prepayment of our then-outstanding principal amount under the Term Loan Agreement. Secondary Offerings OnSeptember 15, 2020 , we completed an offering of 28,750,000 shares of Class A common stock, including the exercise in full by the underwriters of their option to purchase up to 3,750,000 additional shares of Class A common stock, at a public offering price of$33.25 per share. All of the shares were sold by certain of our stockholders, or the Selling Stockholders. We did not receive any of the proceeds from the sale of the shares by the Selling Stockholders. The offering expenses of approximately$1.4 million is payable by us and recorded in "Other general expenses" within the Consolidated Statements of Comprehensive Income (Loss). Immediately subsequent to the closing of the secondary offering, our sole stockholder of our Class B common stock converted 33,068,863 shares of its Class B common stock into shares of Class A common stock. OnJanuary 26, 2021 , we completed an offering of 23,000,000 shares of Class A common stock, par value$0.001 per share, including the exercise in full by the underwriters of their option to purchase up to 3,000,000 additional shares of Class A common stock, at a public offering price of$40.00 per share. The shares were sold by certain of the Selling Stockholders. We did not receive any of the proceeds from the sale of the shares by those Selling Stockholders. In connection with the offering we incurred approximately$1.2 million in expenses. OnJune 1, 2021 , we completed an offering of 17,250,000 shares of Class A common stock, par value$0.001 per share, including the exercise in full by the underwriters of their option to purchase up to 2,250,000 additional shares of Class A common stock, at a public offering price of$43.50 per share. The shares were sold by certain of the Selling Stockholders. We did not receive any of the proceeds from the sale of the shares by those Selling Stockholders. In connection with the offering we incurred approximately$1.1 million in expenses.
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
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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 forexpenditures 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 willdepend 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
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.
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 between our two operating segments as follows:
• Residential: Prices for our residential products are typically set
annually, however recent market trends have warranted repricing on a more
frequent basis, taking into account current and 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 thenature 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 as the market
demands.
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 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. During fiscal year 2021, we experienced significant increases in
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the cost of our raw materials due to factors such as global and domestic supply
chain disruptions, extreme weather events, including Winter Storm Uri, and the
direct and indirect effects of the COVID-19 pandemic. While 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 anticipate
that the increased raw material prices and shortages of raw materials that we
experienced in fiscal year 2021 may continue for the foreseeable future. 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.
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.
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 and its direct and indirect effects present very serious
concerns for our business and operations, our employees and their families, our
customers and our suppliers, we believe that we have adapted and continue to
adapt well to the wide ranging changes that the global economy continues to
undergo, 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 includes periods prior to the outbreak of the COVID-19
pandemic.
Although we have implemented measures to mitigate the impact of the COVID-19
pandemic on our business, financial condition and results of operations, 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
direct and indirect economic effects of the COVID-19 pandemic will likely
continue to affect demand for our products in the foreseeable future. As the
COVID-19 pandemic
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continues, it may also have the effect of heightening many of the risks described in "Risk Factors" in this Annual Report. 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. 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 endedSeptember 30, 2021 , 2020 and 2019. Years Ended September 30, 2021 - 2020 Variance 2020 - 2019 Variance (U.S. dollars in thousands) 2021 2020 2019 $ Variance % Variance $ Variance % Variance Net sales$ 1,178,974 $ 899,259 $ 794,203 $ 279,715 31.1 %$ 105,056 13.2 % Cost of sales 789,023 603,209 541,006 185,814 30.8 % 62,203 11.5 % Gross profit 389,951 296,050 253,197 93,901 31.7 % 42,853 16.9 %
Selling, general and
administrative
expenses 244,205 308,275 183,572 (64,070 ) (20.8 )% 124,703 67.9 %
Other general expenses 2,592 8,616 9,076
(6,024 ) (69.9 )% (460 ) (5.1 )% Loss on disposal of property, plant and equipment 1,025 904 1,495 121 13.4 % (591 ) (39.5 )%
Operating income (loss) 142,129 (21,745 ) 59,054 163,874
N/M (80,799 ) (136.8 )%
Interest expense, net 20,311 71,179 83,205 (50,868 )
(71.5 )% (12,026 ) (14.5 )%
Loss on extinguishment
of debt - 37,587 - (37,587 ) N/M 37,587 N/M
Income tax expense
(benefit) 28,668 (8,278 ) (3,955 ) 36,946 N/M (4,323 ) 109.3 %
Net income (loss)
N/M% $ (102,037 ) N/M%
"N/M" indicates the variance as a percentage is not meaningful.
Year Ended
Net sales for the year endedSeptember 30, 2021 increased by$279.7 million , or 31.1%, to$1,179.0 million from$899.3 million for the year endedSeptember 30, 2020 . The increase was primarily attributable to higher sales in both our Residential and Commercial segments. Net sales for the year endedSeptember 30, 2021 increased for our Residential segment by 35.4% and increased for our Commercial segment by 5.3%, in each case as compared to the prior year.
Cost of Sales
Cost of sales for the year endedSeptember 30, 2021 increased by$185.8 million , or 30.8%, to$789.0 million from$603.2 million for the year endedSeptember 30, 2020 , primarily due to increased costs on higher sales volumes and higher costs of raw materials and manufacturing.
Gross Profit
Gross profit for the year endedSeptember 30, 2021 increased by$93.9 million , or 31.7%, to$390.0 million from$296.1 million for the year endedSeptember 30, 2020 . Gross margin increased to 33.1% for the year endedSeptember 30, 2021 compared to 32.9% for the year endedSeptember 30, 2020 . The increase in gross profit was driven by the strong results in the Residential and Commercial segments which include pricing and manufacturing productivity, partially offset by higher costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by
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Other General Expenses
Other general expenses were$2.6 million during the year endedSeptember 30, 2021 , which primarily related to our secondary offerings in January and June of 2021 and$8.6 million during the year endedSeptember 30, 2020 , which related to our initial public offering inJune 2020 .
Interest Expense, net
Interest expense, net, decreased by$50.9 million , or 71.5%, to$20.3 million for the year endedSeptember 30, 2021 from$71.2 million for the year endedSeptember 30, 2020 . Interest expense decreased primarily due to the reduced principal amount outstanding under our Term Loan Agreement, the redemption of our 2021 Senior Notes during the year endedSeptember 30, 2020 and lower average interest rates during the year endedSeptember 30, 2021 , when compared to the year endedSeptember 30, 2020 .
Loss on Extinguishment of Debt
Loss on extinguishment of debt decreased by$37.6 million for the year endedSeptember 30, 2021 as a result of the extinguishment of the 2025 Senior Notes and the 2021 Senior Notes during the year endedSeptember 30, 2020 . For more information regarding the 2021 Senior Notes and the 2025 Senior Notes, see Note 7 "Debt" to our Consolidated Financial Statements included elsewhere in this Annual Report. Income Tax Expense (Benefit) Income tax expense increased by$36.9 million to$28.7 million for the year endedSeptember 30, 2021 compared to an income tax benefit of$8.3 million for the year endedSeptember 30, 2020 . The increase in our income tax expense was primarily driven by our pre-tax operating earnings.
Net Income (Loss)
Net income increased by
Year Ended
Net sales for the year endedSeptember 30, 2020 increased by$105.1 million , or 13.2%, to$899.3 million from$794.2 million for the year endedSeptember 30, 2019 . The increase was primarily attributable to higher sales in our Residential segment. Net sales for the year endedSeptember 30, 2020 increased for our Residential segment by 17.7% and decreased for our Commercial segment by 7.7%, in each case as compared to the prior year.
Cost of Sales
Cost of sales for the year endedSeptember 30, 2020 increased by$62.2 million , or 11.5%, to$603.2 million from$541.0 million for the year endedSeptember 30, 2019 primarily due to increased costs on higher sales volumes and the impact of COVID-19 related production costs partially offset by manufacturing productivity.
Gross Profit
Gross profit for the year endedSeptember 30, 2020 increased by$42.9 million , or 16.9%, to$296.1 million from$253.2 million for the year endedSeptember 30, 2019 . Gross margin increased to 32.9% for the year endedSeptember 30, 2020 compared to 31.9% for the year endedSeptember 30, 2019 . The increase in gross profit was driven by higher Residential segment sales and manufacturing productivity, partially offset by the impact of COVID-19 related production costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by$124.7 million , or 67.9%, to$308.3 million , or 34.3% of net sales, for the year endedSeptember 30, 2020 from$183.6 million , or 23.1% of net sales, for the year endedSeptember 30, 2019 . The increase was primarily attributable to$120.5 million of stock-based compensation expense related to our initial public offering and the accelerated vesting of stock-based compensation expense resulting from the secondary offering, partially offset by lower marketing and selling expenses during the initial COVID-19 disruption.
Other General Expenses
Other general expenses which were
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Interest Expense, net
Interest expense, net, decreased by$12.0 million , or 14.5%, to$71.2 million for the year endedSeptember 30, 2020 from$83.2 million for the year endedSeptember 30, 2019 . Interest expense decreased primarily due to the reduced principal amount outstanding under our Term Loan Agreement, the redemption of our 2021 Senior Notes and lower average interest rates during the year endedSeptember 30, 2020 , when compared to the year endedSeptember 30, 2019 .
Loss on Extinguishment of Debt
Loss on extinguishment of debt was
Income Tax Expense (Benefit)
Income tax benefit increased by$4.3 million to$8.3 million for the year endedSeptember 30, 2020 compared to$4.0 million for the year endedSeptember 30, 2019 . The increase in our income tax benefit was primarily driven by our pre-tax net loss, offset by the non-deductible stock-based compensation expense we recognized, as a result of our initial public offering and secondary offering.
Net Income (Loss)
Net loss increased by$102.0 million to a net loss of$122.2 million for the year endedSeptember 30, 2020 compared to net loss of$20.2 million for the year endedSeptember 30, 2019 , primarily due to$120.5 million of increased selling, general and administrative expenses due to the recognition of additional stock-based compensation expense as a result of our initial public offering and secondary offering, as well as$37.6 million of expenses related to the extinguishment of debt.
Segment Results of Operations
We report our results in two segments: Residential and Commercial. The key segment measures used by our chief operating decision maker in deciding how to evaluate performance and allocate resources to each of the segments are Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin. Depending on certain circumstances, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin may be calculated differently, from time to time, than our Adjusted EBITDA and Adjusted EBITDA Margin, which are further discussed under the heading "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 Annual Report consistent with the requirements of theFinancial 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, stock-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$20.1 million to$59.7 million for the year endedSeptember 30, 2021 from$39.6 million for the year endedSeptember 30, 2020 , and decreased by$2.7 million to$39.6 million for the year endedSeptember 30, 2020 from$42.3 million for the year endedSeptember 30, 2019 .
Residential
The following table summarizes certain financial information relating to the Residential segment results that have been derived from our audited Consolidated Financial Statements for the years endedSeptember 30, 2021 , 2020 and 2019. Years Ended September 30, 2021 - 2020 Variance 2020 - 2019 Variance (U.S. dollars in $ % $ % thousands) 2021 2020 2019 Variance Variance Variance Variance Net sales$ 1,044,126 $ 771,167 $ 655,445 $ 272,959 35.4 %$ 115,722 17.7 %
Segment Adjusted EBITDA 314,563 238,060 188,742
76,503 32.1 % 49,318 26.1 %
Segment Adjusted EBITDA
Margin 30.1 % 30.9 % 28.8 % N/A N/A N/A N/A
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Net sales of the Residential segment for the year endedSeptember 30, 2021 increased by$273.0 million , or 35.4%, to$1,044.1 million from$771.2 million for the year endedSeptember 30, 2020 . The increase was primarily attributable to higher net sales related to our Deck, Rail & Accessories and Exteriors businesses. Net sales of the Residential segment for the year endedSeptember 30, 2020 increased by$115.7 million , or 17.7%, to$771.2 million from$655.4 million for the year endedSeptember 30, 2019 . The increase was primarily attributable to higher sales in our Deck, Rail and Accessories and Exteriors businesses driven by continued market growth and success of new products across the portfolio, as well as the benefit from investments in downstream selling capabilities, retail expansion and pricing. Segment Adjusted EBITDA Segment Adjusted EBITDA of the Residential segment for the year endedSeptember 30, 2021 increased by$76.5 million , or 32.1% to$314.6 million from$238.1 million for the year endedSeptember 30, 2020 . The increase was mainly driven by higher sales, pricing, manufacturing productivity, partially offset by higher raw material costs, manufacturing costs and selling, general and administrative expenses. Segment Adjusted EBITDA of the Residential segment for the year endedSeptember 30, 2020 increased by$49.3 million , or 26.1%, to$238.1 million from$188.7 million for the year endedSeptember 30, 2019 . The increase was mainly driven by higher sales, net manufacturing productivity improvements, as well as lower selling, general and administrative expenses, partially offset by COVID-19 related production costs. Commercial The following table summarizes certain financial information relating to the Commercial segment results that have been derived from our audited Consolidated Financial Statements for the years endedSeptember 30, 2021 , 2020 and 2019. Years Ended September 30, 2021 - 2020 Variance 2020 - 2019 Variance (U.S. dollars in $ % $ % thousands) 2021 2020 2019 Variance Variance Variance Variance Net sales$ 134,848 $ 128,092 $ 138,758 $ 6,756 5.3 %$ (10,666 ) (7.7 )%
Segment Adjusted EBITDA 19,323 15,051 21,493 4,272
28.4 % (6,442 ) (30.0 )%
Segment Adjusted EBITDA
Margin 14.3 % 11.8 % 15.5 % N/A N/A N/A N/A
Net Sales
Net sales of the Commercial segment increased by $6.8 million , or 5.3%, to
$134.8 million for the year ended September 30, 2021 from $128.1 million for the
year ended September 30, 2020 . The increase was primarily attributable to higher
net sales in our Vycom business, partially offset by decreased net sales in our
Scranton Products business.
Net sales of the Commercial segment for the year ended September 30, 2020
decreased by $10.7 million , or 7.7%, to $128.1 million from $138.8 million for
the year ended September 30, 2019 . The decrease was primarily driven by lower
sales in our Vycom business, as the effects of COVID-19 impacted certain end
market demands.
Segment Adjusted EBITDA
Segment Adjusted EBITDA of the Commercial segment was
Segment Adjusted EBITDA of the Commercial segment was$15.1 million for the year endedSeptember 30, 2020 compared to$21.5 million for the year endedSeptember 30, 2019 . The decrease was primarily driven by lower sales in the Vycom business, partially offset by lower manufacturing costs and reductions in selling, general and administrative expenses. 44 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
To supplement our Consolidated Financial Statements prepared and presented in accordance with generally accepted accounting principles inthe 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. Years Ended September 30, (U.S. dollars in thousands, except per share amounts) 2021 2020 2019 Non-GAAP Financial Measures: Adjusted Gross Profit$ 457,926 $ 359,066 $ 314,858 Adjusted Gross Profit Margin 38.8 % 39.9 % 39.6 % Adjusted Net Income$ 152,933 $ 72,632 $ 46,663 Adjusted Diluted EPS$ 0.98 $ 0.59 $ 0.43 Adjusted EBITDA$ 274,187 $ 213,513 $ 179,566 Adjusted EBITDA Margin 23.3 % 23.7 % 22.6 %
Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, 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. Adjusted Gross Profit Margin is equal to Adjusted Gross Profit divided by net sales. We define Adjusted Net Income as net income (loss) before amortization, stock-based compensation costs, business transformation costs, acquisition costs, initial public offering costs, capital structure transaction costs and certain other costs as described below. We define Adjusted Diluted EPS as Adjusted Net Income divided by weighted average common shares outstanding-diluted, to reflect the conversion or exercise, as applicable, of all outstanding shares of restricted stock awards, restricted stock units and options to purchase shares of our common stock. We define Adjusted EBITDA as net income (loss) before interest expense, net, income tax (benefit) expense and depreciation and amortization and by adding to or subtracting therefrom items of expense and income as described below. Adjusted EBITDA Margin is equal to Adjusted EBITDA divided by net sales. We believe Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain expenses that can vary from company to company depending on, among other things, its financing, capital structure and the method by which its assets were acquired, and can also vary significantly from period to period. We also add back depreciation and amortization and stock-based compensation because we do not consider them indicative of our core operating performance. We believe their exclusion facilitates comparisons of our operating performance on a period-to-period basis. Therefore, we believe that showing gross profit and net income, as adjusted to remove the impact of these expenses, is helpful to investors in assessing our gross profit and net income performance in a way that is similar to the way management assesses our performance. Additionally, EBITDA and EBITDA margin are common measures of operating performance in our industry, and we believe they facilitate operating comparisons. Our management also uses Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with other GAAP financial measures for planning purposes, including as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance. Management considers Adjusted Gross Profit and Adjusted Net Income and Adjusted Diluted EPS as useful measures because our cost of sales includes the depreciation of property, plant and equipment used in the production of products and the amortization of various intangibles related to our manufacturing processes. Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• These measures do not reflect our cash expenditures, future requirements
for capital expenditures or contractual commitments;
• These measures do not reflect changes in, or cash requirements for, our
working capital needs;
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• Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the significant
interest expense, or the cash requirements necessary to service interest
or principal payments, on our debt;
• Adjusted EBITDA and Adjusted EBITDA Margin do not reflect our income tax
expense or the cash requirements to pay our taxes;
• Adjusted Gross Profit, Adjusted Net Income, Adjusted Diluted EPS and
Adjusted EBITDA exclude the expense of depreciation, in the case of
Adjusted Gross Profit and Adjusted EBITDA, and amortization, in each case,
of our assets, and, although these are non-cash expenses, the assets being
depreciated or amortized may have to be replaced in the future;
• Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA exclude the
expense associated with our equity compensation plan, although equity
compensation has been, and will continue to be, an important part of our
compensation strategy;
• Adjusted Gross Profit, Adjusted Net Income, Adjusted Diluted EPS and
Adjusted EBITDA exclude certain business transformation costs, acquisition
costs and other costs, each of which can affect our current and future
cash requirements; and
• Other companies in our industry may calculate Adjusted Gross Profit,
Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS,
Adjusted EBITDA and Adjusted EBITDA Margin differently than we do,
limiting their usefulness as comparative measures.
Because of these limitations, none of these metrics should be considered indicative of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
The following table presents reconciliations of the most comparable financial measures calculated in accordance with GAAP to these non-GAAP financial measures for the periods indicated:
Adjusted Gross Profit and Adjusted Gross Profit Margin Reconciliation
Years Ended September 30,
(U.S. dollars in thousands) 2021 2020 2019
Gross profit $ 389,951 $ 296,050 $ 253,197 Depreciation and amortization (1) 67,903 62,276 56,398 Business transformation costs (2)
- - 5,263
Acquisition costs (3) - 665 -
Other costs (4) 72 75 -
Adjusted Gross Profit $ 457,926 $ 359,066 $ 314,858
Years Ended September 30,
2021 2020 2019
Gross margin 33.1 % 32.9 % 31.9 %Depreciation and amortization 5.7 % 6.9 % 7.1 % Business transformation costs
- - 0.6 %
Acquisition costs - 0.1 % -
Other costs - - -
Adjusted Gross Profit Margin 38.8 % 39.9 % 39.6 %
(1) Depreciation and amortization for fiscal years 2021, 2020 and 2019 consists
of
depreciation and
respectively, of amortization of intangible assets, comprised of intangibles
relating to our manufacturing processes.
(2) Business transformation costs reflect startup costs of our new recycling
facility of
(3) Acquisition costs reflect inventory step-up adjustments related to recording
the inventory of acquired businesses at fair value on the date of
acquisition.
(4) Other costs includes impact of retroactive adoption of ASC 842 leases of
million for fiscal year 2021 and reduction in workforce costs of
for fiscal year 2020.
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Adjusted Net Income and Adjusted Diluted EPS Reconciliation
Years Ended September 30,
(U.S. dollars in thousands, except per share
amounts) 2021 2020 2019
Net income (loss) $ 93,150 $ (122,233 ) $ (20,196 )
Amortization (1) 49,802 55,144 60,226
Stock-based compensation costs (2) 18,746 120,517 3,682
Business transformation costs (3) - 594
16,560
Acquisition costs (4) - 1,596
4,110
Initial public offering and secondary offering costs (5) 2,592 8,616
9,076
Other costs (6) 5,192 4,154 (6,845 ) Capital structure transaction costs (7) - 37,587 - Tax impact of adjustments (8) (16,549 ) (33,343 ) (19,950 ) Adjusted Net Income$ 152,933 $ 72,632 $ 46,663 Years Ended September 30, 2021 2020 2019 Net income (loss) per common share - diluted$ 0.59 $ (1.00 ) $ (0.19 ) Amortization 0.32 0.45 0.56 Stock-based compensation costs 0.12 0.99 0.04 Business transformation costs - - 0.15 Acquisition costs - 0.01 0.04 Initial public offering and secondary offering costs 0.02 0.07 0.08 Other costs 0.03 0.03 (0.06 ) Capital structure transaction costs - 0.31 - Tax impact of adjustments (0.10 ) (0.27 ) (0.19 ) Adjusted Diluted EPS (9)$ 0.98 $ 0.59 $ 0.43
(1) Effective as of
Income to remove depreciation expense. The prior period had been recast to
reflect the change.
(2) Stock-based compensation costs for the year ended
expenses related to our initial public offering. Expenses related to our
recurring awards granted each fiscal year are excluded from the Adjusted Net
Income reconciliation.
(3) Business transformation costs reflect consulting and other costs related to
repositioning of brands of
costs related to the transformation of the senior management team of
million and
related to the relocation of our corporate headquarters of
fiscal year 2019, start-up costs of our new recycling facility of
million for fiscal year 2019, and other integration-related costs of
million for fiscal year 2019.
(4) Acquisition costs reflect costs directly related to completed acquisitions of
and inventory step-up adjustments related to recording the inventory of
acquired businesses at fair value on the date of acquisition of
for fiscal year 2020.
(5) Initial public offering and secondary offering costs includes
fees related to the Secondary offering of our Class A common stock in fiscal
year 2020.
(6) Other costs reflect costs for legal expenses of
and
of the retroactive adoption of ASC 842 leases of
2021, reduction in workforce costs of
income from an insurance recovery of legal loss of
year 2019, and costs related to an incentive plan and other ancillary
expenses associated with the initial public offering of
million for fiscal years 2021 and 2020, respectively.
(7) Capital structure transaction costs include loss on extinguishment of debt of
Notes for fiscal year 2020.
(8) Tax impact of adjustments is based on applying a combined
state statutory tax rate of 24.5%, 24.5% and 24.0% for fiscal years 2021,
2020 and 2019, respectively.
(9) Weighted average common shares outstanding used in computing diluted net
income (loss) per common share is 156,666,394, 122,128,515, and 108,162,741
shares for fiscal years 2021, 2020 and 2019, respectively.
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Adjusted EBITDA and Adjusted EBITDA Margin Reconciliation
Years Ended September 30,
(U.S. dollars in thousands) 2021 2020 2019
Net income (loss) $ 93,150 $ (122,233 ) $ (20,196 )
Interest expense 20,311 71,179 83,205
Depreciation and amortization 101,604 99,781 93,929
Tax expense (benefit) 28,668 (8,278 ) (3,955 ) Stock-based compensation costs 22,670 120,517
3,682
Business transformation costs (1) - 594
16,560
Acquisition costs (2) - 1,596
4,110
Initial public offering and secondary offering costs (3) 2,592 8,616
9,076
Other costs (4) 5,192 4,154 (6,845 ) Capital structure transaction costs (5) - 37,587 - Total adjustments 181,037 335,746 199,762 Adjusted EBITDA$ 274,187 $ 213,513 $ 179,566 Years Ended September 30, 2021 2020 2019 Net margin 7.9 % (13.6 )% (2.5 )% Interest expense 1.7 7.9 10.5 Depreciation and amortization 8.6 11.1 11.8 Tax expense (benefit) 2.5 (0.9 ) (0.5 ) Stock-based compensation costs 1.9 13.4 0.5 Business transformation costs - 0.1 2.1 Acquisition costs - 0.2 0.5 Initial public offering and secondary offering costs 0.2 0.9 1.1 Other costs 0.5 0.4 (0.9 ) Capital structure transaction costs - 4.2 - Total adjustments 15.4 % 37.3 % 25.1 % Adjusted EBITDA Margin 23.3 % 23.7 % 22.6 %
(1) Business transformation costs reflect consulting and other costs related to
repositioning of brands of
costs related to the transformation of the senior management team of
million and
related to the relocation of our corporate headquarters of
fiscal year 2019, start-up costs of our new recycling facility of
million for fiscal year 2019, and other integration-related costs of
million for fiscal year 2019.
(2) Acquisition costs reflect costs directly related to completed acquisitions of
and inventory step-up adjustments related to recording the inventory of
acquired businesses at fair value on the date of acquisition of
for fiscal year 2020 .
(3) Initial public offering and secondary offering costs includes
fees related to the Secondary offering of our Class A common stock completed
in fiscal year 2020.
(4) Other costs reflect costs for legal expenses of
and
of the retroactive adoption of ASC 842 leases of
2021, reduction in workforce costs of
income from an insurance recovery of legal loss of
year 2019, and costs related to an incentive plan and other ancillary
expenses associated with the initial public offering of
million for fiscal years 2021 and 2020, respectively.
(5) Capital structure transaction costs include loss on extinguishment of debt of
Notes for fiscal year 2020.
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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. As ofSeptember 30, 2021 , we had cash and cash equivalents of$250.5 million and total indebtedness of$467.7 million .CPG International LLC , our direct, wholly owned subsidiary, had approximately$146.7 million available under the borrowing base of our Revolving Credit Facility for future borrowings as ofSeptember 30, 2021 .CPG International LLC has the option to increase the commitments under the Revolving Credit Facility by up to$100.0 million , subject to certain conditions. We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements as a result of cash flows from operating activities, available cash balances and availability under our Revolving Credit Facility after consideration of our debt service and other cash requirements. In the longer term, our liquidity will depend on many factors, including our results of operations, our future growth, the timing and extent of our expenditures to develop new products and improve our manufacturing capabilities, the expansion of our sales and marketing activities and the extent to which we make acquisitions. Changes in our operating plans, material changes in anticipated sales, increased expenses, acquisitions or other events may cause us to seek additional equity and/or debt financing in future periods.
Holding Company Status
We are a holding company and do not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers from our subsidiaries to meet our obligations. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries' ability to pay dividends or make other distributions to us.CPG International LLC is party to the Senior Secured Credit Facilities. The obligations under the Senior Secured Credit Facilities are secured by specified assets. The obligations under the Senior Secured Credit Facilities are guaranteed byThe AZEK Company Inc. and the wholly owned domestic subsidiaries ofCPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries. The Senior Secured Credit Facilities contain covenants restricting payments of dividends byCPG 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 Agreement generally prohibit the payment of dividends unless the fixed charge coverage ratio ofCPG 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$40.0 million plus 50% of consolidated net income for the period commencingOctober 1, 2013 to the end of the most recent fiscal quarter for which internal consolidated financial statements ofCPG International LLC are available at the time of such restricted payment, plus certain customary addbacks. Based on the general restrictions in our Term Loan Agreement as ofSeptember 30, 2021 ,CPG International LLC would have been permitted to declare or pay dividends of up to$168.5 million , plus any dividends for the specific purposes specified in the Senior Secured Credit Facilities. Since the restricted net assets of the Company 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 Annual Report for condensed parent company financial statements of the Company.
Cash Sources
We have historically relied on cash flows from operations generated byCPG International LLC , borrowings under the credit facilities, issuances of notes and other forms of debt financing and capital contributions to fund our cash needs. OnSeptember 30, 2013 , our subsidiary,CPG International LLC (as successor-in-interest toCPG Merger Sub LLC , a limited liability company formed to effect the acquisition ofCPG 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 Facility. The Revolving Credit Facility provides for maximum aggregate borrowings of up to$150.0 million , subject to an asset-based borrowing base. The borrowing base is limited to a specified percentage of eligible accounts receivable and inventory, less reserves that may be established by the Revolver Administrative Agent in the exercise of its reasonable credit judgment. As ofSeptember 30, 2021 and 2020,CPG International LLC had no outstanding borrowings under the Revolving Credit Facility and had$3.3 million and$6.8 million , respectively, of outstanding letters of credit held against the Revolving Credit Facility. As ofSeptember 30, 2021 and 2020,CPG International LLC had approximately$146.7 million and$129.4 million , respectively, available under the borrowing base for future borrowings in addition to cash and cash equivalents on hand of$250.5 million and$215.0 million , respectively. Because our borrowing capacity under the Revolving Credit Facility depends, in part, on inventory, 49
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accounts receivable and other assets that fluctuate from time to time, the amount available under the borrowing base may not reflect actual borrowing capacity under the Revolving Credit Facility.
Cash Uses
Our principal cash requirements have included working capital, capital
expenditures, payments of principal and interest on our debt, 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.
Cash Flows
Years Ended September 30, 2021 - 2020 Variance 2020 - 2019 Variance
(U.S. dollars in $ % $ %
thousands) 2021 2020 2019 Variance Variance Variance Variance Net cash provided by (used in)
operating activities
109,318 111.1 %$ 3,489 3.7 % Net cash provided by (used in)
investing activities (175,073 ) (113,794 ) (62,935 )
(61,279 ) 53.9 % (50,859 ) 80.8 % Net cash provided by (used in)
financing activities 2,918 124,498 (8,273 ) (121,580 ) (97.7 )% 132,771 N/M% Net increase (decrease) in cash$ 35,524 $ 109,065 $ 23,664 $ (73,541 ) N/M%$ 85,401 N/M%
"N/M" indicates the variance as a percentage is not meaningful.
Year Ended
Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities was$207.7 million and$98.4 million for the years endedSeptember 30, 2021 and 2020, respectively. The$109.3 increase in cash provided by operating activities is primarily related to the increase in net income over the year endedSeptember 30, 2020 .
Cash Provided by (Used in) Investing Activities
Net cash used in investing activities was$175.1 million and$113.8 million for the years endedSeptember 30, 2021 and 2020, respectively. Net cash used in investing activities for the year endedSeptember 30, 2021 primarily consisted of purchases of property, plant and equipment to support our expansion of capacity in our manufacturing facilities, as compared to the year endedSeptember 30, 2020 , which primarily consisted of purchases of property, plant and equipment in the normal course of business and$18.5 million for the acquisition ofReturn Polymers, Inc.
Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was$2.9 million and$124.5 million for the years endedSeptember 30, 2021 and 2020, respectively. Net cash provided by financing activities for the year endedSeptember 30, 2021 consisted of proceeds of cash received from the exercise of stock options, offset by debt fees paid to third parties, as compared to the year endedSeptember 30, 2020 , which consisted of proceeds from our IPO, net of related costs, our issuance of the 2025 Senior Notes and the Revolving Credit Facility, offset by our redemption of the 2025 Senior Notes and the 2021 Senior Notes, debt payments and redemptions of capital contributions.
Year Ended
Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities was$98.4 million and$94.9 million for the years endedSeptember 30, 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. During the year endedSeptember 30, 2020 , our operating cash flow increased as a result of the increased demand for our Residential products, partially offset by higher accounts receivable and inventory balances. 50
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Cash Provided by (Used in) Investing Activities
Net cash used in investing activities was$113.8 million and$62.9 million for the years endedSeptember 30, 2020 and 2019, respectively, primarily representing purchases of property, plant and equipment in the normal course of business and$18.5 million for the acquisition ofReturn Polymers, Inc.
Cash Provided by (Used in) Financing Activities
Net cash provided by (used in) financing activities was$124.5 million and$(8.3) million for the years endedSeptember 30, 2020 and 2019, respectively. Net cash provided by financing activities for the year endedSeptember 30, 2020 consisted of proceeds from our IPO, net of related costs, our issuance of the 2025 Senior Notes and the Revolving Credit Facility, offset by our redemption of the 2025 Senior Notes and the 2021 Senior Notes, debt payments and redemptions of capital contributions, as compared to the year endedSeptember 30, 2019 , which consisted of proceeds from our Revolving Credit Facility, offset by payments for debt and contingent consideration related to the acquisition of Ultralox.
Availability under our Revolving Credit Facility
The Revolving Credit Facility provides for maximum aggregate borrowings of up to$150.0 million , subject to an asset-based borrowing base. Outstanding revolving loans under the Revolving Credit Facility 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 inU.S. dollars with a maturity of one month plus 100 basis points, plus, in each case, a spread of 25 to 75 basis points based on average historical availability, or (ii) for Eurocurrency borrowings, adjusted LIBOR plus a spread of 125 to 175 basis points, based on average historical availability. The maturity of the Revolving Credit Facility is the earlier ofMarch 31, 2026 and the date that is 91 days prior to the maturity of the Term Loan Agreement or any permitted refinancing thereof. A "commitment fee" accrues on any unused portion of the revolving commitments under the Revolving Credit Facility during the preceding three calendar month period. If the average daily used percentage is greater than 50%, the commitment fee equals 25 basis points, and if the average daily used percentage is less than or equal to 50%, the commitment fee equals 37.5 basis points. The obligations under the Revolving Credit Facility are secured by a first priority security interest in certain assets, including substantially all of the accounts receivable, inventory, deposit accounts, securities accounts and cash assets ofThe AZEK Company Inc. ,CPG International LLC and the subsidiaries ofCPG International LLC that are guarantors under the Revolving Credit Facility, and the proceeds thereof (subject to certain exceptions), or the Revolver Priority Collateral, plus a second priority security interest in all of the Term Loan Priority Collateral (as defined below). The obligations under the Revolving Credit Facility are guaranteed byThe AZEK Company Inc. and the wholly owned domestic subsidiaries ofCPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries. Revolving loans under the Revolving Credit Facility may be voluntarily prepaid in whole, or in part, in each case without premium or penalty.CPG International LLC is also required to make mandatory prepayments (i) when aggregate borrowings exceed commitments or the applicable borrowing base and (ii) during "cash dominion," which occurs if (a) the availability under the Revolving Credit Facility is less than the greater of (i)$12.5 million and (ii) 10% of the lesser of (x)$150.0 million and (y) the borrowing base, for five consecutive business days or (b) certain events of default have occurred and are continuing. The Revolving Credit Facility contains affirmative covenants that are customary for financings of this type, including allowing the Revolver Administrative Agent to perform periodic field exams and appraisals to evaluate the borrowing base. The Revolving Credit Facility contains various negative covenants, including limitations on, subject to certain exceptions, the incurrence of indebtedness, the incurrence of liens, dispositions, investments, acquisitions, restricted payments, transactions with affiliates, as well as other negative covenants customary for financings of this type. The Revolving Credit Facility also includes a financial maintenance covenant, applicable only when the excess availability is less than the greater of (i) 10% of the lesser of the aggregate commitments under the Revolving Credit Facility and the borrowing base, and (ii)$12.5 million . In such circumstances, we would be required to maintain a minimum fixed charge coverage ratio (as defined in the Revolving Credit Facility) for the trailing four quarters equal to at least 1.0 to 1.0; subject to our ability to make an equity cure (no more than twice in any four quarter period and up to five times over the life of the facility). As ofSeptember 30, 2021 and 2020,CPG International LLC was in compliance with the financial and nonfinancial covenants imposed by the Revolving Credit Facility. The Revolving Credit Facility also includes customary events of default, including the occurrence of a change of control.
We also have the option to increase the commitments under the Revolving Credit
Facility by up to
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Term Loan Agreement
The Term Loan Agreement is a first lien term loan. As of each ofSeptember 30, 2021 and 2020,CPG International LLC had$467.7 million outstanding under the Term Loan Agreement. The Term Loan Agreement will mature onMay 5, 2024 . The interest rate applicable to the outstanding principal under the Term Loan 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 inU.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 175 basis points, plus, in each case, the applicable margin of 150 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) 75 basis points, plus the applicable margin of 250 basis points per annum. The applicable margin may be reduced by a further 25 basis points in respect of both Eurocurrency borrowings and ABR borrowings during any period thatCPG International LLC maintains specified public corporate family ratings. The obligations under the Term Loan Agreement are secured by a first priority security interest in the membership interests ofCPG International LLC owned byThe AZEK Company Inc. , the equity interests ofCPG International LLC's domestic subsidiaries and all remaining assets not constituting Revolver Priority Collateral (subject to certain exceptions) ofThe AZEK Company Inc. ,CPG International LLC and the subsidiaries ofCPG International LLC that are guarantors under the Term Loan Agreement, or the Term Loan Priority Collateral, and a second priority security interest in the Revolver Priority Collateral. The obligations under the Term Loan Agreement are guaranteed byThe AZEK Company Inc. and the wholly owned domestic subsidiaries ofCPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries. The Term Loan Agreement may be voluntarily prepaid in whole, or in part, in each case without premium or penalty (other than the Prepayment Premium, as defined in the Term Loan 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) byCPG 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 Agreement. As ofSeptember 30, 2021 , and 2020, no excess cash flow payment was required based on the current leverage ratio. The lenders under the Term Loan Agreement have the option to decline any prepayments based on excess cash flows. At the lenders' option the excess cash flow payment made inJanuary 2020 was$2.2 million with the remaining prepayment declined by the lenders. Additionally,CPG International LLC is required to pay the outstanding principal amount of the Term Loan Agreement in quarterly installments of 0.25253% of the aggregate principal amount under the Term Loan Agreement outstanding, and such quarterly payments may be reduced as a result of prepayments. Based on the prepayment of$337.7 million made with net proceeds we received from our IPO,CPG International LLC has prepaid all of the quarterly principal payments otherwise due through the maturity of the Term Loan Agreement. The Term Loan Agreement contains affirmative covenants, negative covenants and events of default, which are broadly consistent with those in the Revolving Credit Facility (with certain differences consistent with the differences between a revolving loan and term loan) and that are customary for facilities of this type. The Term Loan Agreement does not have any financial maintenance covenants. As ofSeptember 30, 2021 and 2020,CPG International LLC was in compliance with the covenants imposed by the Term Loan Agreement. The Term Loan 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 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.
Restrictions on Dividends
The Senior Secured Credit Facilities each restrict payments of dividends unless certain conditions, as provided in the Revolving Credit Facility or the Term Loan Agreement, as applicable, are met.
Contingent Commitments
We have contractual commitments for purchases of certain minimum quantities of
raw materials at index-based prices, and non-cancelable capital and operating
leases, outstanding letters of credit and fixed asset purchase commitments. For
a description of our contractual obligations and commitments, see Notes 7
"Debt", 9 "Leases" and 17 "Commitments and Contingencies" to our Consolidated
Financial Statements included elsewhere in this Annual Report.
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Other
We are currently in the process of a multi-phase capacity expansion program including the opening of a new manufacturing facility to be located inBoise, Idaho . In connection with our capacity expansion program, we have announced our intention to invest approximately$230 million through 2022 which we expect to add a total of approximately 85% of incremental decking capacity relative to our decking capacity at the end of fiscal year 2019, combined with increases in recycling, railing and exteriors capacity. The first and second phases of our multi-phase capacity expansion plan were completed during the third quarter of fiscal year 2021, providing cumulatively approximately 40% more decking capacity. We subsequently upsized our expansion plans at ourWilmington, Ohio facility and expect to add an incremental approximately 15% of decking and recycling capacity in early 2022. The third phase involves the opening of a new manufacturing facility, which will be located inBoise, Idaho and is expected to be operational during fiscal 2022 and contribute approximately 30% more decking capacity.
We also intend to continue to invest in new capacity in the ordinary course as we execute against the long-term material conversion opportunity and market expansion.
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--------------------------------------------------------------------------------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 Annual Report. 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.
We recognize revenues when control of the promised goods is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods, at a point in time, when shipping occurs. Each product we transfer to the customer is considered one performance obligation. We have elected to account for shipping and handling costs as activities to fulfill the promise to transfer the goods. As a result of this accounting policy election, we do not consider shipping and handling activities as promised services to our customers. Customer contracts are typically fixed price and short-term in nature. The transaction price is based on the product specifications and is determined at the time of order. We do not engage in contracts greater than one year, and therefore do not have any incremental costs capitalized as ofSeptember 30, 2021 orSeptember 30, 2020 . We may offer various sales incentive programs throughout the year. We estimate the amount of sales incentive to allocate to each performance obligation, or product shipped, using the most-likely-amount method of estimation, based on sales to the direct customer or sell-through customer. The estimate is updated each reporting period and any changes are allocated to the performance obligations on the same basis as at inception. Changes in estimate allocated to a previously satisfied performance obligation are recognized as part of net revenue in the period in which the change occurs under the cumulative catch-up method. In addition to sales incentive programs, we may offer a payment discount, if payments are received within 30 days. We estimate the payment discount that we determine will be taken by the customer based on prior history and using the most-likely-amount method of estimation. We believe the most-likely-amount method best predicts the amount of consideration to which we will be entitled. The payment discounts are also reflected as part of net revenue. The total amount of incentives was$92.5 million ,$63.1 million and$50.8 million for the years endedSeptember 30, 2021 , 2020 and 2019, respectively. Customer program costs and incentives, such as rebates are a common practice in our business. We incur customer program costs to promote sales of products and to maintain competitive pricing. Customer program costs and incentives include annual programs related to volume growth as well as certain product-specific incentives. The program costs are accounted for at the time the revenue is recognized in net sales. Management's estimates are based on historical and projected experience for each type of program or customer and in consideration of product specific incentives. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in volume expectations).
We evaluate goodwill for impairment in the fourth quarter at the reporting unit level annually, or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below the carrying amount.Goodwill is considered to be impaired when the net book value of the reporting unit exceeds its estimated fair value. Our evaluation may begin with a qualitative assessment of the factors that could impact the significant inputs used to estimate fair value to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount or we may elect to bypass the qualitative assessment and proceed to a quantitative assessment to determine if goodwill is impaired. In quantitative impairment tests, we first compare the fair value of the reporting unit to the carrying value. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired and an impairment loss is recognized for the excess up to the amount of goodwill allocated to the reporting unit. We measure fair value of the reporting units to which goodwill is allocated using an income based approach, a generally accepted valuation methodology, using relevant data available through and as of the impairment testing date. Under the income approach, fair value is determined using a discounted cash flow method, projecting future cash flows of each reporting unit, as well as a terminal value, and discounting such cash flows at a rate of return that reflects the relative risk of the cash flows. The key 54 -------------------------------------------------------------------------------- assumptions and factors used in this approach include, but are not limited to, revenue growth rates and profit margins based on internal forecasts, a weighted average cost of capital used to discount future cash flows, and a review with comparable market multiples for the industry segment as well as our historical operating trends. Any impairment is increased to encompass the income tax effects of any tax deductible goodwill on the carrying amount of the reporting unit, so that the after-tax impairment loss is equivalent to the amount by which the carrying value of the reporting unit exceeds its fair value. No impairments were recorded during the year endedSeptember 30, 2021 as the estimated fair value substantially exceeded the carrying value for all reporting units. Product Warranties We provide product assurance warranties against certain defects to our customers based on standard terms and conditions for periods beginning as of the sale date and lasting from five years to a lifetime, depending on the product and subject to various limitations. We provide for the estimated cost of warranties by product line at the time revenue is recognized based on management's judgment, considering such factors as cost per claim, historical experience, anticipated rates of claims, and other available information, including our stated warranty policies and procedures. Management reviews and adjusts these estimates, if necessary, based on the differences between actual experience and historical estimates. Because warranty issues may surface later in the product life cycle, 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. The warranty obligation is reflected in other current and other non-current liabilities in the consolidated balance sheets.
Equity Based Compensation
Prior to our IPO
To assist us in attracting, retaining, incentivizing and motivating employees, certain employees were granted limited partnership interests in our former indirect parent entity, which we refer to as the Partnership, that generally were intended to constitute "profits interests," or the Profits Interests. The Profits Interests were subject to specified hurdle amounts, which functioned like option exercise prices because the Profits Interests did not participate in distributions by the Partnership until distributions to equity holders had exceeded the relevant hurdle amounts. In general, awards of Profits Interests were 50% time vested and 50% performance vested. Prior to completion of our IPO, interests in the Partnership, including the Profits Interests, were not listed on any established exchange. In determining the fair value of the Profits Interests, we took into account the methodologies and approaches described in theAmerican Institute of Certified Public Accountants Accounting and Valuation Guide , Valuation of Privately-Held Company Equity Securities Issued as Compensation. The sole material asset of the Partnership was indirect ownership of our company. Accordingly, the fair value of the Profits Interests was derived by reference to the value of our company, which we estimated using a combination of the income approach and the market approach. Under the income approach, we estimated the fair value of our company based on the present value of our future estimated cash flows and the estimated residual value of our company beyond the forecast period. These future values were discounted to their present values at a discount rate deemed appropriate to reflect the risks inherent in achieving these estimated cash flows. Significant estimates and judgments involved in the income approach include our estimated future cash flows, the perpetuity growth rate assumed in estimating the residual value of our cash flows and the discount rate used to discount our cash flows to present value. For the market approach, we utilized the comparable company method by analyzing a group of companies that were considered to be comparable to us in terms of product offerings, revenue, margins and/or growth. We then used these companies to develop relevant market multiples, which were applied to our corresponding financial metrics to estimate our equity value. Significant estimates and judgments used in the comparable company method included the selection of comparable companies and the selection of appropriate market multiples. Application of these approaches involves the use of estimates, judgment and assumptions that are highly subjective. Following our IPO, it is not necessary to apply these valuation approaches as shares of our Class A common stock are traded in the public market. In order to determine the value of the Profits Interests, the estimated equity value of the Partnership was allocated among the various interests in the Partnership, including the Profits Interests, using the option pricing method, which treated the various interests in the Partnership as call options with exercise prices determined based on their respective rights to participate in distributions by the Partnership. The values attributable to these implicit call options were determined using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the use of highly subjective assumptions, including volatility and the expected term of the call options. As equity interests in the Partnership were not publicly traded, expected volatility was derived based on the volatilities of a peer group of publicly traded companies that were deemed to be similar to us. The expected term of the options was based on the anticipated time to liquidity. Other assumptions include the risk-free rate of interest and dividend yield. The risk-free rate of interest was based on yields forU.S. Treasury securities with remaining maturities corresponding to the estimated term of the options. Dividends were assumed to be zero, consistent with historical experience. After the equity value was determined and 55 -------------------------------------------------------------------------------- allocated to the various classes of interests in the Partnership, including the Profits Interests, a discount for lack of marketability, or DLOM, was applied to derive the fair value of the Profits Interests. A DLOM is meant to account for the lack of marketability of a security that is not publicly traded. The cost of time-vested Profits Interests was recognized as an expense generally on a straight-line basis over the employee's requisite service period, which generally coincided with the vesting of the award. For performance vested Profits Interests, expense was recognized if and when the achievement of the applicable performance criteria became probable. Performance vested Profits Interests only vested upon receipt by the Sponsors of specified proceeds (in the form of cash and marketable securities) or, in the event of a Change of Control (as defined in the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as ofSeptember 30, 2013 ), upon the Sponsors achieving a specified rate of return. ThroughSeptember 30, 2019 and immediately prior to the IPO, no compensation expense had been recognized with respect to the performance vested Profits Interests because the achievement of the performance criteria had not become probable.
Subsequent to our IPO
We determine the expense for all employee stock-based compensation awards by estimating their fair value and recognizing such value as an expense, on a straight-line, ratable or cliff basis, depending on the award, in our consolidated financial statements over the requisite service period in which employees earn the awards. We estimate the fair value of performance-based awards granted to employees using theMonte Carlo pricing model and for service-based awards granted to employees using the Black Scholes pricing model. The fair value of performance-based awards that are expected to vest is recognized as compensation expense on a straight-line basis over the requisite service period. The fair value of service-based awards that are expected to vest is recognized as compensation expense on either (1) a straight-line basis, (2) a ratable vesting basis or (3) a cliff vesting basis. We account for forfeitures as they occur. To determine the fair value of a stock-based award using theMonte Carlo and Black Scholes models, we make assumptions regarding the risk-free interest rate, expected future volatility, expected dividend yield and performance period. The risk-free rate is based on theU.S. treasury yield curve in effect at the time of grant. We estimate the expected volatility of the share price by reviewing the estimated volatility levels of our Class A common stock in conjunction with the historical volatility levels of public companies that operate in similar industries or are similar in terms of stage of development or size and then projecting this information toward its future expected volatility. We exercise judgment in selecting these companies, as well as in evaluating the available historical and implied volatility for these companies. Dividend yield is determined based on our future plans to pay dividends. We calculate the performance period based on the specific market condition to be achieved and derived from estimates of future performance. We calculate the expected term in years for each stock option using a simplified method based on the average of each option's vesting term and original contractual term. The simplified method is used due to the lack of sufficient historical data available to provide a reasonable basis upon which to estimate the expected term of each stock option.
Stock-Based Compensation Expense
We recognized$22.7 million ,$120.5 million and$3.3 million in stock-based compensation expense during the years endedSeptember 30, 2021 , 2020 and 2019, respectively. The stock-based compensation expense recognized in fiscal year 2020 is primarily a result of the vesting of performance-based equity awards due to the Sponsors receiving sufficient proceeds from our secondary offering completed inSeptember 2020 . As ofSeptember 30, 2021 , the Company had not yet recognized compensation cost on unvested stock-based awards of$24.5 million , with a weighted average remaining recognition period of 2.4 years.
Income Taxes
In determining our current income tax provision, we assessed temporary
differences resulting from differing treatments of items for tax and accounting
purposes. These differences resulted in deferred tax assets and liabilities
which are recorded in our consolidated balance sheets. When we maintain deferred
tax assets, we must assess the likelihood that these assets will be recovered
through adjustments to future taxable income. To the extent we believe, based on
available evidence, it is more likely than not that all or some portion of the
asset will not be realized, we establish a valuation allowance. We record an
allowance reducing the asset to a value we believe is more likely than not to be
realized based on our expectation of future taxable income. We believe the
accounting estimate related to the valuation allowance is a critical accounting
estimate because it is highly susceptible to change from period to period as it
requires management to make assumptions about our future income over the lives
of the deferred tax assets, and the impact of increasing or decreasing the
valuation allowance is potentially material to our results of operations.
Forecasting future income requires us to use a significant amount of judgment.
In estimating future income, we use our internal operating budgets and
long-range planning projections. We developed our budgets and long-range
projections based on recent results, trends, economic and industry forecasts
influencing our segments' performance, our backlog, planned timing of new
product launches,
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and customer sales projections. Significant changes in the expected realization
of net deferred tax assets would require that we adjust the valuation allowance,
resulting in a change to net income.
We record liabilities for uncertain income tax positions based on a two-step
process. The first step is recognition, where we evaluate whether an individual
tax position has a likelihood of greater than 50% of being sustained upon
examination based on the technical merits of the position, including resolution
of any related appeals or litigation processes. For tax positions that are
currently estimated to have a less than 50% likelihood of being sustained, no
tax benefit is recorded. For tax positions that have met the recognition
threshold in the first step, we perform the second step of measuring the benefit
(expense) to be recorded. The actual benefits (expense) ultimately realized may
differ from our estimates. In future periods, changes in facts, circumstances,
and new information may require us to change the recognition and measurement
estimates with regard to individual tax positions. Changes in recognition and
measurement estimates are recorded in the consolidated statement of income and
consolidated balance sheet in the period in which such changes occur. As of
September 30, 2021 and 2020, we had liabilities for unrecognized tax benefits
pertaining to uncertain tax positions totaling $1.0 million and $1.0 million ,
respectively.
Recently Adopted Accounting Pronouncements
Under the Jumpstart Our Business Startups Act, we qualified as an emerging growth company, or an EGC, and as such, have elected not to opt out of the extended transition period for complying with new or revised accounting pronouncements. During the extended transition period, we were not subject to new or revised accounting standards applicable to public companies.
Based on our public float calculation atMarch 31, 2021 , we are deemed a Large Accelerated Filer under theU.S. Securities and Exchange Commission guidelines and ceased to qualify as an EGC effectiveSeptember 30, 2021 . The loss of EGC status resulted in losing the reporting exemptions noted above, and in particular required our independent registered public accounting firm to provide an attestation report on the effectiveness of our internal control over financial reporting as of and for the year endedSeptember 30, 2021 under Section 404(b) of the Sarbanes-Oxley Act. OnOctober 1, 2018 , we early adopted ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The update will supersede most current revenue recognition guidance. Under the new standard, entities are required to identify the contract with a customer; identify the separate performance obligations in the contract; determine the transaction price; allocate the transaction price to the separate performance obligations in the contract; and recognize the appropriate amount of revenue when (or as) the entity satisfies each performance obligation. The adoption of this standard did not have a material impact on our Consolidated Financial Statements. OnOctober 1, 2019 , we adopted ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory. The standard amends several aspects of the tax accounting and recognition timing for intra-company transfers. We adopted the standard using a modified retrospective approach, with an adjustment to the beginning retained earnings of approximately$1.3 million , due to the cumulative impact of adopting the standard. The adoption of this standard did not have a material impact on our Consolidated Financial Statements. OnOctober 1, 2020 , we adopted ASU No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which amends Topic 820, Fair Value Measurement. This standard modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The adoption of this standard did not have a material impact on our Consolidated Financial Statements. OnOctober 1, 2020 , we adopted ASC 842 (Leases) using the transition method introduced by ASU 2018-11, which does not require revisions to comparative periods. Adoption of the new standard resulted in the recording of lease assets and lease liabilities of approximately$15.2 million and$18.7 million , respectively, as ofOctober 1, 2020 . The difference between the lease assets and lease liabilities primarily relates to accrued rent and unamortized lease incentives recorded in accordance with the previous leasing guidance. As of the adoption date, accumulated deficit within shareholder's equity on our consolidated balance sheet decreased by$2.1 million , primarily related to the derecognition of build-to-suit leasing arrangements. The new standard did not materially impact our consolidated statements of income or cash flows. OnOctober 1, 2020 , we adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), and the subsequent amendments The standard sets forth an expected credit loss model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, and certain off-balance sheet credit exposures. The adoption of this standard did not have a material impact on our Consolidated Financial Statements. 57 -------------------------------------------------------------------------------- OnOctober 1, 2020 , we adopted ASU No. 2018-15, Intangibles-Goodwill andOther-Internal-Use Software (Subtopic 350-40): The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The adoption of the standard did not have a material impact on our Consolidated Financial Statements. OnOctober 1, 2020 , we adopted ASU No. 2020-04, Reference Rate Reform (Topic 848), The standard provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The adoption of the standard did not have a material impact on our Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
InDecember 2019 , the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to general principles in Topic 740 and clarifying and amending existing guidance. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2020 . For all other entities, the amendments are effective for fiscal years beginning afterDecember 15, 2021 , and interim periods within fiscal years beginning afterDecember 15, 2022 . Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The amendments are applied on a prospective or retrospective basis, depending upon the amendment adopted within this ASU. The amendments in this ASU are effective for us for annual periods beginning afterDecember 15, 2020 and interim periods within annual periods beginning afterDecember 15, 2021 . We are currently evaluating the impact this adoption will have on our Consolidated Financial Statements.
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