Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our annual consolidated financial statements and related notes and our discussion and analysis of financial condition and results of operations, which were included in our 2022 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or the SEC, on November 29, 2022, or our 2022 Form 10-K, as well as Item 1. Financial Statements in this Form 10-Q.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding future operations, cash flows, expansion plans, capital investments, capacity targets and other strategic initiatives, are forward-looking statements. In some cases, forward looking statements may be identified by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “expect,” “objective,” “plan,” “potential,” “seek,” “grow,” “target,” “if,” or the negative of these terms and similar expressions intended to identify forward-looking statements. In particular, statements about potential new products and product innovation, statements regarding the potential impact of climate change and extreme weather events, the COVID-19 pandemic or geopolitical conflicts, such as the conflict between Russia and Ukraine, statements about the markets in which we operate and the economy more generally, including inflation and interest rates, supply and demand balance, growth of our various markets and growth in the use of engineered products as well as our ability to share in such growth, statements about our ability to source our raw materials in line with our expectations, future pricing for our products or our raw materials and our ability to successfully manage market and interest rate risks and control or reduce costs, statements with respect to our ability to meet future goals and targets, including our environmental, social and governance targets, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in the Quarterly Report on Form 10-Q are forward-looking statements. We have based these forward-looking statements primarily on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled “Risk Factors” set forth in Part I, Item 1A of our 2022 Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results may differ materially and adversely from those anticipated or implied in the forward-looking statements. You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
Overview
We are an industry-leading designer and manufacturer of beautiful, low-maintenance and environmentally sustainable outdoor living products, including TimberTech® decking, Versatex® and AZEK® Trim, and StruXure pergolas. Homeowners are investing in their outdoor spaces and are increasingly recognizing the significant advantages of engineered, long-lasting products, which are converting demand away from traditional materials, particularly wood. Our products transform those outdoor spaces by combining highly appealing aesthetics with significantly lower maintenance costs compared to traditional materials. Our innovative portfolio of outdoor living products, including decking, railing, trim, siding, pergolas, 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 with the customer in mind. In furtherance of that value, we are focused on sustainability across our operations and have adopted strategies to enable us to meet the growing demand for environmentally-friendly products.
We report our results in two segments: Residential and Commercial. We leverage a shared technology and U.S.-based manufacturing platform to create an extensive range of long-lasting and low-maintenance products that convert demand away from traditional materials. Our Residential segment serves the high-growth outdoor living market by offering products that inspire consumers to design outdoor spaces tailored to their individual lifestyles. Our innovative portfolio of outdoor living products, including decking, railing, exterior trim, pergolas and cabanas and accessories, are sold under our TimberTech, AZEK Exteriors, VERSATEX®, ULTRALOX®, StruXure and INTEX® brands. Our Commercial segment addresses demand for low-maintenance,
25
highly engineered products in a variety of commercial and industrial markets, including the outdoor, graphic displays and signage, educational and recreational markets, as well as the industrial and chemical industries. Products sold by our Commercial segment include highly engineered polymer sheeting as well as partitions, lockers and storage solutions. Over our history we have developed a reputation as a leading innovator in our markets by leveraging our differentiated manufacturing capabilities, material science expertise and product management proficiency to consistently introduce new products into the market. This long-standing commitment has been critical to our ability to stay at the forefront of evolving industry trends and consumer demands, which in turn has allowed us to become a market leader across our core product categories.
Economic Environment; Global Events
We expect the macroeconomic environment, including increased inflation and rising interest rates, will continue to be a critical factor affecting the overall business climate as well as our business and demand for our products. During the first quarter of fiscal 2023, our channel partners met demand partially through inventory drawdowns causing us to experience a recalibration of channel inventory and negatively impacting sales for the period. We believe this recalibration in our Residential segment is complete and will better position us and our channel partners to drive continued expansion of our market position in fiscal year 2023. Looking ahead, we will continue proactively adjusting our operating plans, capital expenditures and expenses as necessary and appropriate and executing on our long-term strategy.
In addition, the current conflict between Russia and Ukraine and the related sanctions and other penalties imposed by countries around the world against Russia continue to create substantial uncertainty in the global political and economic landscapes. While our operations are primarily within North America and we have no operations in Russia or Ukraine, and we do not have direct exposure to customers and vendors in Russia and Ukraine, we are actively monitoring the broader economic impact of the crisis, especially the potential impact of any further disruptions to global supply chains generally and our supply chain in particular, fluctuating commodity and fuel prices, and, in turn, prices of our raw materials, and the impact of an extended economic downturn on our direct and indirect customers. In addition, the U.S. government has reported that U.S. sanctions against Russia in response to the conflict could lead to an increased threat of cyberattacks against U.S. companies. These increased threats could pose risks to the security of our information technology systems, as well as the confidentiality, availability and integrity of our or our customers’ data.
Finally, we expect that the direct and indirect economic effects of the COVID-19 pandemic will likely continue to affect demand for our products in ways that may be difficult to predict. The global impact of the COVID-19 pandemic continues to evolve, and we continue to monitor the situation closely.
We are unable to fully predict the impact that the above events and conditions will have on the global economy, our industry or our business, financial condition, results of operations or cash flows. See also Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” of this Quarterly Report on Form 10-Q and Part 1, Item 1A “Risk Factors” of our 2022 Form 10-K.
Recent Acquisition
On August 1, 2022, we acquired INTEX Millwork Solutions, LLC, a New Jersey LLC, or INTEX, for a total purchase price of approximately $25.9 million, which consisted of $20.1 million in cash and $5.8 million in contingent consideration, subject to customary post-closing working capital adjustments. INTEX is located in Mays Landing, New Jersey and manufactures high-quality railing solutions, column wraps, and pergolas. We financed the acquisition with cash on hand.
26
Results of Operations
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
The following table summarizes certain financial information relating to our operating results that have been derived from our unaudited Consolidated Financial Statements for the three months ended March 31, 2023 and 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(U.S. dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
$ Variance |
|
|
% Variance |
|
Net sales |
|
$ |
377,692 |
|
|
$ |
396,255 |
|
|
$ |
(18,563 |
) |
|
|
(4.7 |
)% |
Cost of sales |
|
|
269,519 |
|
|
|
273,795 |
|
|
|
(4,276 |
) |
|
|
(1.6 |
)% |
Gross profit |
|
|
108,173 |
|
|
|
122,460 |
|
|
|
(14,287 |
) |
|
|
(11.7 |
)% |
Selling, general and administrative expenses |
|
|
74,460 |
|
|
|
70,822 |
|
|
|
3,638 |
|
|
|
5.1 |
% |
Operating income (loss) |
|
|
33,713 |
|
|
|
51,638 |
|
|
|
(17,925 |
) |
|
|
(34.7 |
)% |
Interest expense, net |
|
|
10,774 |
|
|
|
4,010 |
|
|
|
6,764 |
|
|
|
168.7 |
% |
Income tax expense (benefit) |
|
|
6,666 |
|
|
|
11,810 |
|
|
|
(5,144 |
) |
|
|
(43.6 |
)% |
Net income (loss) |
|
$ |
16,273 |
|
|
$ |
35,818 |
|
|
$ |
(19,545 |
) |
|
|
(54.6 |
)% |
Net Sales
Net sales for the three months ended March 31, 2023 decreased by $18.6 million, or 4.7%, to $377.7 million from $396.3 million for the three months ended March 31, 2022. The decrease was primarily due to an approximately 15% decline in volume, partially offset by positive pricing contribution and a $7.5 million net sales contribution from an acquisition. As expected, the volume declines were a result of actively managing lower channel inventory levels with our partners ahead of the traditional building season given the ongoing uncertain macroeconomic environment. Net sales for the three months ended March 31, 2023 decreased for our Residential segment by 2.4% and our Commercial segment by 22.5%, in each case as compared to the prior year period.
Cost of Sales
Cost of sales for the three months ended March 31, 2023 decreased by $4.3 million, or 1.6%, to $269.5 million from $273.8 million for the three months ended March 31, 2022 primarily due to decreased costs on lower sales volumes, partially offset by higher material costs and underutilization of manufacturing capacity.
Gross Profit
Gross profit for the three months ended March 31, 2023 decreased by $14.3 million, or 11.7%, to $108.2 million from $122.5 million for the three months ended March 31, 2022. The decrease in gross profit was primarily driven by the lower sales results in the Residential and Commercial segments. Gross profit as a percent of net sales decreased to 28.6% for the three months ended March 31, 2023 compared to 30.9% for the three months ended March 31, 2022.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $3.6 million, or 5.1%, to $74.5 million, or 19.7% of net sales, for the three months ended March 31, 2023 from $70.8 million, or 17.9% of net sales, for the three months ended March 31, 2022. The increase was primarily due to higher marketing expenses and contribution from acquisitions, partially offset by lower acquisition costs.
Interest Expense, net
Interest expense, net, increased by $6.8 million, or 168.7%, to $10.8 million for the three months ended March 31, 2023 from $4.0 million for the three months ended March 31, 2022. Interest expense, net increased due to a higher interest rate on outstanding debt and a higher principal balance outstanding during the three months ended March 31, 2023, when compared to the three months ended March 31, 2022.
Income Tax Expense (Benefit)
Income tax expense (benefit) decreased by $5.1 million to $6.7 million for the three months ended March 31, 2023 compared to $11.8 million for the three months ended March 31, 2022. The decrease in our income tax expense was primarily driven by the lower pre-tax income.
27
Net Income (Loss)
Net income (loss) decreased by $19.5 million to $16.3 million for the three months ended March 31, 2023 compared to $35.8 million for the three months ended March 31, 2022, due to the factors described above.
Six Months Ended March 31, 2023 Compared to Six Months Ended March 31, 2022
The following tables summarize certain financial information relating to our operating results that have been derived from our unaudited Consolidated Financial Statements for the six months ended March 31, 2023 and 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
|
|
|
|
(U.S. dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
$ Variance |
|
|
% Variance |
|
Net sales |
|
$ |
593,951 |
|
|
$ |
655,963 |
|
|
$ |
(62,012 |
) |
|
|
(9.5 |
)% |
Cost of sales |
|
|
438,199 |
|
|
|
444,894 |
|
|
|
(6,695 |
) |
|
|
(1.5 |
)% |
Gross profit |
|
|
155,752 |
|
|
|
211,069 |
|
|
|
(55,317 |
) |
|
|
(26.2 |
)% |
Selling, general and administrative expenses |
|
|
147,904 |
|
|
|
133,991 |
|
|
|
13,913 |
|
|
|
10.4 |
% |
Operating income |
|
|
7,848 |
|
|
|
77,078 |
|
|
|
(69,230 |
) |
|
|
(89.8 |
)% |
Interest expense, net |
|
|
20,073 |
|
|
|
8,158 |
|
|
|
11,915 |
|
|
|
146.1 |
% |
Income tax expense (benefit) |
|
|
(2,662 |
) |
|
|
16,395 |
|
|
|
(19,057 |
) |
|
|
(116.2 |
)% |
Net income (loss) |
|
$ |
(9,563 |
) |
|
$ |
52,525 |
|
|
$ |
(62,088 |
) |
|
|
(118.2 |
)% |
Net Sales
Net sales for the six months ended March 31, 2023 decreased by $62.0 million, or 9.5%, to $594.0 million from $656.0 million for the six months ended March 31, 2022. The decrease was primarily due to an approximately 22% decline in volume, primarily as a result of the channel inventory reductions to better calibrate inventory to historical average levels discussed above, partially offset by positive pricing and a $28.4 million net sales contribution from recent acquisitions. Net sales for the six months ended March 31, 2023 decreased for our Residential segment by 8.7% and for our Commercial segment by 14.3%, in each case as compared to the prior year period.
Cost of Sales
Cost of sales for the six months ended March 31, 2023 decreased by $6.7 million, or 1.5%, to $438.2 million from $444.9 million for the six months ended March 31, 2022 primarily due to decreased costs on lower sales volumes, partially offset by higher material costs and underutilization of manufacturing capacity.
Gross Profit
Gross profit for the six months ended March 31, 2023 decreased by $55.3 million, or 26.2%, to $155.8 million from $211.1 million for the six months ended March 31, 2022. The decrease in gross profit was primarily driven by the lower sales results in the Residential and Commercial segments. Gross profit as a percent of net sales decreased to 26.2% for the six months ended March 31, 2023 compared to 32.2% for the six months ended March 31, 2022.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $13.9 million, or 10.4%, to $147.9 million, or 24.9% of net sales, for the six months ended March 31, 2023 from $134.0 million, or 20.4% of net sales, for the six months ended March 31, 2022. The increase was primarily due to the contribution from acquisitions and higher marketing and selling expenses, partially offset by lower acquisition costs.
Interest Expense, net
Interest expense, net, increased by $11.9 million, or 146.1%, to $20.1 million for the six months ended March 31, 2023 from $8.2 million for the six months ended March 31, 2022. Interest expense, net increased due to a higher interest rate on outstanding debt and a higher principal balance outstanding during the six months ended March 31, 2023, when compared to the six months ended March 31, 2022.
28
Income Tax Expense (Benefit)
Income tax expense decreased by $19.1 million to $(2.7) million for the six months ended March 31, 2023 compared to $16.4 million for the six months ended March 31, 2022. The decrease in our income tax expense was primarily driven by the pre-tax loss in the six months ended March 31, 2023 as compared to pre-tax income for the six months ended March 31, 2022.
Net Income (Loss)
Net income (loss) decreased by $62.1 million to $(9.6) million for the six months ended March 31, 2023 compared to $52.5 million for the six months ended March 31, 2022, due to the factors described above.
Segment Results of Operations
We report our results in two segments: Residential and Commercial. The key segment measures used by our chief operating decision maker in deciding how to evaluate performance and allocate resources to each of the segments are Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin. Depending on certain circumstances, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin may be calculated differently, from time to time, than our Adjusted EBITDA and Adjusted EBITDA Margin, which are further discussed under the heading “Non-GAAP Financial Measures.” Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin represent measures of segment profit reported to our chief operating decision maker for the purpose of making decisions about allocating resources to a segment and assessing its performance and are determined as disclosed in our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q consistent with the requirements of the Financial Accounting Standards Board’s, or FASB, Accounting Standards Codification, or ASC 280, Segment Reporting. We define Segment Adjusted EBITDA as a segment’s net income (loss) before income tax (benefit) expense and by adding to or subtracting therefrom interest expense, net, depreciation and amortization, share-based compensation costs, asset impairment and inventory revaluation costs, business transformation costs, capital structure transaction costs, acquisition costs, initial public offering costs and certain other costs. Segment Adjusted EBITDA Margin is equal to a segment’s Segment Adjusted EBITDA divided by such segment’s net sales. Corporate expenses, which include selling, general and administrative costs related to our corporate offices, including payroll and other professional fees, are not included in computing Segment Adjusted EBITDA. Such corporate expenses decreased by $0.6 million to $21.7 million for the three months ended March 31, 2023, from $22.3 million for the three months ended March 31, 2022, and decreased by $0.1 million to $42.9 million for the six months ended March 31, 2023, from $43.0 million for the six months ended March 31, 2022.
Residential
The following table summarizes certain financial information relating to the Residential segment results that have been derived from our unaudited Condensed Consolidated Financial Statements for the three and six months ended March 31, 2023 and 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
|
|
|
|
(U.S. dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
$ Variance |
|
|
% Variance |
|
|
2023 |
|
|
2022 |
|
|
$ Variance |
|
|
% Variance |
|
Net sales |
|
$ |
342,116 |
|
|
$ |
350,358 |
|
|
$ |
(8,242 |
) |
|
|
(2.4 |
)% |
|
$ |
521,600 |
|
|
$ |
571,491 |
|
|
$ |
(49,891 |
) |
|
|
(8.7 |
)% |
Segment Adjusted EBITDA |
|
|
80,375 |
|
|
|
98,350 |
|
|
|
(17,975 |
) |
|
|
(18.3 |
)% |
|
|
106,382 |
|
|
|
167,781 |
|
|
|
(61,399 |
) |
|
|
(36.6 |
)% |
Segment Adjusted EBITDA Margin |
|
|
23.5 |
% |
|
|
28.1 |
% |
|
N/A |
|
|
N/A |
|
|
|
20.4 |
% |
|
|
29.4 |
% |
|
N/A |
|
|
N/A |
|
Net Sales
Net sales for the three months ended March 31, 2023 decreased by $8.2 million, or 2.4%, to $342.1 million from $350.4 million for the three months ended March 31, 2022. The decrease was attributable to lower net sales related to our Deck, Rail & Accessories businesses partially offset by positive growth in our Exteriors business.
Net sales for the six months ended March 31, 2023 decreased by $49.9 million, or 8.7%, to $521.6 million from $571.5 million for the six months ended March 31, 2022. The decrease was attributable to lower net sales related to our Deck, Rail & Accessories businesses as a result of channel inventory reductions to better calibrate inventory to historical average levels as discussed above, partially offset by $28.4 million in net sales contribution from recent acquisitions and positive growth in our Exteriors business.
Segment Adjusted EBITDA
Segment Adjusted EBITDA for the three months ended March 31, 2023 decreased by $18.0 million, or 18.3%, to $80.4 million from $98.4 million for the three months ended March 31, 2022. The decrease was mainly driven by lower sales, higher raw material costs and higher selling and marketing expenses.
29
Segment Adjusted EBITDA for the six months ended March 31, 2023 decreased by $61.4 million, or 36.6%, to $106.4 million from $167.8 million for the six months ended March 31, 2022. The decrease was mainly driven by lower sales, higher raw material costs and higher selling and marketing expenses.
Commercial
The following table summarizes certain financial information relating to the Commercial segment results that have been derived from our unaudited Condensed Consolidated Financial Statements for the three and six months ended March 31, 2023 and 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
|
|
|
|
(U.S. dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
$ Variance |
|
|
% Variance |
|
|
2023 |
|
|
2022 |
|
|
$ Variance |
|
|
% Variance |
|
Net sales |
|
$ |
35,576 |
|
|
$ |
45,897 |
|
|
$ |
(10,321 |
) |
|
|
(22.5 |
)% |
|
$ |
72,351 |
|
|
$ |
84,472 |
|
|
$ |
(12,121 |
) |
|
|
(14.3 |
)% |
Segment Adjusted EBITDA |
|
|
7,829 |
|
|
|
8,675 |
|
|
|
(846 |
) |
|
|
(9.8 |
)% |
|
|
12,983 |
|
|
|
13,423 |
|
|
|
(440 |
) |
|
|
(3.3 |
)% |
Segment Adjusted EBITDA Margin |
|
|
22.0 |
% |
|
|
18.9 |
% |
|
N/A |
|
|
N/A |
|
|
|
17.9 |
% |
|
|
15.9 |
% |
|
N/A |
|
|
N/A |
|
Net Sales
Net sales for the three months ended March 31, 2023 decreased by $10.3 million, or 22.5%, to $35.6 million from $45.9 million for the three months ended March 31, 2022. The decrease was primarily attributable to lower net sales in our Vycom and Scranton Products businesses as some of our Vycom channel partners met demand partially through inventory drawdowns which negatively impacted net sales.
Net sales for the six months ended March 31, 2023 decreased by $12.1 million, or 14.3%, to $72.4 million from $84.5 million for the six months ended March 31, 2022. The decrease was primarily attributable to lower net sales in our Vycom and Scranton Products businesses as some of our Vycom channel partners met demand partially through inventory drawdowns which negatively impacted net sales.
Segment Adjusted EBITDA
Segment Adjusted EBITDA of the Commercial segment was $7.8 million for the three months ended March 31, 2023, compared to $8.7 million for the three months ended March 31, 2022. The decrease was primarily driven by lower sales, partially offset by net manufacturing productivity.
Segment Adjusted EBITDA of the Commercial segment was $13.0 million for the six months ended March 31, 2023, compared to $13.4 million for the six months ended March 31, 2022. The decrease was primarily driven by lower sales, partially offset by net manufacturing productivity.
Non-GAAP Financial Measures
To supplement our Condensed Consolidated Financial Statements prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we use certain non-GAAP performance financial measures, as described below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance from management’s view and because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. Our GAAP financial results include significant expenses that may not be indicative of our ongoing operations as detailed in the tables below.
However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our Condensed Consolidated Financial Statements prepared and presented in accordance with GAAP.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
(U.S. dollars in thousands, except per share amounts) |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
Adjusted Gross Profit |
|
$ |
130,702 |
|
|
$ |
143,754 |
|
|
$ |
202,601 |
|
|
$ |
250,844 |
|
Adjusted Gross Profit Margin |
|
|
34.6 |
% |
|
|
36.3 |
% |
|
|
34.1 |
% |
|
|
38.2 |
% |
Adjusted Net Income |
|
$ |
26,992 |
|
|
$ |
50,783 |
|
|
$ |
13,140 |
|
|
$ |
79,541 |
|
Adjusted Diluted EPS |
|
$ |
0.18 |
|
|
$ |
0.33 |
|
|
$ |
0.09 |
|
|
$ |
0.51 |
|
Adjusted EBITDA |
|
$ |
72,810 |
|
|
$ |
90,921 |
|
|
$ |
87,910 |
|
|
$ |
149,441 |
|
Adjusted EBITDA Margin |
|
|
19.3 |
% |
|
|
22.9 |
% |
|
|
14.8 |
% |
|
|
22.8 |
% |
Free Cash Flow |
|
$ |
39,777 |
|
|
$ |
(85,585 |
) |
|
$ |
15,858 |
|
|
$ |
(181,538 |
) |
Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, Adjusted EBITDA Margin and Free Cash Flow
We define Adjusted Gross Profit as gross profit before depreciation and amortization, business transformation costs and acquisition costs as described below. Adjusted Gross Profit Margin is equal to Adjusted Gross Profit divided by net sales. We define Adjusted Net Income as net income (loss) before amortization, stock-based compensation costs, business transformation costs, acquisition costs, initial public offering costs, capital structure transaction costs and certain other costs as described below. We define Adjusted Diluted EPS as Adjusted Net Income divided by weighted average common shares outstanding—diluted, to reflect the conversion or exercise, as applicable, of all outstanding shares of restricted stock awards, restricted stock units and options to purchase shares of our common stock. We define Adjusted EBITDA as net income (loss) before interest expense, net, income tax (benefit) expense and depreciation and amortization and by adding to or subtracting therefrom items of expense and income as described below. Adjusted EBITDA Margin is equal to Adjusted EBITDA divided by net sales. We believe Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain expenses that can vary from company to company depending on, among other things, its financing, capital structure and the method by which its assets were acquired, and can also vary significantly from period to period. For example, we add back 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.
Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•These measures do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
•These measures do not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect our income tax expense or the cash requirements to pay our taxes;
31
•Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin exclude the expense of amortization of our assets, and Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted EBITDA and Adjusted EBITDA Margin also exclude the expense of depreciation of our assets, and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future;
•Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin exclude the expense associated with our equity compensation plan, although equity compensation has been, and will continue to be, an important part of our compensation strategy;
•Adjusted Gross Profit, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin exclude certain business transformation costs, acquisition costs and other costs, each of which can affect our current and future cash requirements; and
•Other companies in our industry may calculate Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as comparative measures.
Because of these limitations, none of these metrics should be considered indicative of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
In addition, we provide Free Cash Flow, which is a non-GAAP financial measure that we define as net cash provided by (used in) operating activities less purchases of property, plant and equipment. We believe Free Cash Flow is useful to investors as an important liquidity measure of the cash that is available to us after capital expenditures. Free Cash Flow is used by our management as a measure of our ability to generate and use cash, including in order to invest in future growth, fund acquisitions, return capital to our stockholders and repay indebtedness. Our use of Free Cash Flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results under GAAP. Some of these limitations are:
•Free Cash Flow is not a substitute for net cash provided by (used in) operating activities, including because our capital expenditures as a manufacturing company can be significant and can vary from period to period;
•Free Cash Flow does not reflect our future contractual commitments or mandatory debt repayments and accordingly does not represent residual cash flow available for discretionary expenditures or the total increase or decrease in our cash balance for a given period; and
•Other companies in our industry may calculate Free Cash Flow differently than we do, limiting its usefulness as a comparative measure.
The following table presents reconciliations of the most comparable financial measures calculated in accordance with GAAP to these non-GAAP financial measures for the periods indicated:
Adjusted Gross Profit and Adjusted Gross Profit Margin Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
(U.S. dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
Gross Profit |
|
$ |
108,173 |
|
|
$ |
122,460 |
|
|
$ |
155,752 |
|
|
$ |
211,069 |
|
Depreciation and amortization (1) |
|
|
22,413 |
|
|
|
20,086 |
|
|
|
46,733 |
|
|
|
38,567 |
|
Acquisitions costs (2) |
|
|
— |
|
|
|
1,208 |
|
|
|
— |
|
|
|
1,208 |
|
Other costs (3) |
|
|
116 |
|
|
|
— |
|
|
|
116 |
|
|
|
— |
|
Adjusted Gross Profit |
|
$ |
130,702 |
|
|
$ |
143,754 |
|
|
$ |
202,601 |
|
|
$ |
250,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
Gross Margin |
|
|
28.6 |
% |
|
|
30.9 |
% |
|
|
26.2 |
% |
|
|
32.2 |
% |
Depreciation and amortization |
|
|
5.9 |
% |
|
|
5.1 |
% |
|
|
7.9 |
% |
|
|
5.8 |
% |
Acquisitions costs |
|
|
0.0 |
% |
|
|
0.3 |
% |
|
|
0.0 |
% |
|
|
0.2 |
% |
Other costs |
|
|
0.1 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Adjusted Gross Profit Margin |
|
|
34.6 |
% |
|
|
36.3 |
% |
|
|
34.1 |
% |
|
|
38.2 |
% |
(1)Depreciation and amortization for the three months ended March 31, 2023 and 2022 consists of $17.8 million and $14.8 million, respectively, of depreciation and $4.6 million and $5.3 million, respectively, of amortization of intangible assets
32
relating to our manufacturing process. Depreciation and amortization for the six months ended March 31, 2023 and 2022 consists of $37.5 million and $28.5 million, respectively, of depreciation and $9.2 million and $10.1 million, respectively, of amortization of intangible assets relating to our manufacturing process.
(2)Acquisition costs reflect inventory step-up adjustments related to recording the inventory of acquired businesses at fair value on the date of acquisition.
(3)Other costs include costs related to a reduction in workforce of $0.1 million in the three and six months ended March 31, 2023.
Adjusted Net Income and Adjusted Diluted EPS Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
(U.S. dollars in thousands, except per share amounts) |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
Net income (loss) |
|
$ |
16,273 |
|
|
$ |
35,818 |
|
|
$ |
(9,563 |
) |
|
$ |
52,525 |
|
Amortization |
|
|
11,620 |
|
|
|
12,564 |
|
|
|
23,457 |
|
|
|
25,444 |
|
Stock-based compensation (1) |
|
|
1,101 |
|
|
|
1,804 |
|
|
|
2,360 |
|
|
|
3,765 |
|
Acquisition costs (2) |
|
|
1,421 |
|
|
|
5,136 |
|
|
|
3,856 |
|
|
|
5,633 |
|
Other costs (3) |
|
|
415 |
|
|
|
177 |
|
|
|
1,148 |
|
|
|
662 |
|
Tax impact of adjustments (4) |
|
|
(3,838 |
) |
|
|
(4,716 |
) |
|
|
(8,118 |
) |
|
|
(8,488 |
) |
Adjusted Net Income |
|
$ |
26,992 |
|
|
$ |
50,783 |
|
|
$ |
13,140 |
|
|
$ |
79,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
Net income (loss) |
|
$ |
0.11 |
|
|
$ |
0.23 |
|
|
$ |
(0.06 |
) |
|
$ |
0.34 |
|
Amortization |
|
|
0.08 |
|
|
|
0.08 |
|
|
|
0.15 |
|
|
|
0.15 |
|
Stock-based compensation |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.02 |
|
Acquisition costs |
|
|
0.01 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
|
0.04 |
|
Other costs |
|
|
— |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.01 |
|
Tax impact of adjustments |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
|
(0.05 |
) |
|
|
(0.05 |
) |
Adjusted Diluted EPS (5) |
|
$ |
0.18 |
|
|
$ |
0.33 |
|
|
$ |
0.09 |
|
|
$ |
0.51 |
|
(1)Stock-based compensation costs reflect expenses related to our initial public offering. Expenses related to our recurring awards granted each fiscal year are excluded from the Adjusted Net Income reconciliation.
(2)Acquisition costs reflect costs directly related to completed acquisitions of $1.4 million and $3.9 million in the three months ended March 31, 2023 and 2022, respectively, and $3.9 million and $4.4 million in the six months ended March 31, 2023 and 2022, respectively, and inventory step-up adjustments related to recording inventory of acquired businesses at fair value on the date of acquisition of $1.2 million for the three and six months ended March 31, 2022.
(3)Other costs include costs related to a reduction in workforce of $0.2 million in the three and six months ended March 31, 2023, respectively, costs for legal expense of $0.1 million in the three months ended March 31, 2022, and $0.2 million and $0.4 million in the six months ended March 31, 2023 and 2022, respectively, costs related to an incentive plan and other ancillary expenses associated with the initial public offering of $0.1 million for the six months ended March 31, 2022, and other costs of $0.2 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively, and $0.7 million and $0.2 million for the six months ended March 31, 2023 and 2022, respectively.
(4)Tax impact of adjustments are based on applying a combined U.S. federal and state statutory tax rate of 26.5% for the three and six months ended March 31, 2023, respectively, and 24.5% for the three and six months ended March 31, 2022, respectively.
(5)Weighted average common shares outstanding used in computing diluted net income per common share of 151,268,535 and 156,121,476 for the three months ended March 31, 2023 and 2022, respectively, and 151,185,650 and 156,560,502 for the six months ended March 31, 2023 and 2022, respectively.
33
Adjusted EBITDA and Adjusted EBITDA Margin Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
(U.S. dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
Net income (loss) |
|
$ |
16,273 |
|
|
$ |
35,818 |
|
|
$ |
(9,563 |
) |
|
$ |
52,525 |
|
Interest expense |
|
|
10,774 |
|
|
|
4,010 |
|
|
|
20,073 |
|
|
|
8,158 |
|
Depreciation and amortization |
|
|
31,635 |
|
|
|
29,042 |
|
|
|
65,475 |
|
|
|
57,124 |
|
Income tax expense (benefit) |
|
|
6,666 |
|
|
|
11,810 |
|
|
|
(2,662 |
) |
|
|
16,395 |
|
Stock-based compensation |
|
|
5,626 |
|
|
|
4,928 |
|
|
|
9,583 |
|
|
|
8,944 |
|
Acquisition costs (1) |
|
|
1,421 |
|
|
|
5,136 |
|
|
|
3,856 |
|
|
|
5,633 |
|
Other costs (2) |
|
|
415 |
|
|
|
177 |
|
|
|
1,148 |
|
|
|
662 |
|
Total adjustments |
|
|
56,537 |
|
|
|
55,103 |
|
|
|
97,473 |
|
|
|
96,916 |
|
Adjusted EBITDA |
|
$ |
72,810 |
|
|
$ |
90,921 |
|
|
$ |
87,910 |
|
|
$ |
149,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
Net income (loss) |
|
|
4.3 |
% |
|
|
9.0 |
% |
|
|
(1.6 |
)% |
|
|
8.0 |
% |
Interest expense |
|
|
2.8 |
% |
|
|
1.0 |
% |
|
|
3.4 |
% |
|
|
1.2 |
% |
Depreciation and amortization |
|
|
8.4 |
% |
|
|
7.3 |
% |
|
|
11.0 |
% |
|
|
8.7 |
% |
Income tax expense (benefit) |
|
|
1.8 |
% |
|
|
3.0 |
% |
|
|
(0.4 |
)% |
|
|
2.5 |
% |
Stock-based compensation |
|
|
1.5 |
% |
|
|
1.2 |
% |
|
|
1.6 |
% |
|
|
1.4 |
% |
Acquisition costs |
|
|
0.4 |
% |
|
|
1.3 |
% |
|
|
0.6 |
% |
|
|
0.9 |
% |
Other costs |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
0.1 |
% |
Total adjustments |
|
|
15.0 |
% |
|
|
13.9 |
% |
|
|
16.4 |
% |
|
|
14.8 |
% |
Adjusted EBITDA Margin |
|
|
19.3 |
% |
|
|
22.9 |
% |
|
|
14.8 |
% |
|
|
22.8 |
% |
(1)Acquisition costs reflect costs directly related to completed acquisitions of $1.4 million and $3.9 million in the three months ended March 31, 2023 and 2022, respectively, and $3.9 million and $4.4 million in the six months ended March 31, 2023 and 2022, respectively, and inventory step-up adjustments related to recording inventory of acquired businesses at fair value on the date of acquisition of $1.2 million for the three and six months ended March 31, 2022.
(2)Other costs include costs related to a reduction in workforce of $0.2 million in the three and six months ended March 31, 2023, respectively, costs for legal expense of $0.1 million in the three months ended March 31, 2022, and $0.2 million and $0.4 million in the six months ended March 31, 2023 and 2022, respectively, costs related to an incentive plan and other ancillary expenses associated with the initial public offering of $0.1 million for the six months ended March 31, 2022, and other costs of $0.2 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively, and $0.7 million and $0.2 million for the six months ended March 31, 2023 and 2022, respectively.
Free Cash Flow Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
(U.S. dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
Net cash provided by (used in) operating activities |
|
$ |
|
56,733 |
|
|
$ |
|
(36,923 |
) |
|
$ |
|
63,142 |
|
|
$ |
|
(67,543 |
) |
Less: Purchases of property, plant and equipment |
|
|
|
(16,956 |
) |
|
|
|
(48,662 |
) |
|
|
|
(47,284 |
) |
|
|
|
(113,995 |
) |
Free Cash Flow |
|
$ |
|
39,777 |
|
|
$ |
|
(85,585 |
) |
|
$ |
|
15,858 |
|
|
$ |
|
(181,538 |
) |
Liquidity and Capital Resources
Liquidity Outlook
Our primary cash needs are to fund operations, working capital, capital expenditures, debt service, share repurchases and any acquisitions we may undertake. As of March 31, 2023, we had cash and cash equivalents of $126.3 million and total indebtedness of $597.0 million. CPG International LLC, our direct, wholly owned subsidiary, had approximately $147.2 million available under the borrowing base for future borrowings as of March 31, 2023. CPG International LLC also has the option to increase the commitments under the Revolving Credit Facility by up to $100.0 million, subject to certain conditions.
We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements as a result of cash flows from operating activities, available cash balances and availability under our Revolving Credit Facility after consideration of our debt service and other cash requirements. In the longer term, our liquidity will depend on many factors, including our results of operations, our future growth, the timing and extent of our expenditures to develop new products and improve our manufacturing capabilities, the expansion of our sales and marketing activities and the extent to which we make acquisitions. Changes
34
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 Revolving Credit Facility and the 2022 Term Loan Agreement, or, together, the Senior Secured Credit Facilities. The obligations under the Senior Secured Credit Facilities are secured by specified assets. The obligations under the Senior Secured Credit Facilities are guaranteed by us and the wholly owned domestic subsidiaries of CPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries.
The Senior Secured Credit Facilities contain covenants restricting payments of dividends by CPG International LLC unless certain conditions, as provided in the Senior Secured Credit Facilities, are met. The covenants under our Senior Secured Credit Facilities provide for certain exceptions for specific types of payments. However, other than restricted payments under the specified exceptions, the covenants under our 2022 Term Loan Agreement generally prohibit the payment of dividends unless the Total Net Leverage Ratio (as defined in the 2022 Term Loan Agreement) of CPG International LLC, on a pro forma basis, is no greater than 4.25:1.00 and no event of default has occurred and is occurring.
Since our and our subsidiaries’ restricted net assets exceed 25% of our consolidated net assets, in accordance with Rule 12-04, Schedule 1 of Regulation S-X, refer to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for condensed parent company financial statements of the Company.
Cash Sources
We have historically relied on cash flows from operations generated by CPG International LLC, borrowings under the credit facilities, issuances of notes and other forms of debt financing and capital contributions to fund our cash needs.
On September 30, 2013, our subsidiary, CPG International LLC (as successor-in-interest to CPG Merger Sub LLC, a limited liability company formed to effect the acquisition of CPG International LLC), and the lenders party thereto entered into the Revolving Credit Facility. On March 9, 2017, the Revolving Credit Facility was amended and restated to provide for maximum aggregate borrowings of up to $150.0 million, subject to an asset-based borrowing base. The borrowing base is limited to a specified percentage of eligible accounts receivable and inventory, less reserves that may be established by the Revolver Administrative Agent in the exercise of its reasonable credit judgment. As of each of March 31, 2023 and September 30, 2022, CPG International LLC had no outstanding borrowings under the Revolving Credit Facility, respectively and had $2.8 million of outstanding letters of credit held against the Revolving Credit Facility at both dates. As of both March 31, 2023 and September 30, 2022, CPG International LLC had approximately $147.2 million available under the borrowing base for future borrowings in addition to cash and cash equivalents on hand of $126.3 million and $120.8 million, respectively. Because our borrowing capacity under the Revolving Credit Facility depends, in part, on inventory, accounts receivable and other assets that fluctuate from time to time, the amount available under the borrowing base may not reflect actual borrowing capacity under the Revolving Credit Facility.
Cash Uses
Our principal cash requirements have included working capital, capital expenditures, payments of principal and interest on our debt, share repurchases, and, if market conditions warrant, making selected acquisitions. We may elect to use cash from operations, debt proceeds, equity or a combination thereof to finance future acquisition opportunities.
The table below details the total operating, investing and financing activity cash flows for the six months ended March 31, 2023 and 2022.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
|
|
|
|
(U.S. dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
$ Variance |
|
|
% Variance |
|
Net cash provided by (used in) operating activities |
|
$ |
63,142 |
|
|
$ |
(67,543 |
) |
|
$ |
130,685 |
|
|
|
193.5 |
% |
Net cash used in investing activities |
|
|
(47,346 |
) |
|
|
(200,433 |
) |
|
|
153,087 |
|
|
|
76.4 |
% |
Net cash provided by (used in) financing activities |
|
|
(10,354 |
) |
|
|
43,252 |
|
|
|
(53,606 |
) |
|
|
(123.9 |
)% |
Net increase (decrease) in cash |
|
$ |
5,442 |
|
|
$ |
(224,724 |
) |
|
$ |
230,166 |
|
|
|
102.4 |
% |
35
Operating Activities
Net cash provided by (used in) operating activities was $63.1 million and $(67.5) million for the six months ended March 31, 2023 and 2022, respectively. The $130.7 million increase in cash provided by operating activities is primarily related to lower production, which resulted in a decrease in inventory at March 31, 2023 as compared to September 30, 2022, while inventory levels at March 31, 2022 increased significantly from those at September 30, 2021.
Investing Activities
Net cash used in investing activities was $(47.3) million and $(200.4) million for the six months ended March 31, 2023 and 2022, respectively. Net cash used in investing activities for the six months ended March 31, 2023 primarily consisted of $(47.3) million for purchases of property, plant and equipment in the normal course of business, while net cash used in investing activities for the six months ended March 31, 2022, consisted of $(114.0) million for purchases of property, plant and equipment to support our expansion of capacity in our manufacturing facilities and $(86.9) million for acquisitions.
Financing Activities
Net cash provided by (used in) financing activities was $(10.4) million and $43.3 million for the six months ended March 31, 2023 and 2022, respectively. Net cash used in financing activities for the six months ended March 31, 2023 primarily consisted of ($7.5) million of treasury stock repurchases and ($3.0) million of debt principal payments, while net cash provided by financing activities for the six months ended March 31, 2022, consisted of $40.0 million of cash received from the revolving credit facility.
Share Repurchase Program
On May 5, 2022, the Board of Directors authorized us to repurchase up to $400 million of our Class A common stock. The program allows us to repurchase our shares opportunistically from time to time. Purchases may be effected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, accelerated share repurchases or tender offers, some of which may be effected through Rule 10b5-1 plans, or a combination of the foregoing. The timing of repurchases will depend upon several factors, including market and business conditions, and repurchases may be discontinued at any time.
In the fiscal year ended September 30, 2022, we repurchased 2,508,906 shares of our Class A common stock under a $50 million accelerated share repurchase agreement at an average price of $19.93 per share. During the same period, we also repurchased 1,607,664 shares of our Class A common stock on the open market at an average price of $19.58 per share, totaling an approximately $31.5 million reacquisition cost. During the six months ended March 31, 2023, we repurchased an additional 352,760 shares of our Class A common stock on the open market at an average price of $21.23 per share, totaling an approximately $7.5 million reacquisition cost.
As of March 31, 2023, we had approximately $311.0 million available for repurchases under the Share Repurchase Program.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022, that includes, among other provisions, a one percent excise tax on net repurchases of stock after December 31, 2022. We expect the excise tax to apply to our Share Repurchase Program, but do not expect the excise tax to have a material effect on our business.
See Note 13 in the Notes to Condensed Consolidated Financial Statements for additional information.
Revolving Credit Facility
The Revolving Credit Facility provides for maximum aggregate borrowings of up to $150.0 million, subject to an asset-based borrowing base. As of March 31, 2023, outstanding revolving loans under the Revolving Credit Facility bore interest at a rate which equaled, at our option, either (i) for alternative base rate, or ABR, borrowings, the highest of (a) the Federal Funds Rate plus 50 basis points, (b) the prime rate and (c) the LIBOR, as of such date for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, plus, in each case, a spread of 25 to 75 basis points based on average historical availability, or (ii) for Eurocurrency borrowings, adjusted LIBOR plus a spread of 125 to 175 basis points, based on average historical availability. The maturity of the Revolving Credit Facility is the earlier of March 31, 2026 and the date that is 91 days prior to the maturity of the Term Loan Agreement or any permitted refinancing thereof.
On January 26, 2023, CPG International LLC further amended the Revolving Credit Facility, replacing all LIBOR-based provisions with provisions reflecting the Secured Overnight Financing Rate, or SOFR, including, without limitation, the use of a new Adjusted Term SOFR benchmark rate equal to Term SOFR (as defined in the Revolving Credit Agreement) plus 0.10%.
36
A “commitment fee” accrues on any unused portion of the revolving commitments under the Revolving Credit Facility during the preceding three calendar month period. If the average daily used percentage is greater than 50%, the commitment fee equals 25 basis points, and if the average daily used percentage is less than or equal to 50%, the commitment fee equals 37.5 basis points.
The obligations under the Revolving Credit Facility are secured by a first priority security interest in certain assets, including substantially all of the accounts receivable, inventory, deposit accounts, securities accounts and cash assets of the Company, CPG International LLC and the subsidiaries of CPG 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 by us and the wholly owned domestic subsidiaries of CPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries.
Revolving loans under the Revolving Credit 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 of March 31, 2023 and September 30, 2022, 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 $100.0 million, subject to certain conditions.
2022 Term Loan Agreement
The 2022 Term Loan Agreement is a first lien term loan and will mature on April 28, 2029, subject to acceleration or prepayment. The 2022 Term Loan Agreement will amortize in equal quarterly installments of 0.25% of the aggregate principal amount of the loans outstanding, subject to reduction for certain prepayments.
The obligations under the 2022 Term Loan Agreement are secured by a first priority security interest in the membership interests of CPG International LLC owned by us, the equity interests of CPG International LLC’s domestic subsidiaries, other than certain immaterial subsidiaries and other excluded subsidiaries, and all remaining assets not constituting Revolver Priority Collateral (subject to certain exceptions) of the Company, CPG International LLC and the subsidiaries of CPG International LLC that are guarantors under the 2022 Term Loan Agreement, and a second priority security interest in the Revolver Priority Collateral. The obligations under the 2022 Term Loan Agreement are guaranteed by us and the wholly owned domestic subsidiaries of CPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries.
The interest rate applicable to the outstanding principal under the 2022 Term Loan Agreement equals, at our option, (i) in the case of alternative base rate borrowings, the highest of (a) the Federal Funds Rate (as defined in the 2022 Term Loan Agreement) plus 0.50%, (b) the Prime Rate (as defined in the 2022 Term Loan Agreement) as in effect on such day and (c) the one-month Term SOFR (as defined in the 2022 Term Loan Agreement) plus 1.00% per annum, provided that in no event will the alternative base rate be less than 1.50% per annum, plus an applicable margin of 1.50% and (ii) in the case of SOFR borrowings, Term SOFR for the applicable interest period, plus an applicable margin of 2.50%.
Loans under the 2022 Term Loan Agreement may be voluntarily prepaid in whole, or in part, in each case without premium or penalty (other than the Prepayment Premium, as defined in the 2022 Term Loan Agreement, if applicable), subject to certain customary conditions. The 2022 Term Loan Agreement also requires mandatory prepayments of loans under the 2022 Term Loan Agreement from the proceeds of certain debt issuances and certain asset dispositions (subject to certain reinvestment rights) and, commencing with the fiscal year ending September 30, 2023, a percentage of excess cash flow (subject to step-downs upon CPG International LLC achieving certain leverage ratios and other reductions in connection with other debt prepayments).
The 2022 Term Loan Agreement contains affirmative covenants, negative covenants and events of default, which are broadly consistent with those in the Revolving Credit Facility (with certain differences consistent with the differences between a revolving loan and term loan) and that are customary for facilities of this type. The 2022 Term Loan Agreement does not have any financial
37
maintenance covenants. The 2022 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 Credit Agreement in an amount that shall not exceed the sum of (i) the Fixed Incremental Amount, as defined in the 2022 Term Loan Agreement, and (ii) the Ratio Amount, as defined in the 2022 Term Loan Agreement.
Restrictions on Dividends
The Senior Secured Credit Facilities each restrict payments of dividends unless certain conditions, as provided in the Revolving Credit Facility or the 2022 Term Loan Agreement, as applicable, are met.
Contingent Commitments
We have contractual commitments for purchases of certain minimum quantities of raw materials at index-based prices, and non-cancelable capital and operating leases, outstanding letters of credit and fixed asset purchase commitments. For a description of our contractual obligations and commitments, see Notes 8 “Debt”, 10 “Leases” and 17 “Commitments and Contingencies” to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Our unaudited Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of these unaudited Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates.
There have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates disclosed in our 2022 Form 10-K, except as updated in Note 1 of our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
38