UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-39322
The AZEK Company Inc.
(Exact name of registrant as specified in its charter)
Delaware | 90-1017663 | |
( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1330 W Fulton Street, Suite 350, Chicago, Illinois | 60607 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (877) 275-2935
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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Class A Common Stock, par value $0.001 per share | AZEK | The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 31, 2020, the registrant had 121,566,577 shares of Class A Common Stock, $0.001 par value per share, and 33,068,963 shares of Class B Common Stock, $0.001 par value per share, outstanding.
Page | ||||||
PART I. |
FINANCIAL INFORMATION | |||||
Item 1. |
Financial Statements (Unaudited) | |||||
Condensed Consolidated Balance Sheets | 3 | |||||
Condensed Consolidated Statements of Comprehensive Income (Loss) | 4 | |||||
Condensed Consolidated Statements of Stockholders Equity | 5 | |||||
Condensed Consolidated Statements of Cash Flows | 7 | |||||
Notes to Unaudited Condensed Consolidated Financial Statements | 8 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 39 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 64 | ||||
Item 4. |
Controls and Procedures | 66 | ||||
PART II. |
OTHER INFORMATION | 69 | ||||
Item 1. |
Legal Proceedings | 69 | ||||
Item 1A. |
Risk Factors | 70 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 109 | ||||
Item 3. |
Defaults Upon Senior Securities | 109 | ||||
Item 4. |
Mine Safety Disclosures | 109 | ||||
Item 5. |
Other Information | 109 | ||||
Item 6. |
Exhibits | 109 | ||||
113 |
2
The AZEK Company Inc.
Condensed Consolidated Balance Sheets
(In thousands of U.S. dollars, except for share and per share amounts)
(Unaudited)
June 30, 2020 | September 30, 2019 | |||||||
ASSETS: |
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Current assets: |
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Cash and cash equivalents |
$ | 215,111 | $ | 105,947 | ||||
Trade receivables, net of allowances |
79,605 | 52,623 | ||||||
Inventories |
130,626 | 115,391 | ||||||
Prepaid expenses |
10,323 | 6,037 | ||||||
Other current assets |
875 | 10,592 | ||||||
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Total current assets |
436,540 | 290,590 | ||||||
Property, plant and equipment, net |
235,229 | 208,694 | ||||||
Goodwill |
951,190 | 944,298 | ||||||
Intangible assets, net |
306,095 | 342,418 | ||||||
Other assets |
1,268 | 2,263 | ||||||
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Total assets |
$ | 1,930,322 | $ | 1,788,263 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY: | ||||||||
Current liabilities: |
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Accounts payable |
$ | 36,414 | $ | 47,479 | ||||
Accrued rebates |
22,770 | 22,733 | ||||||
Accrued interest |
1,185 | 13,578 | ||||||
Current portion of long-term debt obligations |
| 8,304 | ||||||
Accrued expenses and other liabilities |
47,222 | 47,903 | ||||||
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Total current liabilities |
107,591 | 139,997 | ||||||
Deferred income taxes |
26,732 | 34,003 | ||||||
Finance lease obligationsless current portion |
10,901 | 11,181 | ||||||
Long-term debtless current portion |
506,656 | 1,103,313 | ||||||
Other non-current liabilities |
8,929 | 9,746 | ||||||
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Total liabilities |
660,809 | 1,298,240 | ||||||
Commitments and contingencies (See Note 16) |
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Stockholders equity: |
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Preferred stock, $0.001 par value; 1,000,000 shares authorized and no shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively |
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Class A common stock, $0.001 par value; 1,100,000,000 shares authorized, 121,566,577 shares issued and outstanding at June 30, 2020, and 75,093,778 issued and outstanding at September 30, 2019 |
122 | 75 | ||||||
Class B common stock, $0.001 par value; 100,000,000 shares authorized, 33,068,963 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively |
33 | 33 | ||||||
Additional paid-in capital |
1,488,474 | 652,493 | ||||||
Accumulated deficit |
(219,116 | ) | (162,578 | ) | ||||
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Total stockholders equity |
1,269,513 | 490,023 | ||||||
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Total liabilities and stockholders equity |
$ | 1,930,322 | $ | 1,788,263 | ||||
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See Notes to Condensed Consolidated Financial Statements (Unaudited).
3
The AZEK Company Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands of U.S. dollars, except for share and per share amounts)
(Unaudited)
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net sales |
$ | 223,711 | $ | 221,307 | $ | 635,339 | $ | 578,669 | ||||||||
Cost of sales |
148,588 | 145,897 | 429,553 | 394,948 | ||||||||||||
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Gross margin |
75,123 | 75,410 | 205,786 | 183,721 | ||||||||||||
Selling, general and administrative expenses |
65,164 | 50,185 | 158,330 | 136,988 | ||||||||||||
Other general expenses |
1,623 | 1,997 | 6,716 | 6,155 | ||||||||||||
Loss on disposal of plant, property and equipment |
366 | 36 | 394 | 1,472 | ||||||||||||
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Operating income (loss) |
7,970 | 23,192 | 40,346 | 39,106 | ||||||||||||
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Other expenses: |
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Interest expense |
25,148 | 21,440 | 64,882 | 63,213 | ||||||||||||
Loss on extinguishment of debt |
37,538 | | 37,538 | | ||||||||||||
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Total other expenses |
62,686 | 21,440 | 102,420 | 63,213 | ||||||||||||
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Income (loss) before income taxes |
(54,716 | ) | 1,752 | (62,074 | ) | (24,107 | ) | |||||||||
Income tax expense (benefit) |
(2,600 | ) | 241 | (4,200 | ) | (4,831 | ) | |||||||||
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Net income (loss) |
$ | (52,116 | ) | $ | 1,511 | $ | (57,874 | ) | $ | (19,276 | ) | |||||
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Net income (loss) per common share: |
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Basic and Diluted |
$ | (0.44 | ) | $ | 0.01 | $ | (0.51 | ) | $ | (0.18 | ) | |||||
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Comprehensive income (loss) |
$ | (52,116 | ) | $ | 1,511 | $ | (57,874 | ) | $ | (19,276 | ) | |||||
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Weighted average shares used in calculating net income (loss) per common share: |
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Basic and Diluted |
118,738,357 | 108,162,741 | 113,525,537 | 108,162,741 | ||||||||||||
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See Notes to Condensed Consolidated Financial Statements (Unaudited).
4
The AZEK Company Inc.
Condensed Consolidated Statements of Stockholders Equity
Three and Nine Months Ended June 30, 2020
(In thousands of U.S. dollars, except for share amounts)
(Unaudited)
Common Stock | Additional | Total | ||||||||||||||||||||||||||
Class A | Class B | Paid-In | Accumulated | Stockholders | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance March 31, 2020 |
75,093,778 | $ | 75 | 33,068,963 | $ | 33 | $ | 652,298 | $ | (167,000 | ) | $ | 485,406 | |||||||||||||||
Member redemptions prior to initial public offering |
| | | | (477 | ) | | (477 | ) | |||||||||||||||||||
Conversion of profits interests into common shares |
8,235,299 | 9 | | | (9 | ) | | | ||||||||||||||||||||
Net proceeds from initial public offering |
38,237,500 | 38 | | | 819,373 | | 819,411 | |||||||||||||||||||||
Net income (loss) |
| | | | | (52,116 | ) | (52,116 | ) | |||||||||||||||||||
Stock-based compensation |
| | | | 17,289 | | 17,289 | |||||||||||||||||||||
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Balance June 30, 2020 |
121,566,577 | $ | 122 | 33,068,963 | $ | 33 | $ | 1,488,474 | $ | (219,116 | ) | $ | 1,269,513 | |||||||||||||||
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Balance September 30, 2019 |
75,093,778 | $ | 75 | 33,068,963 | $ | 33 | 652,493 | (162,578 | ) | 490,023 | ||||||||||||||||||
Member contributions prior to initial public offering |
| | | | 1,500 | | 1,500 | |||||||||||||||||||||
Member redemptions prior to initial public offering |
| | | | (3,553 | ) | | (3,553 | ) | |||||||||||||||||||
Conversion of profits interests into common shares |
8,235,299 | 9 | | | (9 | ) | | | ||||||||||||||||||||
Net proceeds from initial public offering |
38,237,500 | 38 | | | 819,373 | | 819,411 | |||||||||||||||||||||
Adoption of ASU 2016-16 |
| | | | | 1,336 | 1,336 | |||||||||||||||||||||
Net income (loss) |
| | | | | (57,874 | ) | (57,874 | ) | |||||||||||||||||||
Stock-based compensation |
| | | | 18,670 | | 18,670 | |||||||||||||||||||||
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Balance June 30, 2020 |
121,566,577 | $ | 122 | 33,068,963 | $ | 33 | $ | 1,488,474 | $ | (219,116 | ) | $ | 1,269,513 | |||||||||||||||
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See Notes to Condensed Consolidated Financial Statements (Unaudited).
5
The AZEK Company Inc.
Condensed Consolidated Statements of Stockholders Equity
Three and Nine Months Ended June 30, 2019
(In thousands of U.S. dollars, except for share amounts)
(Unaudited)
Common Stock | Additional | Total | ||||||||||||||||||||||||||
Class A | Class B | Paid-In | Accumulated | Stockholders | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance March 31, 2019 |
75,093,778 | $ | 75 | 33,068,963 | $ | 33 | $ | 651,194 | $ | (163,169 | ) | $ | 488,133 | |||||||||||||||
Net income (loss) |
| | | | | 1,511 | 1,511 | |||||||||||||||||||||
Member capital redemptions |
| | | | (26 | ) | | (26 | ) | |||||||||||||||||||
Stock-based compensation |
| | | | 737 | | 737 | |||||||||||||||||||||
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Balance June 30, 2019 |
75,093,778 | $ | 75 | 33,068,963 | $ | 33 | $ | 651,905 | $ | (161,658 | ) | $ | 490,355 | |||||||||||||||
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Balance September 30, 2018 |
75,093,778 | $ | 75 | 33,068,963 | $ | 33 | 648,021 | (142,576 | ) | 505,553 | ||||||||||||||||||
Adoption of ASU 2014-09 |
| | | | | 194 | 194 | |||||||||||||||||||||
Net income (loss) |
| | | | | (19,276 | ) | (19,276 | ) | |||||||||||||||||||
Member capital contributions |
| | | | 1,311 | | 1,311 | |||||||||||||||||||||
Member capital redemptions |
| | | | (26 | ) | | (26 | ) | |||||||||||||||||||
Stock-based compensation |
| | | | 2,599 | | 2,599 | |||||||||||||||||||||
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Balance June 30, 2019 |
75,093,778 | $ | 75 | 33,068,963 | $ | 33 | $ | 651,905 | $ | (161,658 | ) | $ | 490,355 | |||||||||||||||
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See Notes to Condensed Consolidated Financial Statements (Unaudited).
6
The AZEK Company Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)
Nine Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Operating activities: |
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Net income (loss) |
$ | (57,874 | ) | $ | (19,276 | ) | ||
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities: |
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Depreciation |
33,603 | 24,155 | ||||||
Amortization of intangibles |
41,622 | 45,479 | ||||||
Non-cash interest expense |
6,527 | 2,990 | ||||||
Deferred income tax benefit |
(4,048 | ) | (5,565 | ) | ||||
Non-cash compensation expense |
18,670 | 3,530 | ||||||
Fair value adjustment for contingent consideration |
| 53 | ||||||
Loss on disposition of property, plant and equipment |
394 | 1,472 | ||||||
Bad debt provision |
522 | 284 | ||||||
Loss on extinguishment of debt |
37,538 | | ||||||
Changes in certain assets and liabilities: |
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Trade receivables |
(26,385 | ) | (33,739 | ) | ||||
Inventories |
(12,703 | ) | (612 | ) | ||||
Prepaid expenses and other current assets |
(4,130 | ) | (3,111 | ) | ||||
Accounts payable |
(12,753 | ) | (869 | ) | ||||
Accrued expenses and interest |
(8,592 | ) | 1,616 | |||||
Other assets and liabilities |
(1,105 | ) | 3,850 | |||||
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Net cash provided by (used in) operating activities |
11,286 | 20,257 | ||||||
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Investing activities: |
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Purchases of property, plant and equipment |
(54,768 | ) | (46,440 | ) | ||||
Proceeds from sale of property, plant and equipment |
223 | 49 | ||||||
Acquisition, net of cash acquired |
(18,453 | ) | | |||||
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Net cash provided by (used in) investing activities |
(72,998 | ) | (46,391 | ) | ||||
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Financing activities: |
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Proceeds from initial public offering, net of related costs |
822,630 | | ||||||
Proceeds from 2025 Senior Notes |
346,500 | | ||||||
Redemption of Senior Notes |
(665,000 | ) | | |||||
Payments of debt extinguishment costs |
(24,938 | ) | | |||||
Proceeds under revolving credit facility |
129,000 | 40,000 | ||||||
Payments under revolving credit facility |
(85,000 | ) | (40,000 | ) | ||||
Payments on long-term debt obligations |
(341,958 | ) | (6,228 | ) | ||||
Payment of debt issuance costs |
(7,704 | ) | | |||||
Proceeds (repayments) of finance lease obligations |
(601 | ) | 1,592 | |||||
Payments of contingent consideration |
| (2,000 | ) | |||||
Redemption of capital contributions |
(3,553 | ) | (26 | ) | ||||
Capital contributions |
1,500 | 1,311 | ||||||
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Net cash provided by (used in) financing activities |
170,876 | (5,351 | ) | |||||
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Net increase (decrease) in cash and cash equivalents |
109,164 | (31,485 | ) | |||||
Cash and cash equivalents Beginning of period |
105,947 | 82,283 | ||||||
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Cash and cash equivalents End of period |
$ | 215,111 | $ | 50,798 | ||||
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Supplemental cash flow disclosure: |
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Cash paid for interest, net of amounts capitalized |
$ | 70,801 | $ | 66,086 | ||||
Cash paid for income taxes, net |
544 | 803 | ||||||
Supplemental non-cash investing and financing disclosure: |
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Capital expenditures in accounts payable at end of period |
$ | 5,058 | $ | 4,142 | ||||
Property, plant and equipment acquired under finance leases |
630 | 1,549 |
See Notes to Condensed Consolidated Financial Statements (Unaudited).
7
The AZEK Company Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, unless otherwise specified)
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The AZEK Company Inc. (the Company) is a Delaware corporation that holds all of the limited liability company interests in CPG International LLC, the entity which directly and indirectly holds all of the equity interests in the operating subsidiaries. The Company is a leading manufacturer of premium, low maintenance building products for residential, commercial and industrial markets. The Companys products include trim, deck, porch, moulding, rail, pavers, bathroom and locker systems, as well as extruded plastic sheet products and other non-fabricated products for special applications in industrial markets. The Company operates in various locations throughout the United States.
AZEK is a brand name for residential products while the commercial products are branded under the brand names Celtec, Playboard, Seaboard, Flametec, Designboard, Cortec, Sanatec, Scranton Products, Aria Partitions, Eclipse Partitions, Hiny Hiders, Tufftec Lockers and Duralife Lockers.
Initial Public Offering
On June 16, 2020, the Company completed its initial public offering (the IPO) of its Class A common stock, in which it sold 38,237,500 shares, including 4,987,500 shares pursuant to the underwriters over-allotment option. The shares began trading on the New York Stock Exchange on June 12, 2020 under the symbol AZEK. The shares were sold at an IPO price of $23.00 per share for net proceeds to the Company of approximately $819.4 million, after deducting underwriting discounts and commissions of $50.6 million and estimated offering expenses of approximately $9.5 million payable by the Company. In addition, the Company used its net proceeds to redeem $350.0 million in aggregate principal of its then-outstanding 2025 Senior Notes, $70.0 million of its then-outstanding principal amount under the Revolving Credit Facility and effected a $337.7 million prepayment of its then-outstanding principal amount under the Term Loan Agreement. Refer to Note 8 for additional information.
In conjunction with the Companys conversion from a limited liability company into a corporation (the Corporate Conversion) prior to the closing of the IPO, the Company effected a unit split of its then-outstanding limited liability company unit and then converted the units on a one-to-one basis into shares of capital stock of the Company, including shares of Class A common stock and Class B common stock. In connection with the closing of the IPO, the Company issued additional shares of its Class A common stock, options to purchase shares of Class A common stock and certain other equity awards to its indirect equity holders prior to the IPO and certain of its officers and employees. All share and per share information presented in the Condensed Consolidated Financial Statements has been retroactively adjusted for all periods presented for the effects of the unit split converted to stock. Refer to Note 12 and 13 for additional information.
b. Summary of Significant Accounting Policies
Basis of Presentation
The Company operates on a fiscal year ending September 30. The accompanying unaudited Condensed Consolidated Financial Statements and notes have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information, and in managements opinion, includes all adjustments, consisting of only normal recurring
8
adjustments, necessary for the fair statement of the Companys financial position, its results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended June 30, 2020, and the cash flows for the nine months ended June 30, 2020, are not necessarily indicative of the results to be expected for the full fiscal year or any other period.
The Companys financial condition and results of operations are being, and are expected to continue to be affected by the current COVID-19 public health pandemic. The economic effects of the COVID-19 pandemic will likely continue to affect demand for the Companys products over the balance of fiscal 2020. Although management has implemented measures to mitigate any impact of the COVID-19 pandemic on the Companys business, financial condition and results of operations, these measures may not fully mitigate the impact of the COVID-19 pandemic on the Companys business, financial condition and results of operations. Management cannot predict the degree to, or the period over, which the Company will be affected by the COVID-19 pandemic and resulting governmental and other measures.
The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in the Companys final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the Securities Act), with the Securities and Exchange Commission (SEC) on June 15, 2020 (the Prospectus). The Condensed Consolidated Balance Sheet as of September 30, 2019 was derived from the audited financial statements at that date. There have been no material changes in the Companys significant accounting policies from those that were disclosed in the Prospectus, except as noted below.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates include revenue recognition, reserves for excess inventory, inventory obsolescence, product warranties, customer rebates, stock-based compensation, litigation, income taxes, contingent consideration, goodwill and intangible asset valuation and accounting for long-lived assets. Managements estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Actual results may differ from estimated amounts. Estimates are revised as additional information becomes available.
Accounting Policies
Refer to the Prospectus for a discussion of the Companys accounting policies, as updated below and for recently adopted accounting standards.
Stock-Based Compensation
The Company determines 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 the Consolidated Financial Statements over the requisite service period in which employees earn the awards. The Company estimates the fair value of performance-based awards granted to employees using the Monte 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) straight-line basis, (2) a ratable vesting basis or (3) a cliff vesting basis. The Company accounts for forfeitures as they occur.
9
To determine the fair value of a stock-based award using the Monte Carlo and Black Scholes models, the Company makes assumptions regarding the risk-free interest rate, expected future volatility, expected dividend yield and performance period. The risk-free rate is based on the U.S. treasury yield curve in effect at the time of grant. The Company estimates the expected volatility of the share price by reviewing the estimated post-IPO volatility levels of its 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. The Company exercises 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 the Companys future plans to pay dividends. The Company calculates the performance period based on the specific market condition to be achieved and derived from estimates of future performance. The Company calculates the expected term in years for each stock option using a simplified method based on the average of each options 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.
Concurrently with the closing of the IPO, the Company granted to certain of its directors, officers and employees restricted stock awards, restricted stock units and stock options, each of which vest upon the satisfaction of a service condition or a performance condition.
Earnings Per Share
Basic net income per common share is computed based on the weighted average number of common shares outstanding. Potentially dilutive shares are included in the diluted per-share calculations using the treasury stock method for the periods in fiscal year 2020 when the effect of their inclusion is dilutive. As the Company did not have shares outstanding prior to its IPO in June 2020, the Company did not have dilutive shares during fiscal year 2019. Refer to Note 14 for additional information.
Research and Development Costs
Research and development costs primarily relate to new product development, product claims support and manufacturing process improvements. Such costs are expensed as incurred and are included in Selling, general and administrative expenses within the Condensed Consolidated Statements of Comprehensive Income (Loss). Total research and development expenses were approximately $1.7 million and $2.1 million, respectively, for the three months ended June 30, 2020 and 2019, and $5.7 million and $5.9 million, respectively, for the nine months ended June 30, 2020 and 2019.
Recently Adopted Accounting Pronouncements
Under the Jumpstart Our Business Startups (JOBS) Act, the Company qualifies as an emerging growth company (EGC) and as such, has elected not to opt out of the extended transition period for complying with new or revised accounting pronouncements. During the extended transition period, the Company is not subject to new or revised accounting standards applicable to public companies. The accounting pronouncements pending adoption below reflect effective dates for the Company as an EGC with the extended transition period.
10
On October 1, 2018, the Company early adopted Accounting Standards Update (ASU) 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 supersedes 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 the Companys Consolidated Financial Statements. Refer to Note 2 for additional information.
On October 1, 2019, the Company 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. The Company 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 the Companys Consolidated Financial Statements. Refer to Note 15 for additional information.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), and issued subsequent amendments to the initial guidance in September 2017 within ASU No. 2017-13, in January 2018 within ASU No. 2018-01, in July 2018 within ASU Nos. 2018-10 and 2018-11, in December 2018 within ASU No. 2018-20, in March 2019 within ASU No. 2019-01, in November 2019 within ASU No. 2019-10 and in June 2020 within ASU No. 2020-05. This standard requires lessees to present right-of-use assets and lease liabilities on the balance sheet. For public entities, the updated standard is effective for fiscal years beginning after December 15, 2018. This standard is effective for the Company as an EGC for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. Assuming the Company remains an EGC, the Company intends to adopt the updated standard during its fiscal year beginning October 1, 2022 and for interim periods within that fiscal year. This standard provides the option to adopt through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, instead of applying the new guidance retrospectively for each prior reporting period presented. The Company is currently evaluating the impact these ASUs adoption will have on its Consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial InstrumentsCredit Losses (Topic 326), and issued subsequent amendments to the initial guidance in May 2019 within ASU No. 2019-05 and in November 2019 within ASU Nos. 2019-10 and 2019-11. This 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. For public entities, the updated standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This standard is effective for the Company as an EGC for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted, and the standard is adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the impact the adoption of this standard will have on its Consolidated Financial Statements.
11
In August 2018, the FASB issued ASU No. 2018-13, Disclosure FrameworkChanges 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. For all entities, this standard is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company intends to adopt the updated standard during its fiscal year beginning October 1, 2020 and for interim periods within fiscal years beginning in that fiscal year. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company is currently evaluating the impact the adoption of this standard will have on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This 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. For public entities, the updated standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The amendments in this ASU are effective for the Company, as an EGC, for annual periods beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 2021. The standard can be adopted either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. Assuming the Company remains an EGC, it intends to adopt the updated standard during its fiscal year beginning October 1, 2021 and for interim periods within fiscal year beginning October 1, 2022. The Company is currently evaluating the impact the adoption of this standard will have on its Consolidated Financial Statements.
In December 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 after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 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 the Company, as an EGC, for annual periods beginning after December 15, 2021 and interim periods within annual periods beginning after December 15, 2022. The Company is currently evaluating the impact this adoption will have on its Consolidated Financial Statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This 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 ASU is effective for all entities as of March 12, 2020, and will apply through December 31, 2022. The Company is currently evaluating the impact this adoption will have on its Consolidated Financial Statements.
12
2. REVENUE
The Company sells its products to residential and commercial markets. The Companys Residential segment principally generates revenue from the manufacture and sale of its premium, low maintenance composite decking, railing, trim, moulding, pavers products and accessories. The Companys Commercial segment generates revenue from the sale of its partition and locker systems along with plastic sheeting and other non-fabricated products for special applications in industrial markets.
The Company recognizes revenues when control of the promised goods is transferred to the Companys customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods, at a point in time, when shipping occurs. Each product the Company transfers to the customer is considered one performance obligation. The Company has 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, the Company does not consider shipping and handling activities as promised services to its 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. The Company may offer various sales incentive programs throughout the year. It estimates 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, the Company may offer a payment discount, if payments are received within thirty days. The Company estimates the payment discount that it believes will be taken by the customer based on prior history and using the most-likely-amount method of estimation. The Company believes the most-likely-amount method best predicts the amount of consideration to which it will be entitled. The payment discounts are also reflected as part of net revenue.
The Company also engages in customer rebates, which are recorded in Net sales in the Condensed Consolidated Statements of Comprehensive Income (Loss) and in Accrued rebates and Trade receivables in the Condensed Consolidated Balance Sheets. The Company recorded accrued rebates of $22.8 million and $18.3 million as of June 30, 2020 and 2019, respectively, and contra trade receivables of $3.0 million and $3.5 million as of June 30, 2020 and 2019, respectively. The rebate activity was as follows (in thousands):
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Beginning balance |
$ | 22,123 | $ | 31,028 | $ | 24,858 | $ | 21,914 | ||||||||
Rebate expense |
11,545 | 10,336 | 44,989 | 38,335 | ||||||||||||
Rebate payments |
(7,844 | ) | (19,578 | ) | (44,023 | ) | (38,463 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 25,824 | $ | 21,786 | $ | 25,824 | $ | 21,786 | ||||||||
|
|
|
|
|
|
|
|
13
The Company records deferred revenue when cash payments are received or due in advance of the Companys performance.
3. BUSINESS COMBINATIONS
On January 31, 2020, the Company acquired certain assets and assumed certain liabilities of Return Polymers, Inc. for a total purchase price of approximately $18.5 million, subject to customary post-closing working capital adjustments. Return Polymers is located in Ashland Ohio and is a provider of full-service recycled PVC material processing, sourcing, logistical support, and scrap management programs. The Company financed the acquisition with cash on hand.
The acquisition was accounted for as a business combination under Accounting Standards Codification (ASC) ASC 805 Business Combinations. Tangible and identifiable intangible assets acquired and liabilities assumed were recorded at their respective fair values. The excess of the consideration transferred over the fair value of the net assets received has been recorded as goodwill in the Residential segment. The factors that contributed to the recognition of goodwill primarily relate to future economic benefits arising from expected sales as well as consuming the recycled PVC materials in current products.
The following table represents the preliminary allocation of assets acquired and liabilities assumed on the acquisition date and certain measurement period adjustments attributable to customary working capital adjustments (in thousands):
Measurement | ||||||||||||
Acquisition | Period | |||||||||||
Date | Adjustments | Total | ||||||||||
Total purchase consideration |
$ | 18,069 | $ | 384 | $ | 18,453 | ||||||
|
|
|
|
|
|
|||||||
Allocation of consideration to assets acquired and liabilities assumed: |
||||||||||||
Cash and cash equivalents |
$ | 204 | $ | (204 | ) | $ | | |||||
Accounts receivable |
1,119 | | 1,119 | |||||||||
Inventories |
2,532 | | 2,532 | |||||||||
Prepaid expenses and other current assets |
39 | | 39 | |||||||||
Property, plant and equipment |
4,080 | | 4,080 | |||||||||
Intangible assets |
5,300 | | 5,300 | |||||||||
Goodwill |
6,304 | 588 | 6,892 | |||||||||
Accounts payable |
(947 | ) | | (947 | ) | |||||||
Accrued expenses and other liabilities |
(562 | ) | | (562 | ) | |||||||
|
|
|
|
|
|
|||||||
Net assets acquired |
$ | 18,069 | $ | 384 | $ | 18,453 | ||||||
|
|
|
|
|
|
At the acquisition date, total intangible assets and goodwill amounted to $11.6 million, comprised of $4.6 million related to customer relationships, and $0.7 million related to trademarks, as well as $6.3 million in goodwill. During the three months ended June 30, 2020, the Company recognized $0.6 million in working capital adjustments, resulting in an increase in goodwill for the same, and $6.9 million in total goodwill as of June 30, 2020. It is expected that $6.9 million of the goodwill is deductible for tax purposes. The estimated useful life for customer relationships is 15 years and trademarks is 10 years. The weighted average useful life at the date of acquisition was 14.3 years.
14
4. INVENTORIES
Inventories are valued at the lower of cost or net realizable value, and are reduced for slow-moving and obsolete inventory. The inventories cost is recorded at standard cost, which approximates actual cost, on a first-in first-out (FIFO) basis. Inventories consisted of the following (in thousands):
June 30, 2020 | September 30, 2019 | |||||||
Raw materials |
$ | 34,353 | $ | 36,855 | ||||
Work in process |
19,557 | 19,514 | ||||||
Finished goods |
76,716 | 59,022 | ||||||
|
|
|
|
|||||
Total inventories |
$ | 130,626 | $ | 115,391 | ||||
|
|
|
|
5. PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment net consisted of the following (in thousands):
June 30, 2020 | September 30, 2019 | |||||||
Land and improvements |
$ | 2,758 | $ | 2,758 | ||||
Buildings and improvements |
70,042 | 67,770 | ||||||
Capital lease - building |
2,021 | 2,021 | ||||||
Capital lease - manufacturing equipment |
1,026 | 1,026 | ||||||
Capital lease - vehicles |
3,685 | 3,835 | ||||||
Manufacturing equipment |
292,176 | 254,570 | ||||||
Computer equipment |
24,742 | 22,733 | ||||||
Furniture and fixtures |
5,855 | 5,409 | ||||||
Vehicles |
410 | 339 | ||||||
|
|
|
|
|||||
Total property, plant and equipment |
402,715 | 360,461 | ||||||
Construction in progress |
32,640 | 16,453 | ||||||
|
|
|
|
|||||
435,355 | 376,914 | |||||||
Accumulated depreciation |
(200,126 | ) | (168,220 | ) | ||||
|
|
|
|
|||||
Total property, plant and equipment - net |
$ | 235,229 | $ | 208,694 | ||||
|
|
|
|
The Company is considered the owner, for accounting purposes only, of leased office space, as it had taken on certain risks of construction build cost overages above normal tenant improvement allowances. Accordingly, the estimated fair value of the leased property was $9.2 million as of both June 30, 2020 and September 30, 2019. The corresponding lease financing obligation was $7.9 million as of both June 30, 2020 and September 30, 2019. The lease financing obligation was recorded in Finance lease obligations less current portion in the Condensed Consolidated Balance Sheets. Refer to Note 16 for additional information.
15
Depreciation expense was approximately $12.7 million and $8.2 million in the three months ended June 30, 2020 and 2019, respectively, and $33.6 million and $24.2 million in the nine months ended June 30, 2020 and 2019, respectively. During the three months ended June 30, 2020 and 2019, $0.3 million and $0.1 million of interest was capitalized, respectively, and during the nine months ended June 30, 2020 and 2019, $0.8 million and $0.7 million of interest was capitalized, respectively. Accumulated amortization for assets under capital leases was $3.9 million and $3.7 million as of June 30, 2020 and September 30, 2019, respectively. Accumulated amortization for the assets under the build-to-suit lease was $0.5 million as of June 30, 2020 and $0.3 million as of September 30, 2019.
6. GOODWILL AND INTANGIBLE ASSETS NET
Goodwill
As of June 30, 2020, the Company had goodwill of $951.2 million with carrying amounts for Residential of $910.8 million and Commercial of $40.4 million. As of September 30, 2019, the Company had goodwill of $944.3 million with carrying amounts for Residential of $903.9 million and Commercial of $40.4 million. As of June 30, 2020, total accumulated goodwill impairments were $32.2 million, all attributable to the Companys Commercial segment.
Intangible assets, net
The Company does not have any indefinite lived intangible assets other than goodwill as of June 30, 2020 and September 30, 2019. Finite-lived intangible assets consisted of the following (in thousands):
As of June 30, 2020 | ||||||||||||||
Lives in
|
Gross Carrying
Value |
Accumulated
Amortization |
Net Carrying
Value |
|||||||||||
Proprietary knowledge |
10 - 15 | $ | 289,300 | $ | (189,474 | ) | $ | 99,826 | ||||||
Trademarks |
5 - 20 | 223,840 | (120,454 | ) | 103,386 | |||||||||
Customer relationships |
15 - 19 | 146,870 | (48,917 | ) | 97,953 | |||||||||
Patents |
10 | 7,000 | (2,927 | ) | 4,073 | |||||||||
Other intangibles |
3 - 15 | 4,076 | (3,219 | ) | 857 | |||||||||
|
|
|
|
|
|
|||||||||
$ | 671,086 | $ | (364,991 | ) | $ | 306,095 | ||||||||
|
|
|
|
|
|
As of September 30, 2019 | ||||||||||||||
Lives in
|
Gross Carrying
Value |
Accumulated
Amortization |
Net Carrying
Value |
|||||||||||
Proprietary knowledge |
10 - 15 | $ | 289,300 | $ | (171,686 | ) | $ | 117,614 | ||||||
Trademarks |
5 - 20 | 223,140 | (108,096 | ) | 115,044 | |||||||||
Customer relationships |
15 - 19 | 142,270 | (39,084 | ) | 103,186 | |||||||||
Patents |
10 | 7,000 | (2,132 | ) | 4,868 | |||||||||
Other intangibles |
3 - 15 | 4,076 | (2,370 | ) | 1,706 | |||||||||
|
|
|
|
|
|
|||||||||
$ | 665,786 | $ | (323,368 | ) | $ | 342,418 | ||||||||
|
|
|
|
|
|
16
Amortization expense was approximately $13.9 million and $15.1 million in the three months ended June 30, 2020 and 2019, respectively, and $41.6 million and $45.5 million in the nine months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, the remaining weighted-average amortization period for acquired intangible assets was 13.1 years.
Amortization expense relating to these amortizable intangible assets as of June 30, 2020, is expected to be as follows (in thousands):
Remaining period of 2020 |
$ | 13,538 | ||
2021 |
49,826 | |||
2022 |
44,369 | |||
2023 |
39,240 | |||
2024 |
34,246 | |||
Thereafter |
124,876 | |||
|
|
|||
Total |
$ | 306,095 | ||
|
|
7. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
Allowance for Doubtful Accounts
Allowance for doubtful accounts consisted of the following (in thousands):
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Beginning balance |
$ | 1,678 | $ | 1,441 | $ | 904 | $ | 1,230 | ||||||||
Provision |
(229 | ) | 67 | 522 | 284 | |||||||||||
Acquisition |
| | 35 | | ||||||||||||
Bad debt write-offs |
(107 | ) | (703 | ) | (119 | ) | (709 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 1,342 | $ | 805 | $ | 1,342 | $ | 805 | ||||||||
|
|
|
|
|
|
|
|
17
Accrued Expenses and Other Liabilities
Accrued expenses consisted of the following (in thousands):
June 30, 2020 | September 30, 2019 | |||||||
Employee related liabilities |
$ | 23,605 | $ | 17,202 | ||||
Professional fees |
5,863 | 14,160 | ||||||
Freight |
4,191 | 4,158 | ||||||
Warranty |
3,375 | 2,543 | ||||||
Marketing |
2,794 | 2,026 | ||||||
Construction in progress |
1,547 | 903 | ||||||
Capital lease |
922 | 721 | ||||||
Contingent consideration |
| 1,303 | ||||||
Other |
4,925 | 4,887 | ||||||
|
|
|
|
|||||
Total accrued expenses and other current liabilities |
$ | 47,222 | $ | 47,903 | ||||
|
|
|
|
8. DEBT
Debt consisted of the following (in thousands):
June 30, 2020 | September 30, 2019 | |||||||
Term Loan Agreement due May 5, 2024 LIBOR + 3.75% (4.75% and 5.93% at June 30, 2020 and September 30, 2019, respectively) (includes a discount of $542 and $1,105 at June 30, 2020 and September 30, 2019, respectively) |
$ | 467,112 | $ | 808,507 | ||||
Revolving Credit Facility through March 9, 2022 LIBOR + 1.75% (2.75% and 0.00% at June 30, 2020 and September 30, 2019, respectively) |
44,000 | | ||||||
2021 Senior Notes due October 1, 2021 Fixed at 8% |
| 315,000 | ||||||
|
|
|
|
|||||
Total |
511,112 | 1,123,507 | ||||||
Less: unamortized deferred financing fees |
(4,456 | ) | (11,890 | ) | ||||
Less: current portion |
| (8,304 | ) | |||||
|
|
|
|
|||||
Long-term debtless current portion and unamortized deferred financing fees |
$ | 506,656 | $ | 1,103,313 | ||||
|
|
|
|
As of June 30, 2020, the Company has scheduled fiscal year debt payments on the Term Loan Agreement and Revolving Credit Facility as follows (in thousands):
18
Remaining period of 2020 |
$ | | ||
2021 |
| |||
2022 |
44,000 | |||
2023 |
| |||
2024 |
467,654 | |||
Thereafter |
| |||
|
|
|||
Total |
$ | 511,654 | ||
|
|
Term Loan Agreement
On September 30, 2013, CPG International LLC refinanced its then outstanding long-term debt and entered into (i) a new senior secured revolving credit facility (the Revolving Credit Facility) among CPG International LLC (as successor-in-interest to CPG Merger Sub LLC, a limited liability company formed to effect the acquisition of CPG International LLC), Deutsche Bank AG New York Branch (Deutsche Bank), as administrative agent and collateral agent (the Revolver Administrative Agent), and the lenders party thereto, (ii) a new secured term loan agreement (the Term Loan Agreement) among CPG International LLC (as successor-in-interest to CPG Merger Sub LLC), as the initial borrower; the Lenders Party thereto; Deutsche Bank and JPMorgan Chase Bank, N.A., as co-syndication agents; Citibank, N.A., the Royal Bank of Scotland PLC and UBS Securities LLC, as co-documentation agents; and Barclays Bank PLC, as administrative agent and collateral agent, (iii) an indenture (the Indenture) in respect of 8.000% senior notes due October 1, 2021 (the 2021 Senior Notes) between CPG International LLC and Wilmington Trust, National Association, as trustee.
The proceeds from borrowings under the amended Term Loan Agreement and the 2021 Senior Notes were used to (i) fund the acquisition of CPG International LLC and (ii) repay all amounts outstanding under the Companys prior term loan agreement, prior notes and related fees.
The Term Loan Agreement matures on May 5, 2024, since the 2021 Senior Notes were redeemed June 8, 2020. The Term Loan Agreement provides for interest on outstanding principal thereunder at a fluctuating rate, at CPG International LLCs option, for (i) alternative base rate (ABR) borrowings, the highest of (a) the Federal Funds Rate as of such day plus 50 basis points, (b) the prime commercial lending rate announced as of such day by the Administrative Agent as defined in the Term Loan Agreement, as the prime rate as in effect on such day and (c) the LIBOR as of such day for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, provided that in no event shall the ABR be less than 200 basis points, plus the applicable margin of 275 basis points per annum; or (ii) for Eurocurrency borrowings, the adjusted LIBOR of (a) the LIBOR in effect for such interest period divided by one, minus the statutory reserves applicable to such Eurocurrency borrowing, if any, and (b) 100 basis points, plus the applicable margin of 375 basis points per annum.
As of June 30, 2020, and September 30, 2019, unamortized deferred financing fees related to the Term Loan Agreement were $4.5 million and $9.1 million, respectively. 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. The Company used part of its net proceeds from the IPO to prepay outstanding principal of the Term Loan Agreement in the amount of $337.7 million, paid $4.3 million in accrued interest, and the Company recognized in interest expense an additional $3.2 million amortization of deferred financing fees associated with the prepayment amounts during the three months ended June 30, 2020.
19
The obligations under the Term Loan Agreement are secured by a first priority security interest in the membership interests of CPG International LLC owned by The AZEK Company Inc. and substantially all of the present and future assets of the borrowers and guarantors including equity interests of their domestic subsidiaries, subject to certain exceptions, (the Term Loan Priority Collateral) and a second priority lien on current assets. The obligations under the Term Loan Agreement are guaranteed by the Company and the wholly owned domestic subsidiaries of CPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries.
The Term Loan Agreement requires mandatory prepayments of the term loans thereunder from certain debt issuances, certain asset dispositions (subject to certain reinvestment rights) and a percentage of excess cash flow (subject to step-downs upon CPG International LLC achieving certain leverage ratios). The estimated prepayment of excess cash flow was $6.4 million at September 30, 2019. At the lenders option, the excess cash flow payment made in January 2020 was $2.2 million, with the remaining prepayment declined by the lenders. CPG International LLC is required to repay the outstanding principal amount under the Term Loan Agreement in quarterly installments equal to 0.25253% of the aggregate principal amount under the Term Loan Agreement outstanding on the amendment date of June 18, 2018 and such quarterly payments may be reduced as a result of prepayments. The Term Loan Agreement restricts payments of dividends unless certain conditions are met, as defined in the Term Loan Agreement.
Revolving Credit Facility
On March 9, 2017, CPG International LLC amended, restated and extended the maturity of the Revolving Credit Facility, and on June 5, 2020, CPG International LLC further amended the Revolving Credit Facility (the Amendment) to establish $8.5 million of commitments for FILO loans, which are available to be drawn in a single disbursement on or prior to December 31, 2020. The availability of the FILO Loans will be subject to satisfaction of certain conditions at the time of borrowing, including the value of borrowing-base eligible assets at the time of borrowing. Under the terms of the Revolving Credit Facility, as amended, FILO Loans may be borrowed against increased percentages of borrowing-base eligible assets (as compared to the percentages of borrowing-base eligible assets applicable to all other loans under the Revolving Credit Facility). The Amendment did not increase the total aggregate amount of commitments under the Revolving Credit Facility. Borrowing of FILO Loans under the Revolving Credit Facility will reduce the total aggregate commitments available for revolving loans for so long as the FILO Loans remain outstanding. If borrowed, the FILO Loans will mature on December 4, 2021. As of June 30, 2020, the Company has not drawn on the FILO loans.
The Revolving Credit Facility matures on March 9, 2022. 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 set percentage of eligible accounts receivable and inventory, less reserves that may be established by the administrative agent and the collateral agent in the exercise of their reasonable credit judgment.
On March 16, 2020, the Company borrowed $89.0 million under the Revolving Credit Facility to enhance financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. The Company used part of its net proceeds from the 2025 Senior Notes issuance to repay $15.0 million of the then-outstanding principal under the Revolving Credit Facility. The Company had a total of $44.0 million and zero outstanding borrowings under the Revolving Credit Facility as of June 30, 2020 and September
20
30, 2019, respectively. In addition, the Company had $3.9 million and $3.0 million of outstanding letters of credit held against the Revolving Credit Facility as of June 30, 2020 and September 30, 2019, respectively. Deferred financing costs, net of accumulated amortization, related to the Revolving Credit Facility at June 30, 2020 and September 30, 2019 were $0.9 million and $0.9 million, respectively. CPG International LLC had approximately $97.0 million available under the borrowing base for future borrowings as of June 30, 2020. 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.
The Revolving Credit Facility provides for an interest rate on outstanding principal thereunder at a fluctuating rate, at CPG International LLCs option, at (i) for ABR borrowings, the highest of (a) the Federal Funds Rate plus 50 basis points, (b) the prime rate and (c) the LIBOR as of such date for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, plus, in each case, a spread of 50 to 100 basis points, based on average historical availability, or (ii) for Eurocurrency borrowings, adjusted LIBOR plus a spread of 150 to 200 basis points, based on average historical availability. A commitment fee accrues on any unused portion of the commitments under the Revolving Credit Facility during the preceding three calendar month period. If the average daily used percentage is greater than 50%, the commitment fee equals 25 basis points, and if the average daily used percentage is less than or equal to 50%, the commitment fee equals 37.5 basis points. The commitment fees were $0.1 million and $0.1 million for the three months ended June 30, 2020 and 2019, respectively, and $0.3 million and $0.3 million for the nine months ended June 30, 2020 and 2019, respectively.
The obligations under the Revolving Credit Facility are guaranteed by The AZEK Company Inc. and its wholly owned domestic subsidiaries other than certain immaterial subsidiaries and other excluded subsidiaries. The obligations under the Revolving Credit Facility are secured by a first priority security interest in substantially all of the accounts receivable, inventory, deposit accounts, securities accounts and cash assets of The AZEK Company Inc., 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) (the Revolver Priority Collateral), plus a second priority security interest in all of the Term Loan Priority Collateral. The Revolving Credit Facility may be voluntarily prepaid in whole, or in part, in each case without premium or penalty. CPG International LLC is also required to make mandatory prepayments (i) when aggregate borrowings exceed commitments or the applicable borrowing base and (ii) during cash dominion, which occurs if (a) the availability under the Revolving Credit Facility is less than the greater of (i) $12.5 million and (ii) 10% of the lesser of (x) $150.0 million and (y) the borrowing base, for five consecutive business days or (b) certain events of default have occurred and are continuing.
The Revolving Credit Facility contains affirmative covenants that are customary for financings of this type, including allowing the Revolver Administrative Agent to perform periodic field exams and appraisals to evaluate the borrowing base. The Revolving Credit Facility contains various negative covenants, including limitations on, subject to certain exceptions, the incurrence of indebtedness, the incurrence of liens, dispositions, investments, acquisitions, restricted payments, transactions with affiliates, as well as other negative covenants customary for financings of this type. The Revolving Credit Facility also includes a financial maintenance covenant, applicable only when the excess availability is less than the greater of (i) 10% of the lesser of the aggregate commitments under the Revolving Credit Facility and the borrowing base, and (ii) $12.5 million. In such circumstances, CPG International LLC would be required to maintain a minimum fixed charge coverage ratio (as defined in the Revolving Credit Facility) for the trailing four quarters equal to at least 1.0 to 1.0; subject to CPG International LLCs ability to make an equity cure (no more than twice in any four quarter period and up to five times over the life of the facility). As of June 30, 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.
21
2021 Senior Notes
The 2021 Senior Notes were issued on September 30, 2013, in an aggregate principal amount of $315.0 million, and had a maturity of October 1, 2021. The 2021 Senior Notes bore interest at the rate of 8.000% per annum payable in cash semi-annually in arrears on April 1 and October 1 of each year (computed based on a 360-day year of twelve 30-day months). The obligations under the 2021 Senior Notes were guaranteed by CPG International LLC and those of its subsidiaries that also guarantee the Revolving Credit Facility and the Term Loan Agreement. The redemption price of the 2021 Senior Notes (expressed as percentages of the principal amount to be redeemed) declined to the par value of the 2021 Senior Notes, plus accrued and unpaid interest based on the schedule below. The 2021 Senior Notes were redeemable in whole or in part, at any time after October 1, 2016 at the following redemption prices, if redeemed during the 12-month period beginning on October 1 of the years indicated below:
2016 |
106.0 | % | ||
2017 |
104.0 | % | ||
2018 |
102.0 | % | ||
2019 and thereafter |
100.0 | % |
The indenture relating to the 2021 Senior Notes contained negative covenants that are customary for financings of this type. The indenture did not contain any financial maintenance covenants. As of September 30, 2019, CPG International LLC was in compliance with the negative covenants imposed by the 2021 Senior Notes and the indenture.
In connection with the 2025 Senior Notes offering, the Company issued a redemption notice on May 7, 2020 for the full $315.0 million of outstanding 2021 Senior Notes, which were redeemed on June 8, 2020. The Company also paid $4.6 million in accrued interest and recognized a $1.9 million loss on the extinguishment in the Loss on the extinguishment of debt within the Condensed Consolidated Statements of Comprehensive Income (Loss). As of September 30, 2019, the unamortized deferred financing fees related to the 2021 Senior Notes consisted of $2.8 million.
2025 Senior Notes
On May 12, 2020, the Company issued $350.0 million of 9.500% 2025 Senior Notes with a maturity of May 15, 2025, and interest was payable on May 15 and November 15 of each year. The Company had the option to redeem all or a portion of the 2025 Senior Notes at any time on or after May 15, 2022 at certain redemption prices, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, before May 15, 2022, the Company had the option to (i) redeem up to 40% of the aggregate principal amount of the 2025 Senior Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.125% of the principal amount of the 2025 Senior Notes redeemed, (ii) redeem (x) up to 40% of the aggregate principal amount of the 2025 Senior Notes or (y) all of the 2025 Senior Notes with the proceeds from a Qualified IPO at a redemption price equal to 107.125% of the principal amount of the 2025 Senior Notes redeemed or (iii) redeem some or all of the 2025 Senior Notes at a price equal to 100% of the principal amount plus a make-whole premium, in the case of each of (i), (ii) and (iii), plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The 2025 Senior Notes were redeemable in whole or in part, at any time after May 15, 2022 at the following redemption prices, plus accrued and unpaid interest, if redeemed during the 12-month period beginning on May 15 of the years indicated below:
2022 |
104.750 | % | ||
2023 |
102.375 | % | ||
2024 and thereafter |
100.000 | % |
22
On June 8, 2020, the Company used the proceeds of the $350.0 million 2025 Senior Notes offering to redeem the 2021 Senior Notes in full and to repay $15.0 million of the outstanding principal amount under the Revolving Credit Facility, and other general corporate purposes. On June 16, 2020, the Company used part of its net proceeds from the IPO to redeem $350.0 million in aggregate principal of the outstanding 2025 Senior Notes, paid $3.9 million in accrued interest and recognized a $35.6 million loss on the extinguishment in the Loss on extinguishment of debt within the Condensed Consolidated Statements of Comprehensive Income (Loss).
Interest expense consisted of the following (in thousands):
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Interest expense |
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Term Loan |
$ | 11,228 | $ | 13,596 | $ | 35,584 | $ | 40,197 | ||||||||
2021 Senior Notes |
4,550 | 6,300 | 17,150 | 18,900 | ||||||||||||
2025 Senior Notes |
3,879 | | 3,879 | | ||||||||||||
Revolving Credit Facility |
846 | 274 | 1,434 | 751 | ||||||||||||
Other |
380 | 386 | 1,155 | 1,077 | ||||||||||||
Amortization |
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Debt issue costs |
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Term Loan |
3,630 | 495 | 4,620 | 1,485 | ||||||||||||
2021 Senior Notes |
176 | 352 | 880 | 1,056 | ||||||||||||
2025 Senior Notes |
180 | | 180 | | ||||||||||||
Revolving Credit Facility |
107 | 89 | 287 | 268 | ||||||||||||
Original issue discounts |
442 | 60 | 562 | 181 | ||||||||||||
Capitalized interest |
(270 | ) | (112 | ) | (849 | ) | (702 | ) | ||||||||
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Interest expense |
$ | 25,148 | $ | 21,440 | $ | 64,882 | $ | 63,213 | ||||||||
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See Note 10 for the fair value of the Companys debt as of June 30, 2020 and September 30, 2019.
23
9. PRODUCT WARRANTIES
The Company provides product assurance warranties of various lengths ranging from 5 years to lifetime for limited coverage for a variety of material and workmanship defects based on standard terms and conditions between the Company and its customers. Warranty coverage depends on the product involved. The warranty reserve activity consisted of the following (in thousands):
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Beginning balance |
$ | 11,984 | $ | 9,824 | $ | 11,133 | $ | 9,304 | ||||||||
Adjustments to reserve |
35 | 1,053 | 2,226 | 2,403 | ||||||||||||
Warranty claims payment |
(770 | ) | (830 | ) | (2,247 | ) | (1,797 | ) | ||||||||
Accretion purchase accounting valuation |
28 | 41 | 165 | 178 | ||||||||||||
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Ending balance |
11,277 | 10,088 | 11,277 | 10,088 | ||||||||||||
Current portion of accrued warranty |
(3,375 | ) | (1,873 | ) | (3,375 | ) | (1,873 | ) | ||||||||
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Accrued warranty less current portion |
$ | 7,902 | $ | 8,215 | $ | 7,902 | $ | 8,215 | ||||||||
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TimberTech Warranties and Related Indemnification
In connection with the acquisition of TimberTech on September 21, 2012 and the acquisition of CPG International LLC on September 30, 2013, the Company recognized the fair value of the related warranty liabilities calculated as the net present value of the expected costs to settle all future warranty claims for products sold prior to the acquisition dates. The Company records accretion expense in Cost of sales in the Condensed Consolidated Statement of Comprehensive Income (Loss) in order to increase the value of the liability to reflect the future value of the warranty claims when they are actually settled. In addition, the Company records estimated warranty claims obligations related to current sales on an ongoing basis for the TimberTech product line.
Pursuant to the TimberTech purchase agreement, the seller, Crane Group Companies Limited (Crane), also agreed to indemnify the Company for claims made up to seven years after the acquisition date for the majority of the costs to settle warranty claims for certain identified problems related to two products which have exhibited a high number of claims related to scorching and fading defects. The products were produced between 2010 and 2011 and have not been sold by the Company since 2011. Similar to its recognition of the warranty liability, the Company recorded an indemnification receivable from Crane on the acquisition date equal to the fair value of the indemnification calculated as the net present value of the expected indemnification payments to be received in the future. At June 30, 2020, $1.9 million was classified as Other Current Assets. As of September 30, 2019, $1.3 million was classified as Other Current Assets and $0.5 million was classified as Other Assets (non-current). Due to a dispute by Crane of its ongoing obligations, the Company has a full reserve recorded against the amount receivable.
The Company will continue to monitor the actual cost to settle warranty claims in the future and will make adjustments to the warranty liability and indemnification receivable if needed. The indemnification period expired on September 21, 2019. Crane disputes the scope of its past indemnification obligations and the Company cannot predict the outcome of the dispute. The Company may need to record additional charges to the Condensed Consolidated Statements of Comprehensive Income (Loss) and the Condensed Consolidated Balance Sheets related to the reserve and any obligations as a result of the indemnification dispute in future periods.
24
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures and records in its consolidated financial statements certain assets and liabilities at fair value. ASC Topic 820, Fair Value Measurement and Disclosures, establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Companys own assumptions (unobservable inputs). This hierarchy consists of the following three levels:
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Level 1 Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. |
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Level 2 Assets and liabilities whose values are based on inputs other than those included in Level 1, including quoted market prices in markets that are not active; quoted prices of assets or liabilities with similar attributes in active markets; or valuation models whose inputs are observable or unobservable but corroborated by market data. |
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Level 3 Assets and liabilities whose values are based on valuation models or pricing techniques that utilize unobservable inputs that are significant to the overall fair value measurement. |
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Financial instruments with a fair value that approximates carrying valueThe carrying amounts of cash and cash equivalents, trade receivables and payables, as well as financial instruments included in other current assets and other current liabilities, approximate fair values because of their short-term maturities.
Financial instruments with a fair value different from carrying valueThe Company has, where appropriate, estimated the fair value of financial instruments for which the amortized cost carrying value may be significantly different than the fair value. As of June 30, 2020, and September 30, 2019, these instruments include outstanding debt. As described in Note 8 Debt, the Company records debt at amortized cost. The carrying values and the estimated fair values of the debt financial instruments (Level 2 measurements) consisted of the following (in thousands):
June 30, 2020 | September 30 2019 | |||||||||||||||
Carrying
Value |
Estimated
Fair Value |
Carrying
Value |
Estimated
Fair Value |
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Term Loan Agreement due May 5, 2024 |
$ | 467,112 | $ | 461,273 | $ | 808,507 | $ | 804,464 | ||||||||
2021 Senior Notes due October 1, 2021 |
| | 315,000 | 315,000 | ||||||||||||
Revolving Credit Facility, expires March 9, 2022 |
44,000 | 44,000 | | |
25
The fair values of the debt instruments were determined using trading prices between qualified institutional buyers; therefore, the 2021 Senior Notes are classified as Level 2.
In connection with the acquisition of WES, LLC and Ultralox Technology, LLC (together, Ultralox) on December 20, 2017, the Company provided a contingent payment to the employees of Ultralox. The contingent payment was based on achievement of a minimum EBITDA amount and a multiple of EBITDA, for EBITDA exceeding a higher threshold for calendar year 2018. Based on the formula, the potential minimum of the contingent payment was zero and the potential maximum was $30.0 million. During the nine months ended June 30, 2019, the Company paid the former owners of Ultralox $2.0 million as partial settlement of the original contingent liability. At the acquisition date, the fair value was estimated to be $5.3 million. Of the fair value, $2.8 million is accounted for as contingent consideration in conjunction with the acquisition related to the non-employee owners, and the remaining $2.5 million (which was subsequently adjusted downward to $0.9 million due to changes in the estimated fair value of the contingent payment) was recognized as compensation expense from date of acquisition through June 30, 2018 related to the employee owners, who forfeit their share of the contingent payment if not employed through that date.
The contingent payment made was based on achievement of a minimum EBITDA amount and a multiple of EBITDA, for EBITDA exceeding a higher threshold for calendar 2018. The Company classified the contingent liability as Level 3, due to the lack of observable inputs. Significant assumptions made by the Company included a central estimate of EBITDA and EBITDA volatility of 39%. Changes in assumptions could have an impact on the payout of the contingent consideration payout amount.
During the nine months ended June 30, 2019, the Company amended the earnout agreement to include two additional payments totaling $3.4 million to the former owners of Ultralox that are contingent upon the employee owners continued employment through December 31, 2018 and 2019. These additional earnout payments will be recognized as compensation expense over the required employment periods, because they are contingent upon future service from the date of the amendment. During the nine months ended June 30, 2020, the Company paid the remaining $1.7 million as settlement of the amended earnout agreement. At June 30, 2020 and September 30, 2019, the contingent payment liability was $0.0 million and $1.3 million, respectively, and is recorded in Accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets.
The following table provides a roll-forward of the aggregate fair value of the contingent consideration and compensation expense categorized as Level 3 (in thousands).
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Beginning balance |
$ | | $ | 558 | $ | 1,303 | $ | 1,900 | ||||||||
Change in fair value of contingent consideration |
| | | 53 | ||||||||||||
Less: contingent payments |
| | (1,675 | ) | (3,675 | ) | ||||||||||
Contingent payment recognized as compensation expense |
| 373 | 372 | 2,653 | ||||||||||||
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Ending balance |
$ | | $ | 931 | $ | | $ | 931 | ||||||||
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26
For the nine months ended June 30, 2020 and 2019, the estimated contingent payment recognized as compensation expense was $0.0 million and $0.9 million, respectively, and was included in Non-cash compensation expense in the Condensed Consolidated Statements of Cash Flows.
11. SEGMENTS
Operating segments for the Company are determined based on information used by the chief operating decision maker (CODM) in deciding how to evaluate performance and allocate resources to each of the segments. The CODM reviews Adjusted EBITDA and Adjusted EBITDA Margin as the key segment measures of performance. Adjusted EBITDA is defined as segment operating income (loss) plus depreciation and amortization, adjusted by adding thereto or subtracting therefrom stock-based compensation costs, business transformation costs, acquisition costs, capital structure transaction costs, and certain other costs. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net sales.
The Company has two reportable segments, Residential and Commercial. The reportable segments were determined primarily based on products and end markets as follows:
ResidentialThe Residential segment manufactures and distributes decking, rail, trim and accessories through a national network of dealers and distributors and multiple home improvement retailers providing extensive geographic coverage and enabling the Company to effectively serve contractors. The additions of Ultralox and Versatex are complementary to the Residential segment railing and trim businesses, respectively. The recent addition of Return Polymers provides a full-service recycled PVC material processing, sourcing, logistical support, and scrap management programs. This segment is impacted by trends in and the strength of home repair and remodel activity.
CommercialThe Commercial segment manufactures, fabricates and distributes resin based extruded sheeting products for a variety of commercial and industrial applications through a widespread distribution network as well as directly to original equipment manufacturers. This segment includes Scranton Products which manufactures lockers and partitions and Vycom which manufactures resin based sheeting products. This segment is impacted by trends in and the strength of the new construction sector.
27
The segment data below includes data for Residential and Commercial for the three and nine months ended June 30, 2020 and 2019 (in thousands).
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net sales to customers |
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Residential |
$ | 192,599 | $ | 182,553 | $ | 538,514 | $ | 476,441 | ||||||||
Commercial |
31,112 | 38,754 | 96,825 | 102,228 | ||||||||||||
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Total |
$ | 223,711 | $ | 221,307 | $ | 635,339 | $ | 578,669 | ||||||||
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Adjusted EBITDA |
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Residential |
$ | 62,326 | $ | 54,090 | $ | 164,047 | $ | 134,818 | ||||||||
Commercial |
5,024 | 6,893 | 11,179 | 14,376 | ||||||||||||
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Total Adjusted EBITDA for reporting segments |
$ | 67,350 | $ | 60,983 | $ | 175,226 | $ | 149,194 | ||||||||
Unallocated net expenses |
(9,530 | ) | (8,212 | ) | (27,782 | ) | (22,128 | ) | ||||||||
Adjustments to Income (loss) before income tax provision |
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Depreciation and amortization |
(26,597 | ) | (23,243 | ) | (75,225 | ) | (69,634 | ) | ||||||||
Stock-based compensation costs |
(18,788 | ) | (737 | ) | (20,169 | ) | (2,600 | ) | ||||||||
Business transformation costs (1) |
(109 | ) | (2,831 | ) | (435 | ) | (12,608 | ) | ||||||||
Acquisition costs (2) |
(182 | ) | (521 | ) | (1,538 | ) | (3,656 | ) | ||||||||
Initial public offering costs |
(1,623 | ) | (1,997 | ) | (6,716 | ) | (6,155 | ) | ||||||||
Other costs (3) |
(2,551 | ) | (250 | ) | (3,015 | ) | 6,693 | |||||||||
Capital structure transaction costs (4) |
(37,538 | ) | | (37,538 | ) | | ||||||||||
Interest expense |
(25,148 | ) | (21,440 | ) | (64,882 | ) | (63,213 | ) | ||||||||
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Income (loss) before income tax provision |
$ | (54,716 | ) | $ | 1,752 | $ | (62,074 | ) | $ | (24,107 | ) | |||||
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(1) |
Business transformation costs reflect consulting and other costs related to repositioning of brands of $0.0 million and $0.7 for the three months ended June 30, 2020 and 2019, respectively, and $0.0 million and $3.9 million for the nine months ended June 30, 2020 and 2019, respectively, compensation costs related to the transformation of the senior management team of $0.1 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively, and $0.4 million and $1.9 million for the nine months ended June 30, 2020 and 2019, respectively, costs related to the relocation of the Companys corporate headquarters of $0.0 million and $1.8 million for the nine months ended June 30, 2020 and 2019, respectively, startup costs of the Companys new recycling facility of $0.0 million and $1.4 million for the three months ended June 30, 2020 and 2019, respectively and $0.0 million and $2.9 million for the nine months ended June 30, 2020 and 2019, respectively, and other integration-related costs of $0.0 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $0.0 million and $2.1 million for the nine months ended June 30, 2020 and 2019, respectively. |
(2) |
Acquisition costs reflect costs directly related to completed acquisitions $0.1 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $0.9 million and $3.7 million for the nine months ended June 30, 2020 and 2019, respectively, and inventory step-up adjustments related to recording the inventory of acquired businesses at fair value on the date of acquisition of $0.1 million and $0.0 million for the three months ended June 30, 2020 and 2019, respectively, and $0.6 million and $0.0 million for the nine months ended June 30, 2020 and 2019, respectively. |
(3) |
Other costs include costs for legal expenses of $0.4 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively, and $0.4 million and $0.8 million for the nine months ended June 30, 2020 and 2019, respectively, reduction in workforce costs of $0.4 million for the three and nine months ended June 30, 2020, income from an insurance recovery of legal loss of $0.0 million and $7.7 million for the nine months ended June 30, 2020 and 2019, respectively, and costs related to an incentive plan associated with the IPO of $1.8 million and $0.1 million for the three months ended June 30, 2020 and 2019, respectively, and $2.2 million and $0.2 million for the nine months ended June 30, 2020 and 2019, respectively. |
(4) |
Capital structure transaction costs include loss on extinguishment of debt of $1.9 million for the 2021 Senior Notes and $35.6 million for the 2025 Senior Notes for the three and nine months ended June 30, 2020. |
28
12. CAPITAL STOCK
The Company completed its IPO on June 16, 2020, in which it sold 38,237,500 shares of its Class A common stock, including 4,987,500 shares pursuant to the underwriters over-allotment option. The shares were sold at an IPO price of $23.00 per share for net proceeds to the Company of approximately $819.4 million, after deducting underwriting discounts and commissions of $50.6 million and estimated offering expenses of approximately $9.5 million payable by the Company.
Immediately prior to the completion of the IPO, the Company converted to a Delaware corporation, from a limited liability company. The Companys certificate of incorporation provides for two classes of common stock: Class A common stock and Class B common stock. In addition, the certificate of incorporation authorizes shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by the board of directors. The Company is authorized to issue up to 1.1 billion shares of Class A common stock, up to 1 hundred million shares of Class B common stock and up to 1 million shares of preferred stock, each par value $0.001 per share, in one or more series. The Class A common stock and Class B common stock provide identical economic rights, but holders of Class B common stock have limited voting rights, specifically that such holders have no right to vote, solely with respect to their shares of Class B common stock, with respect to the election, replacement or removal of directors. Holders of Class A common stock and Class B common stock are not entitled to preemptive rights. Holders of Class B common stock may convert their shares of Class B common stock into shares of Class A common stock on a one-for-one basis, in whole or in part, at any time and from time to time at their option. The Companys Class A common stock is traded on the New York Stock Exchange under the symbol AZEK.
In conjunction with the Corporate Conversion and prior to the closing of the IPO, the Company effected a unit split of its then-outstanding unit, resulting in an aggregate of 108,162,741 units, including 75,093,778 Class A units and 33,068,963 Class B units. Concurrently with the Corporate Conversion, the units were converted to an aggregate of 108,162,741 shares of common stock, including 75,093,778 shares of Class A common stock and 33,068,963 shares of Class B common stock. In addition, a class of the Companys former indirect parents partnership interests referred to as Profits Interests were exchanged for an aggregate of 2,703,243 shares of Class A common stock and 5,532,166 shares of Class A restricted stock, and 4,214,576 shares of Class A common stock reserved for issuance upon the exercise of stock options.
At June 30, 2020, the following amounts were issued and outstanding: 121,566,577 shares of Class A Common Stock and 33,068,963 shares of Class B Common Stock. The Company has not issued any shares of preferred stock.
29
13. STOCK-BASED COMPENSATION
The Company grants stock-based awards to attract, retain and motivate key employees and directors.
Prior to the completion of the IPO, Profits Interests were issued through an LP Interest Agreement. The Profits Interests were, as part of the Corporate Conversion, converted into shares of common stock, restricted stock and stock options. The 2020 Omnibus Incentive Compensation Plan (2020 Plan), became effective as of June 11, 2020, the day of effectiveness of the registration statement filed in connection with the IPO. The 2020 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and performance-based or other equity-related awards to the Companys employees and directors. The maximum aggregate number of shares that may be issued under the 2020 Plan is 15,555,403 shares with 4,981,836 shares remaining in the reserve. The total aggregate number of shares may be adjusted as determined by the Board of Directors.
As part of the Corporate Conversion, the Company modified its terms and conditions of the performance-based awards by changing the vesting conditions. The change was treated as a modification under ASC 718, Stock Compensation, in which the fair value of the performance based awards was measured at the modification date and compared to the fair value of the modified award immediately prior to the modification, with the difference resulting in incremental compensation expense. As a result of the incremental fair value of the modified awards, the Company recognized $8.6 million in incremental compensation cost in Selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income (Loss), for the three months ended June 30, 2020.
Stock-based compensation expense for the three months ended June 30, 2020 and 2019 was $18.8 million and $0.7 million, respectively, and for the nine months ended June 30, 2020 and 2019 was $20.2 million and $2.6, respectively, recognized in Selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income (Loss). Total income tax benefit for the three months ended June 30, 2020 and 2019 was $1.6 million and $0.0 million, respectively, and for the nine months ended June 30, 2020 and 2019 was $1.6 million and $0.0 million, respectively. As of June 30, 2020, the Company had not yet recognized compensation cost on unvested stock-based awards of $136.3 million, with a weighted average remaining recognition period of 2.7 years.
The Companys grant of 199,453 in restricted stock units to certain employees through the 2020 Plan, vest over one to four years at June 30, 2020.
The Company uses the Monte Carlo pricing model to estimate the fair value of its performance-based awards as of the grant date, and uses the Black Scholes pricing model to estimate the fair value of its service-based awards as of the grant date. Under the terms of the 2020 Plan, all stock options will expire if not exercised within ten years of the grant date.
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The following table sets forth the significant assumptions used for the performance-based awards granted during the three months ended June 30, 2020:
June 12, 2020 | ||||
Grant Date | ||||
Risk-free interest rate |
0.75 | % | ||
Expected volatility |
40.00 | % | ||
Expected term (in years) |
0.50 | |||
Expected dividend yield |
0.00 | % |
The following table sets forth the significant assumptions used for the service-based awards granted during the three months ended June 30, 2020:
June 12, 2020 | ||||
Grant Date | ||||
Risk-free interest rate |
0.47% - 0.56 | % | ||
Expected volatility |
35.00 | % | ||
Expected term (in years) |
6.25 - 7.00 | |||
Expected dividend yield |
0.00 | % |
Stock Options
The following table summarizes the performance-based stock option activity for the three months ended June 30, 2020:
Weighted Average | Weighted Average | |||||||||||||||
Exercise Price Per | Remaining Contract | Weighted Average | ||||||||||||||
Number of Shares | Share | Term | Intrinsic Value | |||||||||||||
(in years) | (in thousands) | |||||||||||||||
Outstanding at October 1, 2019 |
| $ | | | $ | | ||||||||||
Granted |
1,706,098 | 23.00 | 10 | 14,372 | ||||||||||||
Exercised |
| | | | ||||||||||||
Cancelled/Forfeited |
| | | | ||||||||||||
Expired |
| | | | ||||||||||||
|
|
|||||||||||||||
Outstanding at June 30, 2020 |
1,706,098 | 23.00 | 10 | 14,372 | ||||||||||||
|
|
|||||||||||||||
Vested and exercisable at June 30, 2020 |
| | | | ||||||||||||
|
|
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The following table summarizes the service-based stock option activity for the three months ended June 30, 2020:
Weighted Average | Weighted Average | |||||||||||||||
Exercise Price Per | Remaining Contract | Weighted Average | ||||||||||||||
Number of Shares | Share | Term | Intrinsic Value | |||||||||||||
(in years) | (in thousands) | |||||||||||||||
Outstanding at October 1, 2019 |
| $ | | | $ | | ||||||||||
Granted |
3,388,557 | 23.00 | 10 | 39,510 | ||||||||||||
Exercised |
| | | | ||||||||||||
Cancelled/Forfeited |
| | | | ||||||||||||
Expired |
| | | | ||||||||||||
|
|
|||||||||||||||
Outstanding at June 30, 2020 |
3,388,557 | 23.00 | 10 | 39,510 | ||||||||||||
|
|
|||||||||||||||
Vested and exercisable at June 30, 2020 |
928,648 | 23.00 | 10 | 7,294 | ||||||||||||
|
|
The service-based stock options are subject to a 180-day lock up period, as described in the Prospectus, and therefore are not considered exercisable until such date.
Restricted Stock Awards
A summary of the performance-based restricted stock awards activity during the three months ended June 30, 2020 was as follows:
Weighted Average | ||||||||
Number of Shares | Grant Date Fair Value | |||||||
(in thousands) | ||||||||
Outstanding and unvested at October 1, 2019 |
| $ | | |||||
Granted |
3,884,615 | 89,032 | ||||||
Vested |
| | ||||||
Forfeited |
| | ||||||
|
|
|||||||
Outstanding and unvested at June 30, 2020 |
3,884,615 | 89,032 | ||||||
|
|
A summary of the service-based restricted stock awards activity during the three months ended June 30, 2020 was as follows:
Weighted Average | ||||||||
Number of Shares | Grant Date Fair Value | |||||||
(in thousands) | ||||||||
Outstanding and unvested at October 1, 2019 |
| $ | | |||||
Granted |
1,647,428 | 5,571 | ||||||
Vested |
53,132 | 147 | ||||||
Forfeited |
| | ||||||
|
|
|||||||
Outstanding and unvested at June 30, 2020 |
1,594,296 | 5,424 | ||||||
|
|
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14. EARNINGS PER SHARE
The Company computes earnings per common share (EPS) under the two-class method which requires the allocation of all distributed and undistributed earnings attributable to the Company to common stock and other participating securities based on their respective rights to receive distributions of earnings or losses. The Companys Class A common stock and Class B common stock equally share in distributed and undistributed earnings, therefore, no allocation to participating securities or dilutive securities is performed.
Basic EPS attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding. Diluted EPS is calculated by adjusting weighted average shares outstanding for the dilutive effect of potential common shares, determined using the treasury-stock method. For purposes of the diluted EPS calculation, restricted stock awards, restricted stock units and options to purchase shares of common stock are considered to be potential common shares. The following table sets forth the computation of the Companys basic and diluted EPS attributable to common stockholders (in thousands, except share and per share amounts):
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | (52,116 | ) | $ | 1,511 | $ | (57,874 | ) | $ | (19,276 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to common stockholders - basic and diluted |
(52,116 | ) | 1,511 | (57,874 | ) | (19,276 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Denominator: |
||||||||||||||||
Weighted-average shares of common stock - basic and diluted |
118,738,357 | 108,162,741 | 113,525,537 | 108,162,741 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per share attributable to common stockholders: |
(52,116 | ) | 1,511 | (57,874 | ) | (19,276 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to common stockholders - basic and diluted |
$ | (0.44 | ) | $ | 0.01 | $ | (0.51 | ) | $ | (0.18 | ) | |||||
|
|
|
|
|
|
|
|
The following table includes the number of shares that may be dilutive common shares in the future, and were not included in the computation of diluted net income (loss) per share because the effect was anti-dilutive:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Restricted Stock Awards |
1,143,949 | | 381,316 | | ||||||||||||
Stock Options |
992,632 | | 330,877 | | ||||||||||||
Restricted Stock Units |
32,877 | | 10,959 | |
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15. INCOME TAXES
The Company calculates the interim tax provision in accordance with the provisions of ASC 740-270, Income Taxes; Interim Reporting, specifically ASC-740-270-25-2. For interim periods, the Company estimates the annual effective income tax rate (AETR) and applies the estimated rate to the year-to-date income or loss before income taxes. The effective income tax rates for the three months ended June 30, 2020 and 2019 were 4.8% and 13.8%, respectively, and for the nine months ended June 30, 2020 and 2019 were 6.8% and 20.0%, respectively. For the three and nine months ended June 30, 2020, the Companys effective tax rate was impacted by nondeductible stock-based compensation related to the IPO conversion, as well as limitations on the deductibility of officers compensation as a public company.
The Company adopted ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, on October 1, 2019. The updated guidance requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. The adoption of this standard did not have a material impact on the Companys Consolidated Financial Statements.
16. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases vehicles, machinery and a manufacturing facility under various capital leases. The Company also leases office equipment, vehicles and manufacturing and office facilities under various operating leases.
In 2018, the Company entered into a lease agreement for its corporate headquarters in Chicago, IL. The Company was responsible for costs to build out the office space and spent approximately $3.4 million in improvements to meet the Companys needs. Based on the lease agreement and the changes made to the office space the Company concluded that it was the deemed owner of the building (for accounting purposes only) during the construction period. The Company recorded the build out costs as an asset with a corresponding build-to-suit liability while the building was under construction. Upon completion of the improvements to the building, the Company evaluated the derecognition of the asset and liability under the provisions of ASC 840-40, LeasesSale-Leaseback Transactions. The Company determined that the lease does not meet the criteria for sale-leaseback accounting treatment, due to the Companys continuing involvement in the project. As a result, the building is being accounted for as a financing obligation. The underlying assets amount to approximately $9.2 million. The Company determined its incremental borrowing rate for the purpose of calculating the interest and principal components of each lease payment was 8.4%.
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Future minimum annual payments under noncancelable leases with initial or remaining noncancelable lease terms in excess of one year as of June 30, 2020 were as follows (in thousands):
Capital | Financing | Operating | ||||||||||
Remaining period of 2020 |
$ | 405 | $ | 192 | $ | 446 | ||||||
2021 |
1,595 | 778 | 1,679 | |||||||||
2022 |
1,439 | 788 | 1,303 | |||||||||
2023 |
1,026 | 808 | 1,075 | |||||||||
2024 |
648 | 827 | 709 | |||||||||
Thereafter |
2,789 | 4,607 | 307 | |||||||||
|
|
|
|
|
|
|||||||
Total Payments |
$ | 7,902 | $ | 8,000 | $ | 5,519 | ||||||
|
|
|
|
|||||||||
Less amount representing interest |
(4,006 | ) | ||||||||||
|
|
|||||||||||
Present value of minimum capital lease payments |
$ | 3,896 | ||||||||||
|
|
Total rent expense was approximately $0.4 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $1.1 million and $1.4 million in the nine months ended June 30, 2020 and 2019, respectively. The future minimum sublease income under a noncancelable sublease was $0.9 million at June 30, 2020.
Legal Proceedings
In the normal course of the Companys business, it is at times subject to pending and threatened legal actions, in some cases for which the relief or damages sought may be substantial. Although the Company is not able to predict the outcome of such actions, after reviewing all pending and threatened actions with counsel and based on information currently available, management believes that the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Companys results of operations or financial position. However, it is possible that the ultimate resolution of such matters, if unfavorable, may be material to the Companys results of operations in a particular future period as the time and amount of any resolution of such actions and its relationship to the future results of operations are not currently known. The Company accrues for losses when they are probable of occurrence and such losses are reasonably estimable. Legal costs expected to be incurred are accounted for as they are incurred.
Loss Contingencies
On June 18, 2018, the Company acquired Versatex. In connection with a contingent liability assumed by the Company in the acquisition, the Company recorded a contingent liability of $5.8 million as a measurement period adjustment to the opening balance sheet related to the assumption of a contingency related to an automobile accident involving a Versatex employee prior to the acquisition. The case was fully settled during the three months ended June 30, 2020 and payment of $5.8 million was made by the Companys insurer to the claimants.
35
During the year ended September 30, 2019, the Company was made aware of a workers compensation case that became reasonably possible to give rise to a liability. The case is in discovery as the nature and extent of the Companys exposure is currently being determined. The Company expects a range of loss of $0.4 million to $0.5 million. As of June 30, 2020, there are various other workers compensation and personal injury claims that have been made against the Company. All such claims are being contested and the Company does not believe a loss is probable; therefore, no reserve has been recorded related to these matters. In addition, the Company carries insurance for these types of matters and is expecting to recover thereon.
The Company is a party to various legal proceedings and claims, which arise in the ordinary course of business. As of June 30, 2020, the Company determined that there was not at least a reasonable possibility that it had incurred a material loss, or a material loss in excess of a recorded accrual, with respect to such proceedings.
Gain Contingency
During the quarter ended March 31, 2018, the Company paid a litigation settlement of $7.5 million. The Company had previously recorded a reserve in the same amount during the quarter ended March 31, 2017. The Company maintains specialty insurance policies. The Company filed claims under its insurance policies to recover the loss and legal defense costs. During the nine months ended June 30, 2019, the Company received $7.7 million as settlement of its claims under the specialty insurance policies. The settlement of $7.7 million is included in operating income for the nine months ended June 30, 2019.
36
17. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
The AZEK Company Inc. (parent company only)
Condensed Balance Sheets
(In thousands of dollars, except share and per share amounts)
June 30, 2020 | September 30, 2019 | |||||||
ASSETS: |
||||||||
Non-current assets: |
||||||||
Investment in subsidiaries |
$ | 1,269,513 | $ | 490,023 | ||||
|
|
|
|
|||||
Total non-current assets |
1,269,513 | 490,023 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,269,513 | $ | 490,023 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||
Total liabilities |
$ | | $ | | ||||
|
|
|
|
|||||
Stockholders equity: |
||||||||
Preferred stock, $0.001 par value; 1,000,000 shares authorized and no shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively |
| | ||||||
Class A common stock, $0.001 par value; 1,100,000,000 shares authorized, 121,566,577 shares issued and outstanding at June 30, 2020 and 75,093,778 shares issued and outstanding at September 30, 2019 |
122 | 75 | ||||||
Class B common stock, $0.001 par value; 100,000,000 shares authorized, 33,068,963 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively |
33 | 33 | ||||||
Additional paid-in capital |
1,488,474 | 652,493 | ||||||
Accumulated deficit |
(219,116 | ) | (162,578 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
1,269,513 | 490,023 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 1,269,513 | $ | 490,023 | ||||
|
|
|
|
The AZEK Company Inc. (parent company only)
Condensed Statements of Comprehensive Income (Loss)
(In thousands of dollars)
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income (loss) of subsidiaries |
$ | (52,116 | ) | $ | 1,511 | $ | (57,874 | ) | $ | (19,276 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) of subsidiaries |
$ | (52,116 | ) | $ | 1,511 | $ | (57,874 | ) | $ | (19,276 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income (loss) |
$ | (52,116 | ) | $ | 1,511 | $ | (57,874 | ) | $ | (19,276 | ) | |||||
|
|
|
|
|
|
|
|
37
The AZEK Company Inc. did not have any cash as of June 30, 2020 or September 30, 2019, accordingly a Condensed Statement of Cash Flows has not been presented.
Basis of Presentation
The parent company financial statements should be read in conjunction with the Companys Consolidated Financial Statements and the accompanying notes thereto. For purposes of this condensed financial information, the Companys wholly owned and majority owned subsidiaries are recorded based upon its proportionate share of the subsidiaries net assets (similar to presenting them on the equity method).
Since the restricted net assets of The AZEK Company Inc. and its subsidiaries exceed 25% of the consolidated net assets of the Company and its subsidiaries, the accompanying condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule 1 of Regulation S-X. This information should be read in conjunction with the accompanying Consolidated Financial Statements.
Dividends from Subsidiaries
There were no cash dividends paid to The AZEK Company Inc. from the Companys consolidated subsidiaries during each of the three and nine months ended June 30, 2020 and 2019.
Restricted Payments
CPG International LLC is party to the Revolving Credit Facility and the Term Loan Agreement originally executed on September 30, 2013, both of which have been amended and extended from time to time. The obligations under the Revolving Credit Facility and Term Loan Agreement are secured by substantially all of the present and future assets of the borrowers and guarantors, including equity interests of their domestic subsidiaries, subject to certain exceptions.
The obligations under the Revolving Credit Facility and Term Loan Agreement are guaranteed by the Company and its wholly owned domestic subsidiaries other than certain immaterial subsidiaries and other excluded subsidiaries. CPG International LLC is not permitted to make certain payments unless those payments are consistent with exceptions outlined in the agreements. These payments include repurchase of equity interests, fees associated with a public offering, income taxes due in other applicable payments. Further, the payments are only permitted if certain conditions are met related to availability and fixed charge coverage as defined in the Revolving Credit Facility and described in Note 8 to these Consolidated Financial Statements.
18. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date the Consolidated Financial Statements were issued. The Company has determined that there were no subsequent events.
38
Item 2. Managements 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 condensed Consolidated Financial Statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited Consolidated Financial Statements included in the Prospectus.
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 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, including growth of our various markets and growth in the use of engineered products, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in 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 II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings, including the prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission, or the SEC, on June 15, 2020; we refer to such prospectus as the Prospectus. 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.
39
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. We define the Outdoor Living market as the market for decks, rail, trim, wood and wood-look siding, porches, pavers, outdoor furniture, outdoor cabinetry and outdoor lighting designed to enhance the utility and improve the aesthetics of outdoor living spaces. Homeowners are continuing to invest in their outdoor spaces and are increasingly recognizing the significant advantages of long-lasting products, which are converting demand away from traditional materials, particularly wood. Our products transform those outdoor spaces by combining highly appealing aesthetics with significantly lower maintenance costs compared to traditional materials. Our innovative portfolio of Outdoor Living products, including deck, rail, trim and accessories, inspires consumers to design outdoor spaces tailored to their unique lifestyle needs. We are well known in the industry, and, according to data provided by Principia Consulting, LLC, a third-party industry research and consulting firm, we generally hold one of the top two market share positions by revenue in our product categories. In addition to our leading suite of Outdoor Living products, we sell a broad range of highly engineered products that are sold in commercial markets, including partitions, lockers and storage solutions. One of our core values is to always do the right thing. We make decisions according to what is right, not what is the cheapest, fastest or easiest, and we strive to always operate with integrity, transparency and the customer in mind. In furtherance of that value, we are focused on sustainability across our operations and have adopted strategies to enable us to meet the growing demand for environmentally-friendly products. Our businesses leverage a shared technology and U.S.-based manufacturing platform to create products that convert demand from traditional materials to those that are long lasting and low maintenance, fulfilling our brand commitment to deliver products that are Beautifully Engineered to Last.
We report our results in two segments: Residential and Commercial. In our Residential segment, our primary consumer brands, TimberTech and AZEK, are recognized by contractors and consumers for their premium aesthetics, uncompromising quality and performance, and diversity of style and design options. In our Commercial segment, we manufacture engineered sheet products and high-quality bathroom partitions and lockers. Over our history we have developed a reputation as a leading innovator in our markets by leveraging our differentiated manufacturing capabilities, material science expertise and product management proficiency to consistently introduce new products into the market. This long-standing commitment has been critical to our ability to stay at the forefront of evolving industry trends and consumer demands, which in turn has allowed us to become a market leader across our core product categories.
Basis of Presentation
Our Consolidated Financial Statements have been derived from our accounts and those of our wholly-owned subsidiaries. Our Consolidated Financial Statements are based on a fiscal year ending September 30.
In January 2020, we acquired Return Polymers, Inc. The assets acquired and liabilities assumed in connection with this acquisition were included in our consolidated balance sheet as of June 30, 2020 and in our consolidated statement of comprehensive income (loss) and statement of cash flow beginning from the effective date of the acquisition in January 2020. The results of operations of Return Polymers are included in our Residential segment.
Initial Public Offering
On June 16, 2020, we completed our initial public offering, or the 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 IPO shares began trading on the New York Stock Exchange on June 12, 2020 under the symbol AZEK. The IPO shares were sold at an IPO price of $23.00 per share for net proceeds to us of approximately $819.4 million, after deducting underwriting discounts and commissions of $50.6 million and estimated offering expenses of $9.5 million payable by us. In addition, we used the net proceeds to
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redeem $350.0 million in aggregate principal of our then-outstanding 9.500% senior notes due 2025, or the 2025 Senior Notes, $70.0 million of the then-outstanding principal amount under our revolving credit facility, or the Revolving Credit Facility, and effected a $337.7 million prepayment of the then-outstanding principal amount under our first lien credit facility, or the Term Loan Agreement.
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:
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Economic conditions: Demand for our products is significantly affected by a number of economic factors impacting our customers, including our distributors and dealers, and consumers. For example, demand for products sold by our Residential segment is driven primarily by home repair and remodeling activity and, to a lesser extent, new home construction activity. The residential repair and remodeling market depends in part on home equity financing, and accordingly, the level of equity in homes will affect consumers ability to obtain a home equity line of credit and engage in renovations that would result in purchases of our products. Demand for our products is also affected by the level of interest rates and the availability of credit, consumer confidence and spending, housing affordability, demographic trends, employment levels and other macroeconomic factors that may influence the extent to which consumers engage in repair and remodeling projects to enhance the outdoor living spaces of their homes. Sales by our Commercial segment in the institutional construction market are affected by amounts available for expenditures in school construction, military bases and other public institutions, which depend in part on the availability of government funding and budgetary priorities. Sales of our engineered polymer materials in our industrial original equipment manufacturer 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. |
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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. |
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Product innovation: We continue to develop and introduce innovative products to accelerate material conversion and expand our markets. We believe that new products will enhance our ability to compete with traditional materials at a variety of price points, and we expect to continue to devote significant resources to developing innovative new products. The volume of our products sold during a given period will depend in part on our successfully introducing new products that generate additional demand as well as the extent to which new products may impact our sales of existing products. |
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Marketing and distribution: Demand for our products is influenced by our efforts to expand and enhance awareness of our premium brands and the benefits of our products as well as to drive continued material conversion. Within our Residential segment, we sell our products through a national network of more than 4,200 dealers, more than 35 distributors and multiple home improvement retailers providing extensive geographic coverage enabling us to effectively serve contractors across the United States and Canada. Within our Commercial segment, we sell our products through a widespread distribution network as well as directly to original equipment manufacturers. 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:
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Residential: Prices for our residential products are typically set annually, taking into account anticipated changes in input costs, market dynamics and new product introductions by us or our competitors. |
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Commercial: A number of our commercial product sales, such as those related to our partitions and lockers product lines, are customized by order, and, therefore, these products are typically priced based on the nature of the particular specifications ordered. For other commercial products, such as various Vycom product lines, we maintain standard pricing lists that we review and change periodically. |
Cost of Materials
Raw material costs, including costs of petrochemical resins, reclaimed polyethylene and PVC material, waste wood fiber and aluminum, represent a majority of our cost of sales. The cost of petrochemical resins used in our manufacturing processes has historically varied significantly and has been affected by changes in supply and demand and in the price of crude oil. In addition, the price of reclaimed polyethylene material, waste wood fiber, aluminum, other additives (including modifiers, titanium dioxide or TiO2, and pigments) and other raw materials fluctuates depending on, among other things, overall market supply and demand and general business conditions. We seek to mitigate the effects of increases in raw material costs by broadening our supplier base, increasing our use of recycled material and scrap, reducing waste and exploring options for material substitution without sacrificing quality. We have long-standing relationships as well as guaranteed supply contracts with some of our key suppliers but, other than certain contracts with prices determined based on the current index price, we have no fixed-price contracts with any of our major vendors. Under our guaranteed supply contracts, the prices are either established annually based on a discount to the then-current market prices or, for purchase orders, based on market rates in effect when the orders become effective. Prices for spot market purchases are negotiated on a continuous basis in line with the market at the time. We have not entered into hedges with respect to our raw material costs at this time, but we may choose to enter into such hedges in the future. For additional information, see Quantitative and Qualitative Disclosures about Market RiskRaw Materials; Commodity Price Risk.
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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 presents very serious concerns for our business and operations, our employees and their families, our customers and our suppliers, we believe that we are adapting well to the wide-ranging changes that the global economy is currently undergoing, and we remain confident that we will continue to maintain business continuity, produce and sell our products safely and in compliance with applicable laws and governmental orders and mandates, maintain our robust and flexible supply chains and be in a strong position to maintain financial flexibility even in the event of a potentially extended economic downturn.
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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 economic effects of the COVID-19 pandemic will likely continue to affect demand for our products over the balance of fiscal 2020. The global impact of the COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the situation closely. As the COVID-19 pandemic continues, it may also have the effect of heightening many of the risks described in Risk Factors in this Quarterly Report on Form 10-Q. See Part II, Item 1A, Risk Factors for a further discussion of the adverse impacts of the COVID-19 pandemic on our business.
Acquisitions
Throughout our history, we have made selected acquisitions, and we expect to continue to strategically pursue acquisitions to enhance our market position, supplement our product and technology portfolios and increase the diversity of our business.
Acquisition of Return Polymers
In January 2020, we acquired Return Polymers, Inc. for a total purchase price of $18.5 million. Return Polymers is located in Ashland Ohio and is a provider of full-service recycled PVC material processing, sourcing, logistical support, and scrap management programs. We financed the acquisition with cash on hand. The acquisition was accounted for as a business combination.
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Results of Operations
The following tables summarize certain financial information relating to our operating results that have been derived from our unaudited Consolidated Financial Statements for the three months ended June 30, 2020 and 2019, and for the nine months ended June 30, 2020 and 2019.
Three Months Ended June 30, | ||||||||||||||||||||||||
(Dollars in thousands) | 2020 |
% of
Net Sales |
2019 |
% of
Net Sales |
Variance | % | ||||||||||||||||||
Net sales |
$ | 223,711 | 100.0 | % | $ | 221,307 | 100.0 | % | $ | 2,404 | 1.1 | % | ||||||||||||
Cost of sales |
148,588 | 66.4 | 145,897 | 65.9 | 2,691 | 1.8 | ||||||||||||||||||
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Gross profit |
75,123 | 33.6 | 75,410 | 34.1 | (287 | ) | (0.4 | ) | ||||||||||||||||
Selling, general and administrative expenses |
65,164 | 29.1 | 50,185 | 22.7 | 14,979 | 29.8 | ||||||||||||||||||
Other general expenses |
1,623 | 0.7 | 1,997 | 0.9 | (374 | ) | (18.7 | ) | ||||||||||||||||
Loss on disposal of property, plant and equipment |
366 | 0.2 | 36 | | 330 | N/M | ||||||||||||||||||
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Operating income (loss) |
7,970 | 3.6 | 23,192 | 10.5 | (15,222 | ) | (65.6 | ) | ||||||||||||||||
Interest expense, net |
25,148 | 11.2 | 21,440 | 9.7 | 3,708 | 17.3 | ||||||||||||||||||
Loss on extinguishment of debt |
37,538 | 16.8 | | | 37,538 | N/M | ||||||||||||||||||
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Income tax expense (benefit) |
(2,600 | ) | (1.2 | ) | 241 | 0.1 | (2,841 | ) | N/M | |||||||||||||||
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Net income (loss) |
$ | (52,116 | ) | (23.3 | )% | $ | 1,511 | 0.7 | % | $ | (53,627 | ) | N/M | % | ||||||||||
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N/M indicates the variance as a percentage is not meaningful.
Three Months Ended June 30, 2020, Compared with Three Months Ended June 30, 2019
Net Sales
Net sales for the three months ended June 30, 2020 increased by $2.4 million, or 1.1%, to $223.7 million from $221.3 million for the three months ended June 30, 2019. The increase was primarily attributable to sales growth in our Residential segment. Net sales for the three months ended June 30, 2020 increased for our Residential segment by 5.5% and decreased for our Commercial segment by 19.7%, in each case as compared to the prior year.
Cost of Sales
Cost of sales for the three months ended June 30, 2020 increased by $2.7 million, or 1.8%, to $148.6 million from $145.9 million for the three months ended June 30, 2019 primarily due to higher depreciation expense and the impact of COVID-19 related production costs.
Gross Profit
Gross profit for the three months ended June 30, 2020 decreased by $0.3 million, or 0.4%, to $75.1 million from $75.4 million for the three months ended June 30, 2019. Gross profit as a percent of net sales decreased to 33.6% for the three months ended June 30, 2020 compared to 34.1% for the three months ended June 30, 2019. The decrease in gross profit as a percent of net sales was primarily due to higher depreciation expense and the impact of COVID-19 related production costs.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $15.0 million, or 29.8%, to $65.2 million, or 29.1% of net sales, for the three months ended June 30, 2020 from $50.2 million, or 22.7% of net sales, for the three months ended June 30, 2019. The increase was primarily attributable to IPO-related expenses of $22.2 million, including the recognition of stock-based compensation expense, partially offset by lower marketing related expenses during the initial COVID-19 disruption early in the quarter.
Other General Expenses
Other general expenses decreased by $0.4 million to $1.6 million during the three months ended June 30, 2020 from $2.0 million during the three months ended June 30, 2019.
Interest Expense, net
Interest expense, net, increased by $3.7 million, or 17.3%, to $25.1 million for the three months ended June 30, 2020 from $21.4 million for the three months ended June 30, 2019. Interest expense increased primarily due to the interest from the issuance of the 2025 Senior Notes and increased principal amount outstanding under our Revolving Credit Facility, partially offset by lower average interest rates during the three months ended June 30, 2020, when compared to the three months ended June 30, 2019.
Loss on Extinguishment of Debt
Loss on extinguishment of debt increased by $37.5 million for the three months ended June 30, 2020 due to the extinguishment of the 2025 Senior Notes and our former 8.000% senior notes due October 1, 2021, or the 2021 Senior Notes.
Income Tax Expense (Benefit)
Income tax expense (benefit) decreased by $2.8 million to ($2.6) million for the three months ended June 30, 2020 compared to $0.2 million for the three months ended June 30, 2019. The changes driving the increase in the tax benefit during the quarter were the loss on extinguishment of debt and the non-deductible stock-based compensation expense, as a result of our IPO.
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Net Income (Loss)
Net income (loss) decreased by $53.6 million to a net loss of $(52.1) million for the three months ended June 30, 2020 compared to net income of $1.5 million for the three months ended June 30, 2019, primarily due to $59.7 million of expenses related to the extinguishment of debt and an increase in selling, general and administrative expenses due to recognition of additional stock-based compensation expense as a result of our IPO.
Nine Months Ended June 30, | ||||||||||||||||||||||||
(Dollars in thousands) | 2020 |
% of
Net Sales |
2019 |
% of
Net Sales |
Variance | % | ||||||||||||||||||
Net sales |
$ | 635,339 | 100.0 | % | $ | 578,669 | 100.0 | % | $ | 56,670 | 9.8 | % | ||||||||||||
Cost of sales |
429,553 | 67.6 | 394,948 | 68.3 | 34,605 | 8.8 | ||||||||||||||||||
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Gross profit |
205,786 | 32.4 | 183,721 | 31.7 | 22,065 | 12.0 | ||||||||||||||||||
Selling, general and administrative expenses |
158,330 | 24.9 | 136,988 | 23.7 | 21,342 | 15.6 | ||||||||||||||||||
Other general expenses |
6,716 | 1.1 | 6,155 | 1.1 | 561 | 9.1 | ||||||||||||||||||
Loss on disposal of property, plant and equipment |
394 | 0.1 | 1,472 | 0.3 | (1,078 | ) | (73.2 | ) | ||||||||||||||||
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Operating income (loss) |
40,346 | 6.4 | 39,106 | 6.8 | 1,240 | 3.2 | ||||||||||||||||||
Interest expense, net |
64,882 | 10.2 | 63,213 | 10.9 | 1,669 | 2.6 | ||||||||||||||||||
Loss on extinguishment of debt |
37,538 | 5.9 | | | 37,538 | N/M | ||||||||||||||||||
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Income tax expense (benefit) |
(4,200 | ) | (0.7 | ) | (4,831 | ) | (0.8 | ) | 631 | (13.1 | ) | |||||||||||||
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Net income (loss) |
$ | (57,874 | ) | (9.1 | )% | $ | (19,276 | ) | (3.3 | )% | $ | (38,598 | ) | N/M | % | |||||||||
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N/M indicates the variance as a percentage is not meaningful.
Nine Months Ended June 30, 2020, Compared with Nine Months Ended June 30, 2019
Net Sales
Net sales for the nine months ended June 30, 2020 increased by $56.6 million, or 9.8%, to $635.3 million from $578.7 million for the nine months ended June 30, 2019. The increase was primarily attributable to higher sales in our Residential segment. Net sales for the nine months ended June 30, 2020 increased for our Residential segment by 13.0% and decreased for our Commercial segment by 5.3%, as compared to the prior year.
Cost of Sales
Cost of sales for the nine months ended June 30, 2020 increased by $34.6 million, or 8.8%, to $429.5 million from $394.9 million for the nine months ended June 30, 2019 primarily due to higher sales and depreciation expense as well as the impact of COVID-19 related production costs.
Gross Profit
Gross profit for the nine months ended June 30, 2020 increased by $22.1 million, or 12.0%, to $205.8 million from $183.7 million for the nine months ended June 30, 2019. Gross profit as a percent of net sales increased to 32.4% for the nine months ended June 30, 2020 compared to 31.7% for the nine months ended June 30, 2019. The increase in gross profit as a percent of net sales was primarily driven by higher Residential segment sales and manufacturing productivity improvements, partially offset by the impact of COVID-19 related production costs.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $21.3 million, or 15.6%, to $158.3 million, or 24.9% of net sales, for the nine months ended June 30, 2020 from $137.0 million, or 23.7% of net sales, for the nine months ended June 30, 2019. The increase was primarily attributable to IPO-related expenses of $29.1 million including the recognition of stock-based compensation expense offset by lower marketing expenses during the initial COVID-19 disruption.
Other General Expenses
Other general expenses increased by $0.5 million to $6.7 million during the nine months ended June 30, 2020 from $6.2 million during the nine months ended June 30, 2019.
Interest Expense, net
Interest expense, net, increased by 1.7 million, or 2.6%, to $64.9 million for the nine months ended June 30, 2020 from $63.2 million for the nine months ended June 30, 2019. Interest expense increased primarily due to the interest from the issuance of the 2025 Senior Notes and increased principal amount outstanding under our Revolving Credit Facility, partially offset by lower average interest rates during the nine months ended June 30, 2020, when compared to the nine months ended June 30, 2019.
Loss on Extinguishment of Debt
Loss on extinguishment of debt increased by $37.5 million for the nine months ended June 30, 2020 due to the extinguishment of the 2025 Senior Notes and the 2021 Senior Notes.
Income Tax Expense (Benefit)
Income tax benefit decreased by $0.6 million to $4.2 million for the nine months ended June 30, 2020 compared to $4.8 million for the nine months ended June 30, 2019. The decrease in our income tax benefit was primarily driven by the loss on extinguishment of debt offset by the non-deductible stock-based compensation expense, as a result of our IPO.
Net Income (Loss)
Net loss increased by $38.6 million to a net loss of $57.9 million for the nine months ended June 30, 2020 compared to net loss of $19.3 million for the nine months ended June 30, 2019, primarily due to $66.6 million of expenses related to the extinguishment of debt and an increase in selling, general and administrative expenses due to recognition of additional stock-based compensation expense as a result of our IPO.
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Segment Results of Operations
We report our results in two segments: Residential and Commercial. The key segment measures used by our chief operating decision maker in deciding how to evaluate performance and allocate resources to each of the segments are Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin. Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin are calculated differently than our Adjusted EBITDA and Adjusted EBITDA Margin, which are further discussed under the heading 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 Quarterly Report on Form 10-Q consistent with the requirements of the Financial Accounting Standards Boards, or FASB, Accounting Standards Codification, or ASC 280, Segment Reporting. We define Segment Adjusted EBITDA as a segments 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 segments Segment Adjusted EBITDA divided by such segments net sales. Corporate expenses, which include selling, general and administrative costs related to our corporate offices, including payroll and other professional fees, are not included in computing Segment Adjusted EBITDA. Such corporate expenses increased by $1.3 million to $9.5 million during the three months ended June 30, 2020, from $8.2 million during the three months ended June 30, 2019, and increased by $5.7 million to $27.8 million for the nine months ended June 30, 2020 from $22.1 million for the nine months ended June 30, 2019.
Residential
The following table summarizes certain financial information relating to the Residential segment results that have been derived from our unaudited Consolidated Financial Statements for the three and nine months ended June 30, 2020 and 2019.
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | Variance | % | 2020 | 2019 | Variance | % | ||||||||||||||||||||||||
Net Sales |
$ | 192,599 | $ | 182,553 | $ | 10,046 | 5.5 | % | $ | 538,514 | $ | 476,441 | $ | 62,073 | 13.0 | % | ||||||||||||||||
Segment Adjusted EBITDA |
62,326 | 54,090 | 8,236 | 15.2 | 164,047 | 134,818 | 29,229 | 21.7 | ||||||||||||||||||||||||
Segment Adjusted EBITDA Margin |
32.4 | % | 29.6 | % | N/A | N/A | 30.5 | % | 28.3 | % | N/A | N/A |
Net Sales
Net sales for the three months ended June 30, 2020 increased by $10.0 million, or 5.5%, to $192.6 million from $182.6 million for the three months ended June 30, 2019. The increase was primarily attributable to higher sales in our Deck, Rail and Accessories business while our Exteriors business rebounded in June as key geographies resumed with strong construction and remodeling activity, which began to increase later in the quarter.
Net sales for the nine months ended June 30, 2020 increased by $62.1 million, or 13.0%, to $538.5 million from $476.4 million for the nine months ended June 30, 2019. The increase was primarily attributable to higher sales in both our Deck, Rail and Accessories and Exteriors businesses driven by continued market growth, success of new products across the portfolio and the benefit from investments in downstream selling capabilities.
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Segment Adjusted EBITDA
Segment Adjusted EBITDA for the three months ended June 30, 2020 increased by $8.2 million, or 15.2% to $62.3 million from $54.1 million for the three months ended June 30, 2019. The increase was mainly driven by higher sales, net manufacturing productivity improvements, as well as lower selling, general and administrative expenses as a result of lower marketing and travel expenses, partially offset by higher COVID-19 related production costs.
Segment Adjusted EBITDA for the nine months June 30, 2020 increased by $29.2 million, or 21.7% to $164.0 million from $134.8 million for the nine months ended June 30, 2019. The increase was mainly driven by higher sales, net manufacturing productivity improvements, as well as lower selling, general and administration 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 unaudited Consolidated Financial Statements for the three and nine months ended June 30, 2020 and 2019.
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | Variance | % | 2020 | 2019 | Variance | % | ||||||||||||||||||||||||
Net Sales |
$ | 31,112 | $ | 38,754 | $ | (7,642 | ) | (19.7 | )% | $ | 96,825 | $ | 102,228 | $ | (5,403 | ) | (5.3 | )% | ||||||||||||||
Segment Adjusted EBITDA |
5,024 | 6,893 | (1,869 | ) | (27.1 | ) | 11,179 | 14,376 | (3,197 | ) | (22.2 | ) | ||||||||||||||||||||
Segment Adjusted EBITDA Margin |
16.1 | % | 17.8 | % | N/A | N/A | 11.5 | % | 14.1 | % | N/A | N/A |
Net Sales
Net sales were $31.1 million for the three months ended June 30, 2020 compared to $38.7 million for the three months ended June 30, 2019, a decrease of $7.6 million, or 19.7%. The Commercial segment has greater exposure to the broader economy and the business saw net sales declines as the effects of COVID-19 impacted certain end market demand during the quarter. The decrease in sales was due in part to geographic shutdowns for our Scranton Products bathroom partitions business and a significant contraction in retail, industrial and trade show business for our Vycom sheet business.
Net sales were $96.8 million for the nine months ended June 30, 2020 compared to $102.2 million for the nine months ended June 30, 2019, a decrease of $5.4 million, or 5.3%. The decrease in sales was primarily driven by lower sales in our Vycom businesses, as the effects of COVID-19 impacted certain end market demands, partially offset by growth in Scranton Products.
Segment Adjusted EBITDA
Segment Adjusted EBITDA of the Commercial segment was $5.0 million for the three months ended June 30, 2020, compared to $6.9 million for the three months ended June 30, 2019. The decrease was primarily driven by lower sales and higher manufacturing costs, partially offset by reductions in selling, general and administrative expenses.
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Segment Adjusted EBITDA of the Commercial segment was $11.2 million for the nine months ended June 30, 2020, compared to $14.4 million for the nine months ended June 30, 2019. The decrease was primarily driven by lower sales and higher manufacturing costs, partially offset by reductions in selling, general and administrative expenses.
Non-GAAP Financial Measures
To supplement our Consolidated Financial Statements prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we use certain non-GAAP performance financial measures, as described below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance from managements 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.
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Non-GAAP financial measures: |
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Adjusted Gross Profit |
$ | 91,234 | $ | 90,462 | $ | 252,989 | $ | 228,143 | ||||||||
Adjusted Gross Profit Margin |
40.8 | % | 40.9 | % | 39.8 | % | 39.4 | % | ||||||||
Adjusted Net Income |
15,847 | 24,168 | 53,650 | 48,198 | ||||||||||||
Adjusted Diluted EPS |
0.13 | 0.22 | 0.47 | 0.45 | ||||||||||||
Adjusted EBITDA |
57,820 | 52,771 | 147,444 | 127,066 | ||||||||||||
Adjusted EBITDA Margin |
25.8 | % | 23.8 | % | 23.2 | % | 22.0 | % |
Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, Adjusted EBITDA Margin and Net Leverage
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 depreciation and 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
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income (loss) before interest expense, net, income tax (benefit) expense and depreciation and amortization and by adding to or subtracting therefrom items of expense and income as described above. Adjusted EBITDA Margin is equal to Adjusted EBITDA divided by net sales. Net Leverage is equal to gross debt less cash and cash equivalents, divided by trailing twelve month Adjusted EBITDA. We believe Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, Adjusted EBITDA Margin and Net Leverage 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. Further, management considers Net Leverage as a useful measure to assess our borrowing capacity.
Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, Adjusted EBITDA Margin and Net Leverage 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:
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These measures do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments; |
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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; |
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Adjusted EBITDA and Adjusted EBITDA Margin do not reflect our income tax expense or the cash requirements to pay our taxes; |
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Adjusted Gross Profit, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA exclude the expense of depreciation and amortization of our assets, and, although these are non-cash expenses, the assets being depreciated may have to be replaced in the future; |
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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; |
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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 |
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Other companies in our industry may calculate Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, Adjusted EBITDA Margin and Net Leverage differently than we do, limiting their usefulness as comparative measures. |
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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
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(In thousands) | ||||||||||||||||
Gross Profit |
$ | 75,123 | $ | 75,410 | $ | 205,786 | $ | 183,721 | ||||||||
Depreciation and amortization (1) |
15,925 | 13,653 | 46,463 | 41,514 | ||||||||||||
Business transformation costs (2) |
| 1,399 | | 2,908 | ||||||||||||
Acquisition costs (3) |
111 | | 665 | | ||||||||||||
Other costs (4) |
75 | | 75 | | ||||||||||||
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Adjusted Gross Profit |
$ | 91,234 | $ | 90,462 | $ | 252,989 | $ | 228,143 | ||||||||
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Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Gross Profit |
33.6 | % | 34.1 | % | 32.4 | % | 31.7 | % | ||||||||
Depreciation and amortization |
7.1 | % | 6.2 | % | 7.3 | % | 7.2 | % | ||||||||
Business transformation costs |
| 0.6 | % | | 0.5 | % | ||||||||||
Acquisition costs |
0.1% | | 0.1 | % | | |||||||||||
Other costs |
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Adjusted Gross Profit Margin |
40.8 | % | 40.9 | % | 39.8 | % | 39.4 | % | ||||||||
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(1) |
Depreciation and amortization for the three and nine months ended June 30, 2020 and 2019 consists of $9.7 million, $6.8 million, $27.9 million and $20.8 million, respectively, of depreciation and $6.2 million, $6.9 million, $18.6 million and $20.7 million, respectively, of amortization of intangibles relating to our manufacturing process. |
(2) |
Business transformation costs include start-up costs of our new recycling facility for the three and nine months ended June 30, 2019. |
(3) |
Acquisition costs include $0.1 million and $0.7 million for inventory step-up adjustments related to recording the inventory of acquired businesses at fair value on the date of acquisition, for the three and nine months ended June 30, 2020, respectively. |
(4) |
Other cost includes reduction in workforce costs of $0.1 million for the three and nine months ended June 30, 2020. |
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Adjusted Net Income and Adjusted Diluted EPS Reconciliation
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income (loss) |
$ | (52,116 | ) | $ | 1,511 | $ | (57,874 | ) | $ | (19,276 | ) | |||||
Depreciation and amortization (1) |
26,597 | 23,243 | 75,225 | 69,634 | ||||||||||||
Stock-based compensation costs |
18,788 | 737 | 20,169 | 2,600 | ||||||||||||
Business transformation costs (2) |
109 | 2,831 | 435 | 12,608 | ||||||||||||
Acquisition costs (3) |
182 | 521 | 1,538 | 3,656 | ||||||||||||
Initial public offering costs |
1,623 | 1,997 | 6,716 | 6,155 | ||||||||||||
Other costs (4) |
2,551 | 250 | 3,015 | (6,693 | ) | |||||||||||
Capital structure transaction costs (5) |
37,538 | | 37,538 | | ||||||||||||
Tax impact of adjustments (6) |
(19,425 | ) | (6,922 | ) | (33,112 | ) | (20,486 | ) | ||||||||
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Adjusted Net Income |
$ | 15,847 | $ | 24,168 | $ | 53,650 | $ | 48,198 | ||||||||
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Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income (loss) per common share - diluted |
$ | (0.44 | ) | $ | 0.01 | $ | (0.51 | ) | $ | (0.18 | ) | |||||
Depreciation and amortization |
0.22 | 0.21 | 0.66 | 0.64 | ||||||||||||
Stock-based compensation costs |
0.16 | 0.01 | 0.18 | 0.03 | ||||||||||||
Business transformation costs |
| 0.03 | | 0.12 | ||||||||||||
Acquisition costs |
| | 0.01 | 0.03 | ||||||||||||
Initial public offering costs |
0.01 | 0.02 | 0.06 | 0.06 | ||||||||||||
Other costs |
0.02 | | 0.03 | (0.06 | ) | |||||||||||
Capital structure transaction costs |
0.32 | | 0.33 | | ||||||||||||
Tax impact of adjustments |
(0.16 | ) | (0.06 | ) | (0.29 | ) | (0.19 | ) | ||||||||
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Adjusted Diluted EPS (7) |
$ | 0.13 | $ | 0.22 | $ | 0.47 | $ | 0.45 | ||||||||
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(1) |
Depreciation and amortization for the three and nine months ended June 30, 2020 and 2019 consists of $12.7 million, $8.2 million, $33.6 million and $24.2 million, respectively, of depreciation and $13.9 million, $15.1 million, $41.6 million and $45.5 million, respectively, of amortization of intangibles. |
(2) |
Business transformation costs include consulting and other costs related to repositioning of our brands of $0.0 million and $0.7 for the three months ended June 30, 2020 and 2019, respectively, and $0.0 million and $3.9 million for the nine months ended June 30, 2020 and 2019, respectively, compensation costs related to the transformation of the senior management team of $0.1 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively, and $0.4 million and $1.9 million for the nine months ended June 30, 2020 and 2019, respectively, costs related to the relocation of our corporate headquarters of $0.0 million and $1.8 million for the nine months ended June 30, 2020 and 2019, respectively, startup costs of our new recycling facility of $0.0 million and $1.4 million for the three months ended June 30, 2020 and 2019, respectively and $0.0 million and $2.9 million for the nine months ended June 30, 2020 and 2019, respectively, and other integration-related costs of $0.0 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $0.0 million and $2.1 million for the nine months ended June 30, 2020 and 2019, respectively. |
(3) |
Acquisition costs reflect costs directly related to completed acquisitions $0.1 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $0.9 million and $3.7 million for the nine months ended June 30, 2020 and 2019, respectively, and inventory step-up adjustments related to recording the inventory of acquired businesses at fair value on the date of acquisition of $0.1 million and $0.0 million for the three months ended June 30, 2020 and 2019, respectively, and $0.6 million and $0.0 million for the nine months ended June 30, 2020 and 2019, respectively. |
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(4) |
Other costs include costs for legal expenses of $0.4 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively, and $0.4 million and $0.8 million for the nine months ended June 30, 2020 and 2019, respectively, reduction in workforce costs of $0.4 million for the three and nine months ended June 30, 2020, income from an insurance recovery of legal loss of $0.0 million and $7.7 million for the nine months ended June 30, 2020 and 2019, respectively, and costs related to an incentive plan associated with our IPO of $1.8 million and $0.1 million for the three months ended June 30, 2020 and 2019, respectively, and $2.2 million and $0.2 million for the nine months ended June 30, 2020 and 2019, respectively. |
(5) |
Capital structure transaction costs include loss on extinguishment of debt of $1.9 million for the 2021 Senior Notes and $35.6 million for the 2025 Senior Notes for the three and nine months ended June 30, 2020. |
(6) |
Tax impact of adjustments are based on applying a combined U.S. federal and state statutory tax rate of 24.5% and 24.0% for the three and nine months ended June 30, 2020 and 2019, respectively. |
(7) |
Weighted average common shares outstanding used in computing diluted net income (loss) per common share of 119,067,790, and 108,162,741, for the three months ended June 30, 2020 and 2019, respectively, and 113,635,347 and 108,162,741 for the nine months ended June 30, 2020 and 2019, respectively. |
Adjusted EBITDA and Adjusted EBITDA Margin Reconciliation
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income (loss) |
$ | (52,116 | ) | $ | 1,511 | $ | (57,874 | ) | $ | (19,276 | ) | |||||
Interest expense |
25,148 | 21,440 | 64,882 | 63,213 | ||||||||||||
Depreciation and amortization |
26,597 | 23,243 | 75,225 | 69,634 | ||||||||||||
Tax expense (benefit) |
(2,600 | ) | 241 | (4,200 | ) | (4,831 | ) | |||||||||
Stock-based compensation costs |
18,788 | 737 | 20,169 | 2,600 | ||||||||||||
Business transformation costs (1) |
109 | 2,831 | 435 | 12,608 | ||||||||||||
Acquisition costs (2) |
182 | 521 | 1,538 | 3,656 | ||||||||||||
Initial public offering costs |
1,623 | 1,997 | 6,716 | 6,155 | ||||||||||||
Other costs (3) |
2,551 | 250 | 3,015 | (6,693 | ) | |||||||||||
Capital structure transaction costs (4) |
37,538 | | 37,538 | | ||||||||||||
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Total adjustments |
109,936 | 51,260 | 205,318 | 146,342 | ||||||||||||
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Adjusted EBITDA |
$ | 57,820 | $ | 52,771 | $ | 147,444 | $ | 127,066 | ||||||||
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Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income (loss) |
(23.3 | )% | 0.7 | % | (9.1 | )% | (3.3 | )% | ||||||||
Interest expense |
11.3 | % | 9.7 | % | 10.2 | % | 10.9 | % | ||||||||
Depreciation and amortization |
11.9 | % | 10.5 | % | 11.8 | % | 12.0 | % | ||||||||
Tax expense (benefit) |
(1.2 | )% | 0.1 | % | (0.7 | )% | (0.8 | )% | ||||||||
Stock-based compensation costs |
8.4 | % | 0.3 | % | 3.2 | % | 0.4 | % | ||||||||
Business transformation costs |
| 1.3 | % | 0.1 | % | 2.2 | % | |||||||||
Acquisition costs |
0.1 | % | 0.2 | % | 0.2 | % | 0.6 | % | ||||||||
Initial public offering costs |
0.7 | % | 0.9 | % | 1.1 | % | 1.1 | % | ||||||||
Other costs |
1.1 | % | 0.1 | % | 0.5 | % | (1.1 | )% | ||||||||
Capital structure transaction costs |
16.8 | % |
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5.9 | % | | ||||||||
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Total adjustments |
49.1 | % | 23.1 | % | 32.3 | % | 25.3 | % | ||||||||
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Adjusted EBITDA Margin |
25.8 | % | 23.8 | % | 23.2 | % | 22.0 | % | ||||||||
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(1) |
Business transformation costs include consulting and other costs related to repositioning of our brands of $0.0 million and $0.7 for the three months ended June 30, 2020 and 2019, respectively, and $0.0 million and $3.9 million for the nine months ended June 30, 2020 and 2019, respectively, compensation costs related to the transformation of the senior management team of $0.1 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively, and $0.4 million and $1.9 million for the nine months ended June 30, 2020 and 2019, respectively, costs related to the relocation of our corporate headquarters of $0.0 million and $1.8 million for the nine months ended June 30, 2020 and 2019, respectively, startup costs of our new recycling facility of $0.0 million and $1.4 million for the three months ended June 30, 2020 and 2019, respectively and $0.0 million and $2.9 million for the nine months ended June 30, 2020 and 2019, respectively, and other integration-related costs of $0.0 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $0.0 million and $2.1 million for the nine months ended June 30, 2020 and 2019, respectively. |
(2) |
Acquisition costs reflect costs directly related to completed acquisitions $0.1 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $0.9 million and $3.7 million for the nine months ended June 30, 2020 and 2019, respectively, and inventory step-up adjustments related to recording the inventory of acquired businesses at fair value on the date of acquisition of $0.1 million and $0.0 million for the three months ended June 30, 2020 and 2019, respectively, and $0.6 million and $0.0 million for the nine months ended June 30, 2020 and 2019, respectively. |
(3) |
Other costs include costs for legal expenses of $0.4 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively, and $0.4 million and $0.8 million for the nine months ended June 30, 2020 and 2019, respectively, reduction in workforce costs of $0.4 million for the three and nine months ended June 30, 2020, income from an insurance recovery of legal loss of $0.0 million and $7.7 million for the nine months ended June 30, 2020 and 2019, respectively, and costs related to an incentive plan associated with our IPO of $1.8 million and $0.1 million for the three months ended June 30, 2020 and 2019, respectively, and $2.2 million and $0.2 million for the nine months ended June 30, 2020 and 2019, respectively. |
(4) |
Capital structure transaction costs include loss on extinguishment of debt of $1.9 million for the 2021 Senior Notes and $35.6 million for the 2025 Senior Notes for the three and nine months ended June 30, 2020. |
Net Leverage Reconciliation
Twelve Months
Ended September 30, 2019 |
Nine Months
Ended June 30, 2019 |
Nine Months
Ended June 30, 2020 |
Twelve Months
Ended June 30, 2020 |
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(In thousands) | ||||||||||||||||
Net income (loss) |
$ | (20,196 | ) | $ | (19,276 | ) | $ | (57,874 | ) | $ | (58,794 | ) | ||||
Interest expense |
83,205 | 63,213 | 64,882 | 84,874 | ||||||||||||
Depreciation and amortization |
93,929 | 69,634 | 75,225 | 99,520 | ||||||||||||
Tax expense (benefit) |
(3,955 | ) | (4,831 | ) | (4,200 | ) | (3,324 | ) | ||||||||
Stock-based compensation costs |
3,682 | 2,600 | 20,169 | 21,251 | ||||||||||||
Business transformation costs |
16,560 | 12,608 | 435 | 4,387 | ||||||||||||
Acquisition costs |
4,110 | 3,656 | 1,538 | 1,992 | ||||||||||||
Initial public offering costs |
9,076 | 6,155 | 6,716 | 9,637 | ||||||||||||
Other costs |
(6,845 | ) | (6,693 | ) | 3,015 | 2,863 | ||||||||||
Capital structure transaction costs |
| | 37,538 | 37,538 | ||||||||||||
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Total adjustments |
199,762 | 146,342 | 205,318 | 258,738 | ||||||||||||
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Adjusted EBITDA |
$ | 179,566 | $ | 127,066 | $ | 147,444 | $ | 199,944 | ||||||||
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Long-term debtless current portion |
$ | 506,656 | ||||||||||||||
Unamortized deferred financing fees |
4,456 | |||||||||||||||
Unamortized original issue discount |
542 | |||||||||||||||
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Gross debt |
511,654 | |||||||||||||||
Cash and cash equivalents |
(215,111 | ) | ||||||||||||||
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Net debt |
296,543 | |||||||||||||||
Net Leverage |
1.5x |
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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 of June 30, 2020, we had cash and cash equivalents of $215.1 million and total indebtedness of $506.7 million. CPG International LLC, our direct, wholly owned subsidiary, had approximately $97.0 million available under the borrowing base for future borrowings as of June 30, 2020. 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. In the fourth quarter of 2020, we also announced an acceleration and expansion of our capacity investment from $100.0 million to $180.0 million and believe we have the adequate liquidity to meet the higher level of capacity investment.
During the three months ended March 31, 2020, we borrowed $129.0 million under the Revolving Credit Facility, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic.
On May 12, 2020, we issued $350.0 million of Senior Notes, and interest was payable on May 15 and November 15 of each year. We had the option to redeem all or a portion of the 2025 Senior Notes at any time on or after May 15, 2022 at certain redemption prices, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, before May 15, 2022, we had the option to (i) redeem up to 40% of the aggregate principal amount of the 2025 Senior Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.125% of the principal amount of the 2025 Senior Notes redeemed, (ii) redeem (x) up to 40% of the aggregate principal amount of the 2025 Senior Notes or (y) all of the 2025 Senior Notes with the proceeds from a Qualified IPO (as such term was defined in the indenture that governed the 2025 Senior Notes) at a redemption price equal to 107.125% of the principal amount of the 2025 Senior Notes redeemed or (iii) redeem some or all of the 2025 Senior Notes at a price equal to 100% of the principal amount plus a make-whole premium, in the case of each of (i), (ii) and (iii), plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
We used the proceeds of the 2025 Senior Notes offering to redeem $315.0 million of outstanding 2021 Senior Notes, representing all of the outstanding 2021 Senior Notes, plus $4.6 million in accrued and unpaid interest to the redemption date, and to repay $15.0 million of the outstanding principal amount under the Revolving Credit Facility.
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On June 5, 2020, we entered into an amendment to the Revolving Credit Facility, or the Amendment, which established $8.5 million of commitments for FILO Loans under the Revolving Credit Facility. The FILO Loans are available to be drawn in a single disbursement on or prior to December 31, 2020. The availability of the FILO Loans will be subject to satisfaction of certain conditions at the time of borrowing, including the value of borrowing-base eligible assets at the time of borrowing. Under the terms of the Revolving Credit Facility as amended by the Amendment, FILO Loans may be borrowed against increased percentages of borrowing-base eligible assets (as compared to the percentages of borrowing-base eligible assets applicable to all other loans under the Revolving Credit Facility). The Amendment did not increase the total aggregate amount of commitments under the Revolving Credit Facility. Borrowing of FILO Loans under the Revolving Credit Facility will reduce the total aggregate commitments available for revolving loans for so long as the FILO Loans remain outstanding. If borrowed, the FILO Loans will mature on December 4, 2021. There is no assurance that we will be able to draw on the FILO Loans at any time. As of June 30, 2020, we have not drawn on the FILO loans.
We redeemed the $350.0 million in aggregate principal amount of outstanding 2025 Senior Notes issued on May 12, 2020 with the net proceeds from the IPO at a redemption price of 107.125% of the outstanding principal amount, plus $3.9 million in accrued and unpaid interest to the redemption date. We also used a portion of the net proceeds received by us from the IPO to repay $70.0 million of the then-outstanding principal amount under the Revolving Credit Facility and to prepay approximately $337.7 million of the outstanding principal amount under our Term Loan Agreement, plus $4.3 million in accrued and unpaid interest thereon.
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 Revolving Credit Facility and Term Loan Agreement, or, together, the Senior Secured Credit Facilities. The obligations under the Senior Secured Credit Facilities are secured by specified assets as described under Indebtedness, and the obligations under the Senior Secured Credit Facilities are guaranteed by The AZEK Company Inc. and the wholly owned domestic subsidiaries of CPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries.
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The Senior Secured Credit Facilities contain covenants restricting payments of dividends by CPG International LLC unless certain conditions, as provided in the Senior Secured Credit Facilities, are met. The covenants under our Senior Secured Credit Facilities provide for certain exceptions for specific types of payments. However, other than restricted payments under the specified exceptions, the covenants under our Term Loan Agreement generally prohibit the payment of dividends unless the fixed charge coverage ratio of CPG International LLC, on a pro forma basis, for the four quarters preceding the declaration or payment of such dividend would be at least 2.00 to 1.00 and such restricted payments do not exceed an amount based on the sum of $40.0 million plus 50% of consolidated net income for the period commencing October 1, 2013 to the end of the most recent fiscal quarter for which internal consolidated financial statements of CPG International LLC are available at the time of such restricted payment, plus certain customary addbacks. Based on the general restrictions in our Term Loan Agreement as of September 30, 2019, CPG International LLC would not have been permitted to declare or pay dividends, except for the specific purposes specified in the Senior Secured Credit Facilities, and, accordingly, $490.0 million of the assets of CPG International LLC were restricted pursuant to the terms of the Senior Secured Credit Facilities.
Since the restricted net assets of The AZEK Company Inc. and its subsidiaries exceed 25% of our consolidated net assets, in accordance with Rule 12-04, Schedule 1 of Regulation S-X, refer to our Consolidated Financial Statements included elsewhere in this Form 10-Q for condensed parent company financial statements of The AZEK Company Inc.
Cash Sources
We have historically relied on cash flows from operations generated by CPG International LLC, borrowings under the credit facilities, issuances of notes and other forms of debt financing and capital contributions to fund our cash needs.
On September 30, 2013, our subsidiary, CPG International LLC (as successor-in-interest to CPG Merger Sub LLC, a limited liability company formed to effect the acquisition of CPG International LLC), Deutsche Bank AG New York Branch, as administrative agent and collateral agent, or the Revolver Administrative Agent, and the lenders party thereto entered into the Revolving Credit 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. On June 5, 2020, we entered into the Amendment, which established $8.5 million of commitments for FILO Loans under the Revolving Credit Facility. Under the terms of the Revolving Credit Facility as amended by the Amendment, FILO Loans may be borrowed against increased percentages of borrowing-base eligible assets (as compared to the percentages of borrowing base eligible assets applicable to all other loans under the Revolving Credit Facility). The Amendment did not increase the total aggregate amount of commitments under the Revolving Credit Facility. FILO Loans may be borrowed in a single disbursement on or prior to December 31, 2020. Borrowing of FILO Loans under the Revolving Credit Facility will reduce the total aggregate commitments available for revolving loans for so long as the FILO Loans remain outstanding. If borrowed, the FILO Loans will mature on December 4, 2021. As of June 30, 2020, we have not drawn on the FILO loans. As of June 30, 2020, and September 30, 2019, CPG International LLC had $44.0 million and $0.0 million, respectively, of outstanding borrowings under the Revolving Credit Facility and had $3.9 million and $3.0 million, respectively, of outstanding letters of credit held against the Revolving Credit Facility. As of June 30, 2020, and September 30, 2019, CPG International LLC had approximately $97.0
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million and $113.7 million, respectively, available under the borrowing base for future borrowings in addition to cash and cash equivalents on hand of $215.1 million and $105.9 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, 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 each of the nine months ended June 30, 2020 and June 30, 2019.
Cash Flows
Nine Months Ended June 30, | $ Variance | % Variance | ||||||||||||||
(Dollars in thousands) | 2020 | 2019 | Increase/(Decrease) | Increase/(Decrease) | ||||||||||||
Net cash provided by (used in) operating activities |
$ | 11,286 | $ | 20,257 | $ | (8,971 | ) | (44.3 | )% | |||||||
Net cash provided by (used in) investing activities |
(72,998 | ) | (46,391 | ) | 26,607 | 57.4 | ||||||||||
Net cash provided by (used in) financing activities |
170,876 | (5,351 | ) | 176,227 | N/M | |||||||||||
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Net increase (decrease) in cash |
$ | 109,164 | $ | (31,485 | ) | $ | 140,649 | 446.7 | % | |||||||
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N/M indicates the variance as a percentage is not meaningful.
Operating Activities
Net cash provided by operating activities was $11.3 million and $20.3 million for the nine months ended June 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. The $9.0 million decrease is a result of a net increase in working capital as we built inventory and accounts receivable during the period and reduced certain payables in accrued expenses.
Investing Activities
Net cash used in investing activities was $73.0 million and $46.4 million for the nine months ended June 30, 2020 and 2019, respectively, primarily representing purchases of property, plant and equipment in the normal course of business and the acquisition of Return Polymers for $18.5 million.
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Financing Activities
Net cash provided by (used in) financing activities was $170.9 million and $(5.4) million for the nine months ended June 30, 2020 and 2019, respectively. Net cash provided by financing activities for the nine months ended June 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 nine months ended June 30, 2019, which consisted of proceeds from our Revolving Credit Facility, offset by payments for debt and contingent consideration related to the acquisition of WES, LLC and its wholly owned subsidiary, Ultralox Technology, LLC.
Indebtedness
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 in U.S. dollars with a maturity of one month plus 100 basis points, plus, in each case, a spread of 50 to 100 basis points based on average historical availability, or (ii) for Eurocurrency borrowings, adjusted LIBOR plus a spread of 150 to 200 basis points, based on average historical availability. On June 5, 2020, we entered into the Amendment, which established $8.5 million of commitments for FILO Loans. The commitments for the FILO Loans do not increase the total aggregate amount of commitments under the Revolving Credit Facility, as the total aggregate amount of revolving commitments under the Revolving Credit Facility will be reduced by the amount of any FILO loans outstanding. The FILO Loans are available to be drawn in a single disbursement on or prior to December 31, 2020. Outstanding FILO Loans under the Revolving Credit 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 in U.S. dollars with a maturity of one month plus 100 basis points, plus, in each case, a spread of 250 basis points based on average historical availability, or (ii) for Eurocurrency borrowings, adjusted LIBOR plus a spread of 350 basis points.
A commitment fee accrues on any unused portion of the revolving commitments under the Revolving Credit 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 Revolving Credit Facility will mature on March 9, 2022. During March 2020, we borrowed $129.0 million under the Revolving Credit Facility, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. On May 14, 2020, following the issuance of the 2025 Senior Notes on May 12, 2020, we repaid $15.0 million of outstanding principal amount under the Revolving Credit Facility. We also repaid $70.0 million of outstanding principal amount under the Revolving Credit Facility with proceeds from the IPO.
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 AZEK Company Inc., 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 The AZEK Company Inc. and the wholly owned domestic subsidiaries of CPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries.
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Revolving loans under the Revolving Credit Facility may be voluntarily prepaid in whole, or in part, in each case without premium or penalty. Other than in the case of a mandatory prepayment, FILO Loans under the Revolving Credit Facility may not be repaid prior to maturity unless all revolving loans have been repaid. CPG International LLC is also required to make mandatory prepayments (i) when aggregate borrowings exceed commitments or the applicable borrowing base and (ii) during cash dominion, which occurs if (a) the availability under the Revolving Credit Facility is less than the greater of (i) $12.5 million and (ii) 10% of the lesser of (x) $150.0 million and (y) the borrowing base, for five consecutive business days or (b) certain events of default have occurred and are continuing.
The Revolving Credit Facility contains affirmative covenants that are customary for financings of this type, including allowing the Revolver Administrative Agent to perform periodic field exams and appraisals to evaluate the borrowing base. The Revolving Credit Facility contains various negative covenants, including limitations on, subject to certain exceptions, the incurrence of indebtedness, the incurrence of liens, dispositions, investments, acquisitions, restricted payments, transactions with affiliates, as well as other negative covenants customary for financings of this type. The Revolving Credit Facility also includes a financial maintenance covenant, applicable only when the excess availability is less than the greater of (i) 10% of the lesser of the aggregate commitments under the Revolving Credit Facility and the borrowing base, and (ii) $12.5 million. In such circumstances, we would be required to maintain a minimum fixed charge coverage ratio (as defined in the Revolving Credit Facility) for the trailing four quarters equal to at least 1.0 to 1.0; subject to our ability to make an equity cure (no more than twice in any four quarter period and up to five times over the life of the facility). As of June 30, 2020, and September 30, 2019, 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.
Term Loan Agreement
The Term Loan Agreement is a first lien term loan. As of June 30, 2020, and September 30, 2019, CPG International LLC had $467.1 million and $808.5 million, respectively, outstanding under the Term Loan Agreement. The Term Loan Agreement will mature on May 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 in U.S. dollars with a maturity of one month plus 100 basis points, provided that in no event will the alternative base rate be less than 200 basis points, plus, in each case, the applicable margin of 275 basis points per annum; or (ii) in the case of Eurocurrency borrowings, the greater of (a) the LIBOR in effect for such interest period divided by one, minus the statutory reserves applicable to such Eurocurrency borrowing, if any, and (b) 100 basis points, plus the applicable margin of 375 basis points per annum.
The obligations under the Term Loan Agreement are secured by a first priority security interest in the membership interests of CPG International LLC owned by The AZEK Company Inc., the equity interests of CPG International LLCs domestic subsidiaries and all remaining assets not constituting Revolver Priority Collateral (subject to certain exceptions) of The AZEK Company Inc., CPG International
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LLC and the subsidiaries of CPG 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 by The AZEK Company Inc., and the wholly owned domestic subsidiaries of CPG 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) by CPG International LLC or any restricted subsidiary and (iii) 50% of excess cash flow, with such percentage subject to reduction (to 25% and to 0%) upon achievement of specified leverage ratios and which prepayment may be declined by the lenders under the Term Loan Agreement. The estimated prepayment from excess cash flow was $6.4 million at September 30, 2019. At the lenders option, the excess cash flow payment made in January 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.
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 of June 30, 2020, and September 30, 2019, 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.
2025 Senior Notes
On May 12, 2020, CPG International LLC issued $350.0 million aggregate principal amount of 2025 Senior Notes. The 2025 Senior Notes are obligations of CPG International LLC and are guaranteed by its subsidiaries that also guarantee the Revolving Credit Facility and the Term Loan Agreement. At any time, CPG International LLC had the option to redeem the 2025 Senior Notes in whole or in part, subject to specified make-whole obligations or redemption prices. CPG International LLC had, prior to May 15, 2022, the option to redeem up to 40% of the aggregate principal amount or 100% of the aggregate principal amount of the 2025 Senior Notes with the proceeds of a Qualified IPO (as defined in the indenture governing the 2025 Senior Notes) at a redemption price equal to 107.125% of the principal amount of the 2025 Senior Notes, plus accrued and unpaid interest to the redemption date. CPG International LLC redeemed the 2025 Senior Notes in full with a portion of net proceeds from the IPO on June 16, 2020.
2021 Senior Notes
On September 30, 2013, CPG International LLC issued $315.0 million aggregate principal amount of 2021 Senior Notes. On May 12, 2020, in conjunction with the issuance of the 2025 Senior Notes, CPG International LLC satisfied and discharged its obligations with respect to the 2021 Senior Notes, which were redeemed in full on June 8, 2020 at a redemption price equal to par plus accrued and unpaid interest to the redemption date.
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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.
Off-Balance Sheet Arrangements
In addition to our debt guarantees, we have contractual commitments for purchases of certain minimum quantities of raw materials at index-based prices, and non-cancelable capital and operating leases, outstanding letters of credit and fixed asset purchase commitments. We have no other material non-cancelable guarantees or commitments, and no material special purpose entities or other off-balance sheet debt obligations.
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 the Prospectus, except as updated in Note 1 of our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate risk relates to the Senior Secured Credit Facilities. To meet our seasonal working capital needs, we borrow periodically on our variable rate revolving line of credit under the Revolving Credit Facility. As of June 30, 2020 and September 30, 2019, we had $467.1 million and $808.5 million, respectively, outstanding under the Term Loan Agreement and $44.0 million and $0.0 million outstanding under the Revolving Credit Facility. The Term Loan Agreement and Revolving Credit Facility bear interest at variable rates. An increase or decrease of 100 basis points in the floating rates on the amounts outstanding under the Senior Secured Credit Facilities as of June 30, 2020 and 2019, would have increased or decreased, respectively, annual cash interest by approximately $5.1 million and $8.1 million, respectively.
In the future, in order to manage our interest rate risk, we may refinance our existing debt or enter into interest rate swaps or otherwise hedge the risk of changes in the interest rate under the Senior Secured Credit Facilities. However, we do not intend or expect to enter into derivative or interest rate swap transactions for speculative purposes.
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Credit Risk
As of June 30, 2020 and September 30, 2019, our cash and cash equivalents were maintained at major financial institutions in the United States, and our current deposits are likely in excess of insured limits. We believe these institutions have sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk to us.
Our accounts receivable primarily relate to revenue from the sale of products primarily to established distributors inside of the United States. To mitigate credit risk, ongoing credit evaluations of customers financial condition are performed. As of June 30, 2020, and September 30, 2019, no customer represented more than 10% of our gross trade accounts receivable.
Foreign Currency Risk
Substantially all of our business is currently conducted in U.S. dollars. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar as compared to other currencies would have a material effect on our operating results.
Inflation
Our cost of sales is subject to inflationary pressures and price fluctuations of the raw materials we use. Historically, we have generally been able over time to recover the effects of inflation and price fluctuations through sales price increases and production efficiencies associated with technological enhancements and volume growth; however, we cannot reasonably estimate our ability to successfully recover any price increases in the future.
Raw Materials
We rely upon the supply of certain raw materials in our production processes; however, we do not typically enter into fixed price contracts with our suppliers and currently have no fixed price contracts with our major vendors. The primary raw materials we use in the manufacture of our products are various petrochemical resins, including polyethylene, polypropylene and PVC resins, reclaimed polyethylene and PVC material, waste wood fiber and aluminum. In addition, we utilize a variety of other additives including modifiers, TiO2 and pigments. The exposures associated with these costs are primarily managed through terms of the sales and by maintaining relationships with multiple vendors. Prices for spot market purchases are negotiated on a continuous basis in line with the market at the time. We have not entered into hedges with respect to our raw material costs at this time, but we may choose to enter into such hedges in the future. Other than short term supply contracts for resins with indexed based pricing and occasional strategic purchases of larger quantities of certain raw materials, we generally buy materials on an as-needed basis.
The cost of some of the raw materials we use in the manufacture of our products is subject to significant price volatility. For example, the cost of petrochemical resins used in our manufacturing processes has historically varied significantly and has been affected by changes in supply and demand and in the price of crude oil. Substantially all of our resins are purchased under supply contracts that average approximately one to two years, for which pricing is variable based on an industry benchmark price index. The resin supply contracts are negotiated annually and generally provide that we are obligated to purchase a minimum amount of resins from each supplier. In addition, the price of reclaimed polyethylene material, waste wood fiber, aluminum, other additives (including modifiers, TiO2 and pigments) and other raw materials fluctuates depending on, among other things, overall market supply and demand and general business conditions.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the evaluation of our disclosure controls and procedures as of June 30, 2020, our principal executive officer and principal financial officer concluded that, as a result of material weaknesses in our internal control over financial reporting as described below, our disclosure controls and procedures were not effective as of June 30, 2020.
Material Weaknesses in Internal Control over Financial Reporting
As of September 30, 2019, we determined that we have three material weaknesses in our internal control over financial reporting. The first material weakness relates to the maintenance of an effective control environment as we lacked a sufficient complement of resources. This material weakness contributed to an additional material weakness relating to the design and maintenance of formal accounting policies, procedures and controls. The third relates to the design and maintenance of effective controls over certain information technology general controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a companys annual or interim financial statements will not be prevented or detected on a timely basis.
The first material weakness relates to the fact that we did not design or maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient complement of resources with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. This material weakness contributed to the following additional three material weaknesses.
The second material weakness relates to the fact that we did not design and maintain adequate formal accounting policies, procedures and controls, or maintain documentary evidence of existing control activities. Specifically, we did not design and maintain adequate formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including adequate controls over the preparation and review of account reconciliations and journal entries. Additionally, we did not maintain adequate documentary evidence of existing control activities, and we did not design and maintain controls over the appropriate classification and presentation of accounts and disclosures in the financial statements.
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As of September 30, 2019, we also have a third material weakness as a result of the material weakness in our control environment in that we did not design and maintain effective controls over certain information technology, or IT, general controls for information systems and applications that are relevant to the preparation of the financial statements. Specifically, we did not design and maintain:
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User access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs and data to appropriate company personnel; |
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Program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately; |
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Computer operations controls to ensure that critical batch jobs are monitored, and data backups are authorized and monitored; and |
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Testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements. |
These IT control deficiencies did not result in a misstatement to our financial statements. However, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatements to one or more assertions, and IT controls and underlying data that support the effectiveness of IT system-generated data and reports).
Each of the material weaknesses described above involve control deficiencies that could result in a misstatement of one or more account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected, and, accordingly, we determined that these control deficiencies constitute material weaknesses.
Managements Plan to Remediate the Material Weaknesses
We are currently in the process of implementing measures and taking steps to address the underlying causes of the material weaknesses. Our efforts to date have included the following:
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We hired finance and accounting personnel with prior work experience in finance and accounting departments of public companies and with technical accounting, financial controls and SEC reporting experience, including the hiring of our Chief Financial Officer in January 2019 and our Chief Accounting Officer in April 2019. We have also reorganized our finance department to place finance personnel in line with our operating functions and to improve internal control over business processes and IT operations. |
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Although we have not remediated the material weaknesses related to the maintenance of an effective control environment and related to the design and maintenance of formal policies, procedures and internal controls, we have designed and are currently implementing formal accounting policies and procedures, training on standards of documentary evidence, as well as implementing additional controls to ensure the reliability of critical spreadsheets and system-generated reports. |
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Specifically, we have designed and implemented the following as part of our ongoing remediation efforts: |
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We formalized and issued accounting policies and position papers covering critical accounting areas. |
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We risk ranked business process controls for remediation to address higher priority areas first. |
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We strengthened controls related to review of account reconciliations, journal entries and balance sheet and income statement fluctuation analysis. |
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We enhanced controls related to the consolidation of financial information of all of our operating companies. |
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We provided training to strengthen process documentation and evidence of control operation, as well as precision of review controls. |
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To complete our remediation plan, we will perform testing to confirm that such controls are designed and operating effectively for a sufficient period of time. |
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Although we have not remediated the material weakness related to the design and maintenance of effective controls over certain information technology general controls, we have designed and are currently implementing an IT general controls framework that addresses risks associated with user access and security, application change management and IT operations; focused training for control owners to help sustain effective control operations; and comprehensive remediation efforts relating to segregation of duties to strengthen user access controls and security. |
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Specifically, we have designed and implemented the following as part of our ongoing remediation: |
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We have risk ranked segregation of duties conflicts within our core financial system, remediated the highest priority conflicts and, where necessary, identified and validated mitigating controls. |
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We enhanced and implemented user administration processes that manage how we grant, modify, and remove user access to our financial applications. We completed a comprehensive review of privileged user access across our financial applications to confirm that access rights are restricted to authorized users based on business need. |
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We enhanced and implemented processes for managing changes to our financial applications (including controls that require all changes to be formally submitted, approved, tested and migrated to production by authorized users) as well as over program development. |
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We enhanced and implemented processes over our computer operations that restrict access to and continually monitor production batch jobs that support our financial reporting applications. |
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To complete our IT general controls remediation plan we will perform testing to confirm that such controls are operating effectively. |
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While we believe these efforts will improve our internal controls and address the underlying causes of the three material weaknesses, such material weaknesses will not be remediated until our remediation plan has been fully implemented and we have concluded that our controls are operating effectively for a sufficient period of time. We cannot be certain that the steps we are taking will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or prevent future material weaknesses or control deficiencies from occurring. In addition, we cannot be certain that we have identified all material weaknesses in our internal control over financial reporting, or that in the future we will not have additional material weaknesses in our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
Other than the changes intended to remediate the material weaknesses noted above, there were no changes in our internal control over financial reporting during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
OTHER INFORMATION
We are subject to various lawsuits, as well as other claims, that arise from time to time, which are ordinary routine litigation and claims incidental to the business. With respect to pending lawsuits and claims, management has evaluated their merits, and, while their outcome cannot be predicted with certainty, management believes that their ultimate resolution will not have a material adverse effect on our business, financial condition or results of operations.
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Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all of the other information contained in the Prospectus, including our Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Prospectus, before making an investment decision. In addition to the risks relating to the COVID-19 pandemic that are specifically described in these Risk Factors, the effects of the COVID-19 pandemic may also have the effect of significantly heightening many of the other risks associated with our business and an investment in our Class A common stock, including the other risks described in this Quarterly Report on Form 10-Q and in the Prospectus. The occurrence of any of the following risks, or additional risks not presently known to us or that we currently believe to be immaterial, could materially and adversely affect our business, financial condition, results of operations and prospects. In such case, the trading price of our Class A common stock could decline, and you may lose all or part of your investment.
Risks Relating to Our Business and Industry
Our business, financial condition and results of operations are being, and are expected to continue to be, adversely affected by the current COVID-19 public health pandemic.
Any outbreaks of contagious diseases, public health epidemics or pandemics and other adverse public health developments could have a material adverse effect on our business, financial condition and results of operations. The COVID-19 pandemic, and the reactions of governmental and other authorities to contain, mitigate or combat the pandemic, which have severely restricted the level of economic activity around the world, have impacted, and are expected to continue to impact, our operations, and the nature, extent and duration of the impact of COVID- 19 or any future disease or adverse health condition is highly uncertain and beyond our control. In response to the COVID-19 pandemic, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations.
Although we have implemented measures to mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations, including reducing our production and expenses, these measures may not fully mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations. We cannot predict the degree to, or the period over, which we will be affected by the COVID-19 pandemic and resulting governmental and other measures.
We expect that the economic effects of the COVID-19 pandemic will likely continue to adversely affect demand for our products over the balance of fiscal 2020. To address the anticipated reduction in demand for our products, we are engaging directly with our distributors to share information on market demand and ensure supply and inventory levels are appropriate. We are also reducing production across our manufacturing sites to align our output with potential reductions in demand during the balance of the year. We anticipate that distributors and dealers may choose to delay the purchase of our products, and homeowners and our industrial and commercial customers may choose to delay new construction or repair and remodeling activity, in response to the COVID-19 pandemic and the measures to contain its spread.
In addition, our supply chain is largely concentrated in the United States, and although it has not been significantly affected by the COVID-19 pandemic to date, we may experience disruptions or delays in our supply chain in connection with the pandemic in the future, which may result in the need to seek alternate suppliers. Alternate suppliers may be more expensive, may not be available or may encounter delays in shipments to us, which would affect our business, financial condition and results of operations. We cannot estimate the extent and duration of the disruption to our supply chain, or the significance of the related financial impact. Should any such disruption continue for an extended period of time, the impact could have a material adverse effect on our business, financial condition and results of operations.
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On March 16, 2020, we borrowed $89.0 million under the Revolving Credit Facility to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic in addition to our other borrowings under the Revolving Credit Facility of $40.0 million in the aggregate during the three months ended March 31, 2020. Using net proceeds we received from the issuance of the 2025 Senior Notes and from the IPO, we repaid $85.0 million in aggregate, of outstanding principal amount under the Revolving Credit Facility. In the longer term, our liquidity will depend on many factors, including our results of operations, our future growth, the timing and extent of our expenditures to develop new products and improve our manufacturing capabilities, the expansion of our sales and marketing activities and the extent to which we make acquisitions. Changes in our operating plans, material changes in anticipated sales, increased expenses, acquisitions or other events may cause us to seek additional equity and/or debt financing in future periods. We cannot assure you if our access to capital would continue to satisfy our needs under the impacts of the COVID-19 pandemic.
We expect that the COVID-19 pandemic will affect many aspects of our business, including, but not limited to, the following:
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We expect to experience reductions in demand for many of our products due to the economic uncertainty resulting from the COVID-19 pandemic, an increase in unemployment rates, and distributors, dealers suppliers, homeowners and other third parties diminished financial condition or financial distress. |
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Our distributors and dealers may be unable to meet their payment obligations to us in a timely manner. Further, other third parties, such as suppliers and other outside business partners, may experience significant disruptions in their ability to satisfy their obligations with respect to us, or they may be unable to do so altogether. |
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Measures that we have taken to address the COVID-19 pandemic, including, among other things, providing additional safety equipment, reducing our production, encouraging our employees who are able to work remotely to do so, enacting and enforcing employee physical distancing protocols in our factories and reducing the need for face-to-face interactions, are reducing the efficiency of our operations. |
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Additionally, we may be exposed to increased cybersecurity risks as a result of remote working requirements. |
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Illness, travel restrictions or other workforce disruptions could negatively affect our supply chain, our ability to timely and satisfactorily meet our customers demands or our other business processes. Even after the COVID-19 pandemic subsides, we could experience a longer-term impact on our operating expenses, including as a result of, among other things, the need for enhanced health and hygiene requirements in our manufacturing facilities and in our corporate offices or the periodic revival of physical or social distancing or other measures in one or more regions, including the states where our manufacturing facilities are located, in attempts to counteract or prevent future outbreaks. |
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We have reduced the number of employees that we employ in order to reduce our operating expenses. We may experience difficulties associated with hiring additional employees or replacing employees. Increased turnover rates of our employees could increase operating costs and create challenges for us in maintaining high levels of employee awareness of, and compliance with, our internal procedures and external regulatory compliance requirements, in addition to increasing our recruiting, training and supervisory costs. |
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In addition to existing travel restrictions implemented in response to the COVID-19 pandemic, states and other jurisdictions may continue to close borders, impose prolonged quarantines and further restrict travel and business activity, which could materially impair our ability to support our operations and customers, to source supplies through our supply chain and to identify, pursue and capture new business opportunities, and which could continue to restrict the ability of our employees to access their workplaces. We also face the possibility of increased overhead or other expenses resulting from compliance with any future government orders or other measures enacted in response to the COVID-19 pandemic. |
Our management of the impact of COVID-19 has required, and will continue to require, significant investment of time by our management and employees as well as other resources. The focus on managing and mitigating the impacts of COVID-19 on our business will likely cause us to divert or delay the application of our resources toward new initiatives, including the development of new products, which may adversely impact our financial condition and results of operations in future periods.
The timing for us resuming operations at or near the levels of operations experienced before the COVID-19 pandemic depends on numerous factors beyond our control, including, among other things: (1) the duration of, any revisions in, and the possible reimposition of governmental quarantine, shelter-in-place or similar social distancing orders or guidelines; (2) the occurrence and magnitude of future outbreaks, including localized outbreaks where our manufacturing facilities are located; (3) the availability of vaccines or other medical remedies and preventive measures; and (4) broader economic conditions, including unemployment levels and the reaction of consumers to potentially longer-term economic uncertainty, which may adversely impact our financial condition and results of operations in future periods.
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Additionally, although we are reviewing and will review any available benefits under the federal and state relief and stimulus legislation and programs, whether presently enacted or enacted in the future, including, among other things, those under the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, at this time, we do not know whether we will be able to access any such benefits in a manner that is advantageous to us or at all.
Demand for our products is significantly influenced by general economic conditions and trends in consumer spending on outdoor living and home exteriors, and adverse trends in, among other things, the health of the economy, repair and remodel and new construction activity, industrial production, consumer confidence and discretionary spending and institutional funding constraints could have a material adverse effect on our business.
Demand for our products is significantly influenced by a number of economic factors affecting our customers, including distributors, dealers, contractors, architects, builders, homeowners and institutional and commercial consumers. Demand for our products depends on the level of residential and commercial improvement and renovation and new construction activity, and, in particular, the amount of spending on outdoor living spaces and home exteriors. Home and commercial renovation and improvement and new construction activity are affected by, among other things, interest rates, consumer confidence and spending habits, demographic trends, housing affordability levels, unemployment rates, institutional funding constraints, industrial production levels, tariffs and general economic conditions.
For example, in our Residential segment, sales of our products depend primarily on the level of repair and remodel activity and, to a lesser extent, new construction activity. Accordingly, increases in interest rates or the reduced availability of financing can reduce the level of home improvement and new construction activity and the demand for our products. In addition, the residential repair and remodel market depends in part on home equity financing, and accordingly, the level of equity in homes will affect consumers ability to obtain a home equity line of credit and engage in renovations that would result in purchases of our products. Accordingly, a weakness in home prices may result in a decreased demand for our residential products.
Many of our residential products are impacted by consumer demand for, and spending on, outdoor living spaces and home exteriors. For example, sales of our deck and rail products depend on lifestyle and architectural trends and the extent to which consumers prioritize spending to enhance outdoor living spaces for their homes. While we believe consumer preferences have increased spending on outdoor living and home exteriors in recent years, the level of spending could decrease in the future. Decreased spending on outdoor living spaces and home exteriors generally or as a percentage of home improvement activity may decrease demand for our deck, railing and trim products.
Demand for our products in our Commercial segment is affected by the level of commercial and governmental construction and renovation activity. The levels of commercial and governmental construction and renovation activity are affected by the levels of interest rates, availability of financing for commercial and industrial projects, the general business environment and the availability of governmental funding. Sales of products by our Commercial segment include sales for use in institutions, such as universities and schools, and in federal, state and local government buildings, which depend on federal, state and local funding for construction and renovation projects. Sales to institutions that depend on public funding are affected by factors that may impose constraints on funding availability for construction and renovation projects, including increased operational costs, budget cuts by federal, state and local governments, including as a result of lower than anticipated tax revenues, increased limitations on federal spending or government shutdowns. Sales to commercial establishments depend on, among other things, general levels of industrial production and business growth and the performance of the various markets in which our commercial end customers operate.
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Adverse trends in any of the foregoing factors could reduce our sales and have a material adverse effect on our business, financial condition and results of operations. Such factors could also alter the balance of our Residential and Commercial sales or the balance of our product sales within either such segment. In light of differing margins, changes in the relative amount and type of residential and commercial industrial activity or the mix of products sold may have an impact on our business and cause our revenues and profitability to fluctuate from period to period.
We operate in a competitive business environment. If we are unable to compete effectively, our sales would suffer and our business, financial condition and operating results would be adversely affected.
We operate in a competitive business environment, and we compete with multiple companies with respect to each of our products. While we have longstanding business relationships with many of our distributors, dealers and contractors, we generally do not have long-term contracts with these customers. Accordingly, any failure to compete effectively, including as a result of the various factors described below, could cause our customers to cease purchasing our products or rapidly decrease our sales.
Our residential products compete primarily with wood products that comprise the majority of decking, railing, trim and related market sales. We also compete with metal products and with engineered products sold by other companies. In our Commercial segment, we compete in several highly fragmented markets. Our Vycom products compete with products sold into narrow market segments with a wide range of end uses through specialized distribution networks that vary depending on the particular end use. Products made by Scranton Products compete with bathroom partitions, lockers and storage solutions sold at a wide range of prices and manufactured using a variety of materials.
Our business model relies on the continued conversion in demand from traditional wood products to our engineered products, and our business could suffer if this conversion does not continue in the future. A number of suppliers of wood and wood composite deck, trim and rail products have established relationships with contractors, builders and large home improvement retailers, and, to compete successfully, we must expand and strengthen our relationships with those parties. We must also compete successfully with products from other manufacturers that offer alternatives to wood and wood composite products, including by developing competitive new products and by responding successfully to new products introduced, and pricing and other competitive actions taken, by competitors.
Some of our competitors have financial, production, marketing and other resources that are significantly greater than ours. Consolidation by industry participants could further increase their resources and result in competitors with expanded market share, larger customer bases, greater diversified product offerings and greater technological and marketing expertise, which may allow them to compete more effectively against us. Moreover, our competitors may develop products that are superior to our products (on a price-to-value basis or otherwise) or may adapt more quickly to new technologies or evolving customer requirements. Technological advances by our competitors may lead to new manufacturing techniques and make it more difficult for us to compete.
Our quarterly operating results may fluctuate as a result of seasonality, changes in weather conditions and changes in product mix.
Our quarterly operating results during the fiscal year ending September 30, 2020 and in future fiscal years may fluctuate or otherwise be significantly affected as a result of the COVID-19 pandemic. The effect of the pandemic may exceed the quarterly changes in our operating results that we have typically experienced from seasonality, weather conditions and product mix.
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We have typically experienced moderately higher levels of sales of our residential products in the second fiscal quarter of the year as a result of our early buy sales and extended payment terms typically available during the second fiscal quarter of the year. As a result of these extended payment terms, our accounts receivable have typically reached seasonal peaks at the end of the second fiscal quarter of the year, and our net cash provided by operating activities has typically been lower in the second fiscal quarter relative to other quarters. Our sales are also generally impacted by the number of days in a quarter or a year that contractors and other professionals are able to install our products. We have generally experienced lower levels of sales of residential products during the first fiscal quarter due to adverse weather conditions in certain markets, which typically reduces the construction and renovation activity during the winter season. Although our products can be installed year-round, unusually adverse weather conditions can negatively impact the timing of the sales of certain of our products, causing reduced sales and negatively impacting profitability when such conditions exist. Our residential products are generally purchased shortly before installation and used in outdoor environments. As a result, there is a correlation between the amount of products we sell and weather conditions during the time they are to be installed. Adverse weather conditions may interfere with ordinary construction, delay projects or lead to cessation of construction involving our products. Prolonged adverse weather conditions could significantly reduce our sales in one or more periods. These conditions may shift sales to subsequent reporting periods or decrease overall sales, given the limited outdoor construction season in many locations. In addition, we have experienced higher levels of sales of our engineered bathroom partition products and our locker products during the second half of our fiscal year, which includes the summer months during which schools are typically closed and therefore more likely to be undergoing remodel activities. These factors can cause our operating results to fluctuate on a quarterly basis.
Our operating results may also fluctuate due to changes in the mix of products sold. We sell products at different prices, composed of different materials and involving varying levels of manufacturing complexity. Changes in the mix of products sold from period to period may affect our average selling price, cost of sales and gross margins.
If we fail to develop new and improved products successfully, or fail to effectively manage the introduction of new products, our business will suffer.
Our continued success depends on our ability to predict the products that will be demanded by our customers and consumers, such as homeowners or commercial or industrial purchasers, and to continue to innovate and introduce improved products in our existing product lines and products in new product categories. We may not be successful in anticipating these needs or preferences or in developing new and improved products. If we do not respond effectively to changing market trends, demands and preferences and to actions by competitors by introducing competitive new products, our business, financial condition and results of operations would suffer.
Even if we do introduce new products in the market, consumers may not choose our new products over existing products. In addition, competitors could introduce new or improved products that would replace or reduce demand for our products or develop proprietary changes in manufacturing technologies that may render our products obsolete or too expensive to compete effectively. In addition, when we introduce new products, we must effectively anticipate and manage the effect of new product introductions on sales of our existing products. If new products displace sales of existing products more broadly or rapidly than anticipated, we may have excess inventory of existing products and be required to reduce prices on existing products, which could adversely affect our results of operations. As we continue to introduce new products at varying price points to broaden our product offerings to compete with products made with wood or other traditional materials across a wide range of prices, our overall gross margins may vary from period to period as a result of changes in product mix.
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Moreover, we may introduce new products with initially lower gross margins with the expectation that the gross margins associated with those products may improve over time as we improve our manufacturing efficiency for those products, and our results of operations would be adversely affected if we are unable to realize the anticipated improvements.
In the past we have devoted, and in the future we expect to continue to devote, significant resources to developing new products. However, we cannot be sure that we will successfully complete the development and testing of new products and be able to release the products when anticipated or at all. From time to time, we may make investments in the development of products we ultimately determine not to release resulting in write-downs of inventory and related assets.
Our business would suffer if we do not effectively manage changes in our manufacturing processes resulting from growth of our business, cost savings and integration initiatives and the introduction of new technologies and products.
We continually review our manufacturing operations in an effort to achieve increased manufacturing efficiencies, integrate new technologies and to address changes in our product lines and in market demand. Periodic manufacturing integrations, realignments and cost savings programs and other changes have adversely affected, and could in the future adversely affect, our operating efficiency and results of operations during the periods in which such programs are being implemented. Such programs may include the addition of manufacturing lines and the consolidation, integration and upgrading of facilities, functions, systems and procedures, including the introduction of new manufacturing technologies and product innovations. These programs involve substantial planning, often require capital investments, and may result in charges for fixed asset impairments or obsolescence and substantial severance costs. Our ability to achieve cost savings or other benefits within the time frames we anticipate is subject to many estimates and assumptions, a number of which are subject to significant economic, competitive and other uncertainties. For example, we have made substantial investments to expand our recycling capabilities and to increase the use of reclaimed materials in our manufacturing processes. While we anticipate that enhancing these capabilities will ultimately decrease our costs, the introduction of these capabilities has required significant initial investment, and we cannot be certain we will realize the benefits of this initiative when anticipated or at all. If these investments and other changes are not effectively integrated into our manufacturing processes, we may suffer from production delays, lower efficiency and manufacturing yields, increased costs and reduced net sales.
We must also effectively address changes to our manufacturing operations resulting from growth of our business generally and introduction of new products. As we increase our manufacturing capacity to meet market demand or begin to manufacture new products at scale, we may face unanticipated manufacturing challenges as production volumes increase, new processes are implemented and new supplies of raw materials used in these products are secured. New products may initially be more costly and less efficient to produce than our existing products. In addition, we could experience delays in production as we increase our manufacturing capacity or begin to manufacture new products that may result in the products ordered by our customers being on back-order as initial production issues are addressed. As a result, increases in manufacturing capacity or the introduction of new products may initially be associated with lower efficiency and manufacturing yields and increased costs, including shipping costs to fill back-orders. If we experience production delays or inefficiencies, a deterioration in the quality of our products or other complications in managing changes to our manufacturing processes, including those that are designed to increase capacity, enhance efficiencies and reduce costs or that relate to new products or technologies, we may not achieve the benefits that we anticipate from these actions when expected, or at all, and our operations could experience disruptions, our manufacturing efficiency could suffer and our business, financial condition and results of operations could be materially and adversely affected.
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Our sales and results of operations may suffer if we do not maintain our relationships with, forecast the demand of and make timely deliveries to our key distributors or other customers.
Our operations depend upon our ability to maintain our strong relationships with our network of distributors and dealers. Our top ten distributors collectively accounted for a majority of our net sales for the year ended September 30, 2019. Our largest distributor, Parksite Inc., accounted for approximately 20% of our net sales for the year ended September 30, 2019. While we have long-standing business relationships with many of our key distributors and our distribution contracts generally provide for exclusive relationships with respect to certain products within certain geographies, these contracts typically permit the distributor to terminate for convenience on several months notice. The loss of, or a significant adverse change in, our relationships with one or more of our significant distributors could materially reduce our net sales.
Distributors and dealers that sell our products are sensitive to meeting the demands of their end customers on a timely basis. Dealers that sell our products typically place orders with our distributors that need to be filled in a short time frame, and these dealers typically do not have an exclusive relationship with us. Purchases by our distributors and dealers are affected by their individual decisions on the levels of inventory they carry, their views on product demand, their financial condition and the manner in which they choose to manage inventory risk. In addition, purchases by distributors and dealers are affected by a variety of other factors, including product pricing, increases in the number of competitive producers and the production capacity of other producers, new product introductions, changes in levels of home renovation and new construction activity, and weather-related fluctuations in demand. As a result, demand for our products can be difficult to predict. If we do not forecast and plan production effectively to manufacture sufficient products to meet demand or if we experience delays in our ability to manufacture products, dealers may seek alternative products, including those of our competitors. Failure to meet demand requirements on a timely basis may cause distributors or dealers to build up inventory as a precautionary measure, rapidly shift their product mix away from our products, harm our long-term relationships with distributors and dealers, harm our brand and reduce, or increase the variability of, our net sales.
We must continue to provide product offerings at price points that meet the needs of distributors and dealers and that they perceive to be competitive with the products on the market. If our key distributors or dealers are unwilling to continue to sell our products at existing or higher levels, or if they desire to sell competing products alongside our products, our ability to maintain or increase our sales could suffer. In addition, mergers or acquisitions involving our distributors or dealers and one of our competitors, or a distributor or dealer with a relationship with one of our competitors, could decrease or eliminate purchases of our product by that distributor or dealer. If a key distributor or dealer were to terminate its relationship with us or reduce purchases of our products, we may not be able to replace that relationship with a relationship with a new distributor or dealer in a timely manner or at all. In addition, any such new relationship may take time to develop and may not be as favorable to us as the relationship it is replacing. The loss of, or a reduction in orders from, any significant distributor or dealer, may have a material adverse effect on our business, financial condition or results of operations.
Shortages in supply, price increases or deviations in the quality of the raw materials used to manufacture our products could adversely affect our sales and operating results.
The primary raw materials used in our products are various petrochemical resins, including polyethylene, polypropylene and PVC resins, reclaimed polyethylene and PVC material, waste wood fiber and aluminum. We also utilize other additives including modifiers, TiO2 and pigments. Our contracts with key suppliers are typically short term in nature, with terms generally ranging from one to three years. While we do not rely on any single supplier for the majority of our raw materials, we do obtain certain raw materials from single or a limited number of suppliers. In particular, we rely on a single supplier for certain
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critical capped compounds used in our deck and railing products. We do not currently have arrangements in place for a redundant or second-source supply for those compounds. If one or more suppliers were unable to satisfy our requirements for particular raw materials, we believe alternative sources of supply would be available. However, we could experience a disruption to our operations as alternative suppliers are identified and qualified and new supply arrangements are entered into, and we cannot be sure we will be able to identify alternative sources of supply rapidly, without incurring significant costs or at all.
In the event of an industry-wide general shortage of our raw materials, a shortage affecting or discontinuation in providing any such raw materials by one or more of our suppliers or a suppliers declaration of force majeure, we may not be able to arrange for alternative sources of such materials on a timely basis or on equally favorable terms. We have also recently significantly increased the use of reclaimed polyethylene and PVC material in our products. As we increase our use of such materials and introduce new materials into our manufacturing processes, we may be unable to obtain adequate quantities of such new raw materials in a timely manner. Any such shortage may materially adversely affect our production process as well as our competitive position as compared to companies that are able to source their raw materials more reliably or at lower cost.
In addition, significant increases in the cost of the raw materials used to manufacture our products could adversely affect our operating results. The cost of some of the raw materials we use in the manufacture of our products is subject to significant price volatility. For example, the cost of petrochemical resins used in our manufacturing processes has historically varied significantly and has been affected by changes in supply and demand and in the price of crude oil. We have not entered into hedges of our raw material costs, and our supply contracts with our major vendors do not contain obligations to sell raw materials to us at a fixed price.
Accordingly, we are exposed to the risk of increases in the market prices of raw materials used in the manufacture of our products. Our results of operations have been affected in the past by changes in the cost of resins, and we expect that our results of operations in the future will continue to be affected by changes in resin costs. In the event of an increase in the cost of resins or other raw materials, we may not be able to recover the increases through corresponding increases in the prices of our products. Even if we are able to increase prices over time, we may not be able to increase prices as rapidly as the increase in our costs. If we are unable to increase our prices or experience a delay in our ability to increase our prices or to recover such increases in our costs, our gross profit will suffer. In addition, increases in the price of our products to compensate for increased costs of raw materials may reduce demand for our products and adversely affect our competitive position as compared to products made of other materials, such as wood and metal, that are not affected by changes in the price of resins and some of the other raw materials that we use in the manufacture of our products.
We are dependent upon the ability of our suppliers to consistently provide raw materials that meet our specifications, quality standards and other applicable criteria. Our suppliers failure to provide raw materials that meet such criteria could adversely affect production schedules and our product quality, which in turn could materially adversely affect our business, financial condition and results of operations.
An interruption of our production capability at one or more of our manufacturing facilities from pandemics, accident, calamity or other causes, or events affecting the global economy, could adversely affect our business.
We manufacture our products at a limited number of manufacturing facilities, and we generally do not have redundant production capabilities that would enable us to shift production of a particular product rapidly to another facility in the event of a loss of one of or a portion of one of our manufacturing facilities. A catastrophic loss of the use of one or more of our manufacturing facilities due to pandemics, including the COVID-19 pandemic, accident, fire, explosion, labor issues, tornado, other weather conditions, natural
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disasters, condemnation, cancellation or non-renewals of leases, terrorist attacks or other acts of violence or war or otherwise could have a material adverse effect on our production capabilities. In addition, unexpected failures, including as a result of power outages or similar disruptions outside of our control, of our equipment and machinery could result in production delays or the loss of raw materials or products in the equipment or machinery at the time of such failures. Any of these events could result in substantial revenue loss and repair costs. An interruption in our production capabilities could also require us to make substantial capital expenditures to replace damaged or destroyed facilities or equipment. There are a limited number of manufacturers that make some of the equipment we use in our manufacturing facilities, and we could experience significant delay in replacing manufacturing equipment necessary to resume production. An interruption in our production capability, particularly if it is of significant duration, could result in a permanent loss of customers who decide to seek alternate products.
Our business operations could be adversely affected by the loss of the services from members of our senior management team and other key employees.
Our success depends in part on the continued contributions of our senior management and other key employees. Our senior operating management members have extensive sales and marketing, engineering, product development, manufacturing and finance backgrounds. The loss of any member of our senior management team or other key employees in the future could significantly impede our ability to successfully implement our business strategy, financial plans, product development goals, marketing initiatives and other objectives. Should we lose the services of any member of our senior management team or key personnel, replacing such personnel could involve a prolonged search and divert management time and attention and we may not be able to locate and hire a qualified replacement. We do not carry key man insurance to mitigate the financial effect of losing the services of any member of our management team.
Acquisitions or joint ventures we may pursue in the future may be unsuccessful.
We may consider the acquisition of other manufacturers or product lines of other businesses that either complement or expand our existing business, or may enter into joint ventures. We cannot assure you that we will be able to consummate any such acquisitions or joint ventures or that any future acquisitions or joint ventures will be able to be consummated at acceptable prices and on acceptable terms. Any future acquisitions or joint ventures we pursue may involve a number of risks, including some or all of the following:
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difficulty in identifying acceptable acquisition candidates; |
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the inability to consummate acquisitions or joint ventures on favorable terms and to obtain adequate financing, which financing may not be available to us at times, in amounts or on terms acceptable to us, if at all; |
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the diversion of managements attention from our core businesses; |
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the disruption of our ongoing business; |
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entry into markets in which we have limited or no experience; |
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the inability to integrate our acquisitions or enter into joint ventures without substantial costs, delays or other problems; |
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unexpected liabilities for which we may not be adequately indemnified; |
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inability to enforce indemnification and non-compete agreements; |
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failing to successfully incorporate acquired product lines or brands into our business; |
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the failure of the acquired business or joint venture to perform as well as anticipated; |
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the failure to realize expected synergies and cost savings; |
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the loss of key employees or customers of the acquired business; |
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increasing demands on our operational systems and the potential inability to implement adequate internal controls covering an acquired business or joint venture; |
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any requirement that we make divestitures of operations or property in order to comply with applicable antitrust laws; |
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possible adverse effects on our reported operating results, particularly during the first several reporting periods after the acquisition is completed; and |
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impairment of goodwill relating to an acquired business, which could reduce reported income. |
Any of these risks could have a material adverse effect on our business, financial condition or results of operations.
In addition, acquisitions or joint ventures could result in significant increases in our outstanding indebtedness and debt service requirements or could involve the issuance of preferred stock or common stock that would be dilutive to existing stockholders. Incurring additional debt to fund an acquisition may result in higher debt service and a requirement to comply with additional financial and other covenants, including potential restrictions on future acquisitions and distributions. Funding an acquisition with our existing cash would reduce our liquidity. The terms of our existing and future debt agreements may limit the size and/or number of acquisitions we can pursue or our ability to enter into a joint venture.
Our business could be adversely affected if we fail to maintain product quality and product performance at an acceptable cost or if we incur significant losses, increased costs or harm to our reputation or brand as a result of product liability claims or product recalls.
In order to maintain and increase our net sales and sustain profitable operations we must produce high- quality products at acceptable manufacturing costs and yields. If we are unable to maintain the quality and performance of our products at acceptable costs, our brand, the market acceptance of our products and our results of operations would suffer. As we regularly modify our product lines and introduce changes to our manufacturing processes or incorporate new raw materials, we may encounter unanticipated issues with product quality or production delays. For example, we have recently introduced products that incorporate larger proportions of reclaimed raw materials, primarily reclaimed polyethylene and PVC. While we engage in product testing in an effort to identify and address any product quality issues before we introduce products to market, unanticipated product quality or performance issues may be identified after a product has been introduced and sold.
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In addition, we face the risk of exposure to product liability or other claims, including class action lawsuits, in the event our products are, or are alleged to be, defective or have resulted in harm to persons or to property. We may in the future incur significant liabilities if product liability lawsuits against us are successful. We may also have to recall and/or replace defective products, which would also result in adverse publicity and loss of sales, and would result in us incurring costs connected with the recall, which could be material. Any losses not covered by insurance could have a material adverse effect on our business, financial condition and results of operations. Real or perceived quality issues, including those arising in connection with product liability lawsuits, warranty claims or recalls, could also result in adverse publicity, which could harm our brand and reputation and cause our sales to decline rapidly. In addition, any such issues may be seized on by competitors in efforts to increase their market share.
We provide product warranties and, if our product warranty obligations were significantly in excess of our reserves, our business, financial condition and results of operations could be materially and adversely affected.
We provide various warranties on our products, ranging from five years to lifetime warranties depending on the product and subject to various limitations. Management estimates warranty reserves, based in part upon historical warranty costs, as a proportion of sales by product line. Management also considers various relevant factors, including our stated warranty policies and procedures, as part of the evaluation of our warranty liability. Because warranty issues may surface later in the life cycle of a product, management continues to review these estimates on a regular basis and considers adjustments to these estimates based on actual experience compared to historical estimates. Estimating the required warranty reserves requires a high level of judgment, especially as many of our products are at a relatively early stage in their product life cycles, and we cannot be sure that our warranty reserves will be adequate for all warranty claims that arise. We have recently increased our use of reclaimed materials in the manufacturing of our products. While we performed extensive testing in connection with the utilization of such materials, the use of reclaimed materials represents a recent and significant change in our business and the use of such materials may result in unanticipated product quality or performance issues and an increase in warranty claims for certain of our products. We have also recently introduced a new warranty that provides coverage for labor costs incurred in the replacement of products under warranty under specified circumstances. Although we have significant experience regarding warranty claims on our products generally, we do not have historical experience relating to warranty claims under the terms of this new warranty coverage. Warranty obligations in excess of our reserves could have a material adverse effect on our business, financial condition and results of operations.
We depend on third parties for transportation services, and the lack of availability of and/or increases in the cost of transportation could have a material adverse effect on our business and results of operations.
Our business depends on the transportation of both finished goods to our distributors and other customers and the transportation of raw materials to us primarily through the use of flatbed trucks and rail transportation. We rely on third parties for transportation of these items. The availability of these transportation services is subject to various risks, including those associated with supply shortages, change in fuel prices, work stoppages, operating hazards and interstate transportation regulations. In particular, a significant portion of our finished goods are transported by flatbed trucks, which are occasionally in high demand (especially at the end of calendar quarters) and/or subject to price fluctuations based on market conditions and the price of fuel.
If the required supply of transportation services is unavailable when needed, we may be unable to sell our products when they are requested by our customers. In that event, we may be required to reduce the price of the affected products, seek alternative and, potentially more costly, transportation services or be unable to sell the affected products. Similarly, if any of these transportation providers were unavailable to deliver raw materials to us in a timely manner, we may be unable to manufacture our products in response to customer demand. In addition, a significant increase in transportation rates or fuel surcharges could adversely affect our profitability. Any of these events could have a material adverse effect on our business and results of operations.
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Increases in labor costs, potential labor disputes and work stoppages or an inability to hire skilled manufacturing, sales and other personnel could adversely affect our business.
An increase in labor costs, work stoppages or disruptions at our facilities or those of our suppliers or transportation service providers, or other labor disruptions, could decrease our sales and increase our expenses. In addition, although our employees are not represented by a union, our labor force may become subject to labor union organizing efforts, which could cause us to incur additional labor costs and increase the related risks that we now face.
The competition for skilled manufacturing, sales and other personnel is intense in the regions in which our manufacturing facilities are located, including in Wilmington, Ohio and Scranton, Pennsylvania. A significant increase in the salaries and wages paid by competing employers could result in a reduction of our labor force, increases in the salaries and wages that we must pay or both. If we are unable to hire skilled manufacturing, sales and other personnel, our ability to execute our business plan, and our results of operations, would suffer.
If we are unable to collect accounts receivable from one or more of our significant distributors, dealers or other customers, our financial condition and operating results could suffer.
We extend credit to our distributors and, to a lesser extent, dealers and other customers, based on an evaluation of their financial condition, and we generally do not require collateral to secure these extensions of credit. The financial health of many of our customers is affected by changes in the economy and the cyclical nature of the building industry. The effects of the COVID-19 pandemic and the related economic downturn or protracted or severe economic declines and cyclical downturns from other causes in the building industry may cause our customers to be unable to satisfy their payment obligations, including their debts to us. While we maintain allowances for doubtful accounts, these allowances may not be adequate to provide for actual losses, and our financial condition and results of operation could be materially and adversely affected if our losses from doubtful accounts significantly exceed our estimates.
We may incur goodwill and other intangible or long-lived asset impairment charges that adversely affect our operating results.
We review our goodwill and other intangibles not subject to amortization for impairment annually, or when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit could be lower than its carrying value. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill or long-lived assets. No impairments were recorded for the nine months ended June 30, 2020 or the year ended September 30, 2019. In the event that we determine our goodwill or long-lived assets are impaired, we may be required to record a significant charge to earnings in our financial statements that could have a material adverse effect on our results of operations.
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We have identified material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses is not effective, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our Class A common stock may decline.
As of September 30, 2019, we determined that we have three material weaknesses in our internal control over financial reporting. The first material weakness relates to the maintenance of an effective control environment as we lacked a sufficient complement of resources. This material weakness contributed to an additional material weakness relating to the design and maintenance of formal accounting policies, procedures and controls. The third relates to the design and maintenance of effective controls over certain information technology general controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a companys annual or interim financial statements will not be prevented or detected on a timely basis.
The first material weakness relates to the fact that we did not design or maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient complement of resources with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. This material weakness contributed to the following additional three material weaknesses.
The second material weakness relates to the fact that we did not design and maintain adequate formal accounting policies, procedures and controls, or maintain documentary evidence of existing control activities. Specifically, we did not design and maintain adequate formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including adequate controls over the preparation and review of account reconciliations and journal entries. Additionally, we did not maintain adequate documentary evidence of existing control activities, and we did not design and maintain controls over the appropriate classification and presentation of accounts and disclosures in the financial statements.
We also had a previous material weakness, which was remediated during fiscal 2019, that related to the fact that we did not design and maintain formal accounting policies, procedures and controls to analyze, account for and disclose non-routine or complex transactions.
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As of September 30, 2019, we also have a third material weakness as a result of the material weakness in our control environment in that we did not design and maintain effective controls over certain information technology, or IT, general controls for information systems and applications that are relevant to the preparation of the financial statements. Specifically, we did not design and maintain:
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User access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs and data to appropriate company personnel; |
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Program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately; |
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Computer operations controls to ensure that critical batch jobs are monitored, and data backups are authorized and monitored; and |
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Testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements. |
These IT control deficiencies did not result in a misstatement to our financial statements. However, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatements to one or more assertions, and IT controls and underlying data that support the effectiveness of IT system-generated data and reports).
Each of the remaining material weaknesses described above involve control deficiencies that could result in a misstatement of one or more account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected, and, accordingly, we determined that these control deficiencies constitute material weaknesses.
We are in the process of taking steps intended to address the underlying causes of the material weaknesses and to remediate the three remaining material weaknesses. Our efforts to date have included: (i) hiring additional qualified finance and accounting personnel, including the hiring of a new Chief Financial Officer and Chief Accounting Officer; (ii) the implementation of formal policies, procedures and controls, training on standards of documentary evidence, as well as implementation of controls designed to ensure the reliability of critical spreadsheets and system generated reports; and (iii) designing and engaging in the implementation of an IT general controls framework that addresses risks associated with user access and security, application change management and IT operations, focused training for control owners to help sustain effective control operations and comprehensive remediation efforts relating to segregation of duties to strengthen user access controls and security.
While we believe these efforts will improve our internal controls and address the underlying causes of the three remaining material weaknesses, such material weaknesses will not be remediated until our remediation plan has been fully implemented and we have concluded that our controls are operating effectively for a sufficient period of time.
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We cannot be certain that the steps we are taking will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or prevent future material weaknesses or control deficiencies from occurring. In addition, we cannot be certain that we have identified all material weaknesses in our internal control over financial reporting, or that in the future we will not have additional material weaknesses in our internal control over financial reporting.
If we fail to effectively remediate the remaining material weaknesses in our internal control over financial reporting, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may be unable to accurately or timely report our financial condition or results of operations. We also could become subject to sanctions or investigations by the securities exchange on which our Class A common stock is listed, the SEC or other regulatory authorities. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets, and the trading price of our Class A common stock may decline.
If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations and the listing standards of the New York Stock Exchange, or the NYSE.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.
In addition to the material weaknesses in our internal control over financial reporting that we have identified, we may discover additional weaknesses in our disclosure controls and internal control over financial reporting in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial
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reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which could have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an emerging growth company as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material adverse effect on our business and operating results and could cause a decline in the price of our Class A common stock.
Subjective estimates and judgments used by management in the preparation of our financial statements, including estimates and judgments that may be required by new or changed accounting standards, may impact our financial condition and results of operations.
The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Due to the inherent uncertainty in making estimates, results reported in future periods may be affected by changes in estimates reflected in our financial statements for earlier periods. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. From time to time, there may be changes in the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some instances, we could be required to apply a new or revised standard retrospectively. If the estimates and judgments we use in preparing our financial statements are subsequently found to be incorrect or if we are required to restate prior financial statements, our financial condition or results of operations could be significantly affected.
The estimates and forecasts of market opportunity and market growth included in this prospectus may prove to be inaccurate, and we cannot assure you our business will grow at similar rates, or at all.
Estimates and forecasts of market size and opportunity and of market growth are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this Quarterly Report on Form 10-Q and in the Prospectus of the size of the markets that we may be able to address and the growth in these markets are subject to many assumptions and may prove to be inaccurate. In particular, the market and industry estimates in the Prospectus were prepared prior to the COVID-19 pandemic. We expect that the COVID-19 pandemic may materially reduce the growth of various of the markets discussed in the Prospectus, and we cannot predict the extent to which
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those estimates will be affected. Further, we may not be able to address fully the markets that we believe we can address, and we cannot be sure that these markets will grow at historical rates or the rates we expect for the future. Even if we are able to address the markets that we believe represent our market opportunity and even if these markets experience the growth we expect, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the estimates and forecasts of market size and opportunity and of market growth included in the Prospectus may not be indicative of our future growth.
We may be subject to significant compliance costs as well as liabilities under environmental, health and safety laws and regulations which could materially and adversely affect our business, financial condition and operations.
Our past and present operations, assets and products are subject to regulation by extensive environmental laws and regulations at the federal, state and local levels. These laws regulate, among other things, air emissions, the discharge or release of materials into the environment, the handling and disposal of wastes, remediation of contaminated sites, worker health and safety and the impact of products on human health and safety and the environment. Under some of these laws, liability for contaminated property may be imposed on current or former owners or operators of the property or on parties that generated or arranged for waste sent to the property for disposal. Liability under these laws may be joint and several and may be imposed without regard to fault or the legality of the activity giving rise to the contamination. Our facilities are located on sites that have been used for manufacturing activities for an extended period of time, which increases the possibility of contamination being present. Despite our compliance efforts, we may still face material liability, limitations on our operations or fines or penalties for violations of environmental, health and safety laws and regulations, including releases of regulated materials and contamination by us or previous occupants at our current or former properties or at offsite disposal locations we use.
We are also subject to permitting requirements under environmental, health and safety laws and regulations applicable in the jurisdictions in which we operate. Those requirements obligate us to obtain permits from one or more governmental agencies in order to conduct our operations. Such permits are typically issued by state agencies, but permits and approvals may also be required from federal or local governmental agencies. The requirements for such permits vary depending on the location where our regulated activities are conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued and the conditions that may be imposed in connection with the granting of the permit. Any failure to obtain or delay in obtaining a permit required for our operations, or the imposition of onerous conditions in any such permits, could adversely affect our business, financial condition and operations.
Applicable environmental, health and safety laws and regulations, and any changes to them or in their enforcement, may require us to make material expenditures with respect to ongoing compliance with, or remediation under, these laws and regulations or require that we modify our products or processes in a manner that increases our costs and/or reduces our profitability. For example, additional pollution control equipment, process changes or other environmental control measures may be needed at our facilities to meet future requirements. In addition, discovery of currently unknown or unanticipated soil or groundwater contamination at our properties could result in significant liabilities and costs. Accordingly, we are unable to predict the future costs of compliance with, or liability under, environmental, health and safety laws and regulations.
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Our business operations could suffer if we fail to adequately protect our intellectual property rights, and we may experience claims by third parties that we are violating their intellectual property rights.
We rely on trademark and service mark protection to protect our brands, and we have registered or applied to register many of these trademarks and service marks. In particular, we believe the AZEK and AZEK Exteriors brands, the TimberTech brand and the VERSATEX brand are significant to the success of our business. In the event that our trademarks or service marks are successfully challenged and we lose the rights to use those trademarks or service marks, or if we fail to prevent others from using them (or similar marks), we could be forced to rebrand our products, requiring us to devote resources to advertising and marketing new brands. In addition, we cannot be sure that any pending trademark or service mark applications will be granted or will not be challenged or opposed by third parties or that we will be able to enforce our trademark rights against counterfeiters.
We generally rely on a combination of unpatented proprietary know-how and trade secrets, and to a lesser extent, patents to preserve our position in the market. Because of the importance of our proprietary know-how and trade secrets, we employ various methods to protect our intellectual property, such as entering into confidentiality agreements with third parties, and controlling access to, and distribution of, our proprietary information. We may not be able to deter current and former employees, contractors and other parties from breaching confidentiality obligations and misappropriating proprietary information. It is difficult for us to monitor unauthorized uses of our products and technology. Accordingly, these protections may not be adequate to prevent competitors from copying, imitating or reverse engineering our products or from developing and marketing products that are substantially equivalent to or superior to our own.
In addition, we have applied for patent protection relating to certain existing and proposed products, processes and services or aspects thereof. We cannot be sure that any of our pending patent applications will be granted or that any patents issued as a result of our patent applications will be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage.
If third parties take actions that affect our rights or the value of our intellectual property or proprietary rights, or if we are unable to protect our intellectual property from infringement or misappropriation, other companies may be able to offer competitive products at lower prices, and we may not be able to effectively compete against these companies. In addition, if any third party copies or imitates our products in a manner that affects customer or consumer perception of the quality of our products, or of engineered products generally, our reputation and sales could suffer whether or not these violate our intellectual property rights.
In addition, we face the risk of claims that we are infringing third parties intellectual property rights. Any such claim, even if it is without merit, could be expensive and time-consuming to defend and could divert the time and attention of our management. An intellectual property claim against us that is successful could cause us to cease making or selling products that incorporate the disputed intellectual property, require us to redesign our products, which may not be feasible or cost effective, and require us to enter into costly royalty or licensing arrangements, any of which could have a material adverse effect on our business, financial condition and results of operations. Moreover, certain material technology and know-how we use to manufacture our products is licensed to us rather than owned by us, and our license is subject to termination in the event of uncured material breach, among other reasons.
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Any major disruption or failure of our information technology systems or our website, or our failure to successfully implement new technology effectively, could adversely affect our business and operations.
We rely on various information technology systems, owned by us and third parties, to manage our operations, maintain books and records, record transactions, provide information to management and prepare our financial statements. In addition, we have made a significant investment in our website which we believe is critical for lead generation and is the primary forum through which we interact with end consumers. A failure of our information technology systems or our website to operate as expected could disrupt our business and adversely affect our financial condition and results of operations. These systems and our website are vulnerable to damage from hardware failure; fire; power loss; Internet; data network and telecommunications failure; loss or corruption of data and impacts of terrorism; natural disasters or other disasters. We may not have sufficient redundant operations to cover a loss or failure in a timely manner. In addition, the operation of these systems and our website is dependent upon third party technologies, systems and services, and support by third party vendors, and we cannot be sure that these third party systems, services and support will continue to be available to us without interruption, particularly in light of the disruptions stemming from the COVID-19 pandemic. Any damage to our information technology systems or website could cause interruptions to our operations that materially adversely affect our ability to meet customers requirements, resulting in an adverse impact to our business, financial condition and results of operations. Periodically, these systems and our website need to be expanded, updated or upgraded as our business needs change. We may not be able to successfully implement changes in our information technology systems and to our website without experiencing difficulties, which could require significant financial and human resources.
We face cybersecurity risks and risks arising from new regulations governing information security and privacy and may incur increasing costs in an effort to mitigate those risks.
We utilize systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding our customers, employees and others, including personal information. We may be vulnerable to, and unable to anticipate or detect, data security breaches and data loss, including rapidly evolving and increasingly sophisticated and prevalent cybersecurity attacks. In addition, data security breaches can also occur as a result of a breach by us or our employees or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. In addition to our own databases, we use third-party service providers to store, process and transmit confidential or sensitive information on our behalf. A data security breach could occur in the future either at their location or within their systems that could affect our personal or confidential information.
A data security breach may expose us to a risk of loss or misuse of this information, and could result in significant costs to us, which may include, among others, fines and penalties, costs related to remediation, potential costs and liabilities arising from governmental or third-party investigations, proceedings or litigation, diversion of management attention and harm to our reputation. We could also experience delays or interruptions in our ability to function in the normal course of business, including delays in the fulfillment of customer orders or disruptions in the manufacture and shipment of products. In addition, actual or anticipated attacks may cause us to incur costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our business, financial condition and reputation.
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The regulatory environment surrounding information security and privacy is increasingly demanding, with frequent imposition of new and changing requirements, which could cause us to incur substantial costs. In the United States, various laws and regulations apply to the collection, processing, disclosure and security of certain types of data, including the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the Health Insurance Portability and Accountability Act of 1996, the Gramm Leach Bliley Act and various state laws relating to privacy and data security, including the California Consumer Privacy Act, which took effect on January 1, 2020.
Any failure or perceived failure by us to comply with laws, regulations, policies or regulatory guidance relating to privacy or data security may result in governmental investigations and enforcement actions, litigation, fines and penalties or adverse publicity, and could cause our customers and consumers to lose trust in us, which could have an adverse effect on our reputation and business.
Changes to legislative and regulatory policies related to home ownership may have a material adverse effect on our business, financial condition and results of operations.
Our markets are affected by legislative and regulatory policies that promote or do not promote home ownership, such as U.S. tax rules allowing for deductions of mortgage interest or interest on home equity loans. For example, the Tax Cuts and Jobs Act, or the Tax Act, which was enacted into law on December 22, 2017, imposes limitations on the deductibility of interest on mortgages qualifying of the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans, including home equity loans that are used to substantially improve the taxpayers home that secures the loan, a reduction from the prior limit of $1.0 million. As many consumers finance renovation projects that use our products with home equity loans, limitations on the deductibility of interest on those loans could reduce demand for our products. In addition, recent U.S. federal and state legislative and regulatory policies enacted in response to the COVID-19 pandemic provide various measures of relief for homeowners, primarily in the form of mortgage payment forbearance for homeowners with federally-backed mortgages and temporary moratoria on foreclosures and evictions. It remains uncertain whether or to what extent such relief measures could protect homeowners, including as a result of their possible expiration and non-renewal, and what impact they will have on the U.S. real estate market and the U.S. and global economies generally, and our business, financial condition and results of operations may be materially and adversely affected as a result. Future changes to laws or policies relating to these or similar matters could reduce demand for our products and have a material adverse effect on our business, financial condition and results of operations.
Many of our products must comply with local building codes and ordinances and failure of our products to comply with such codes and ordinances may have an adverse effect on our business.
Many of our products must comply with local building codes and ordinances. These codes and ordinances are subject to future government review and interpretation. If our products fail to comply with such local building codes or ordinances, our ability to market and sell such products would be impaired. Also, should these codes and ordinances be amended or expanded, or should new laws and regulations be enacted, we could incur additional costs or become subject to requirements or restrictions that require us to modify our products or adversely affect our ability to market and sell our products. Furthermore, failure of our products to comply with such codes or ordinances could subject us to negative publicity or damage our reputation.
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Comprehensive tax reform legislation could adversely affect our business, financial condition and results of operations.
The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for business interest expense to 30% of adjusted taxable income (roughly defined as earnings before interest, taxes, depreciation and amortization in the case of taxable years beginning before January 1, 2022 and earnings before interest and taxes thereafter), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, current U.S. taxation on foreign earnings earned by certain foreign subsidiaries (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. On March 27, 2020, in response to the COVID-19 pandemic, the CARES Act was signed into law and modifies certain provisions under the Tax Act. The CARES Act, among other things, increased the limitation on the deductibility of business interest to 50% of adjusted taxable income for taxable years beginning after December 31, 2018 and before January 1, 2021 and allows taxpayers to elect to compute the limitation on business interest expense for 2020 by using its adjusted taxable income from 2019. The CARES Act also suspends the 80% limitation on the deduction of net operating losses for taxable years beginning before January 1, 2021 and enables taxpayers to carry back net operating losses generated in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five preceding taxable years. The CARES Act also contains provisions relating to refundable payroll tax credits, deferment of employer side social security payments, alternative minimum tax credit refunds and technical corrections to tax depreciation methods for qualified improvement property that may impact our business and financial results. The most significant impacts of the Tax Act on our financial results to date have included lowering of the U.S. federal corporate income tax rate and remeasurement of our net deferred tax liabilities. We expect the limitation under the Tax Act on the tax deduction of interest expense will limit our annual deductions of interest expense as a result of our significant outstanding indebtedness until we reduce our outstanding indebtedness or our adjusted earnings increase by an amount sufficient to permit full deductibility of our interest expense. In the event we are subject to limitations on the deductibility of interest under the Tax Act, we will be permitted an indefinite carryforward, and disallowed interest expense will be deductible in later years, subject to the same 30% limitation (or 50% limitation under the CARES Act for taxable years beginning after December 31, 2018 and before January 1, 2021) and to ownership change limitations under Sections 382 of the Internal Revenue Code of 1986, as amended, or the Code, similar to net operating losses.
We continue to examine the impact that the Tax Act and the CARES Act may have on our business in the longer term. Accordingly, notwithstanding the reduction in the corporate income tax rate, the overall impact on us of the Tax Act and the CARES Act is uncertain.
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Our insurance coverage may be inadequate to protect against the potential hazards incident to our business.
We maintain property, business interruption, product liability and casualty insurance coverage, but such insurance may not provide adequate coverage against potential claims, including losses resulting from interruptions in our production capability or product liability claims relating to the products we manufacture. Consistent with market conditions in the insurance industry, premiums and deductibles for some of our insurance policies have been increasing and may, in the future, increase substantially. In some instances, some types of insurance may become available only for reduced amounts of coverage, if at all. In addition, our insurers could deny coverage for claims. If we were to incur a significant liability for which we were not fully insured or that our insurers disputed, our business, financial condition or results of operations could be materially adversely affected.
We are in the early stages of implementing strategic initiatives related to the use of recycled materials. If we fail to implement these initiatives as expected, our business, financial condition and results of operations could be adversely affected.
Our future financial performance depends in part on our managements ability to successfully implement our strategic initiatives related to developing our recycling capabilities and other cost savings measures, with an aim to reduce our material costs, improve net manufacturing productivity and enhance our business operations. We are still in the early stages of material substitution across our manufacturing network and realizing the benefits of our investments in recycling. To achieve such benefits, we must recycle materials on a cost-effective basis and efficiently convert these materials into high-quality finished goods. This strategy involves significant risks, including the risks that:
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Our profitability may be materially diminished. The variability of our raw material sources can result in considerable reduction in our operating rates and yields, which may more than offset any savings we realize from the low purchase price of the materials. |
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We may not produce a sustainable return on investment. Our plants must convert our raw materials at high rates and net yields to generate the profit margins and cash flows necessary to achieve sustainable returns. |
Changes in trade policies, including the imposition of tariffs, could negatively impact our business, financial condition and results of operations.
The current U.S. administration has signaled support for, and in some instances has taken action with respect to, major changes to certain trade policies, such as the imposition of tariffs on imported products and the withdrawal from or renegotiation of certain trade agreements, including the North American Free Trade Agreement. For example, the United States has increased tariffs on certain imports from China, as well as on steel and aluminum products imported from various countries. We procure certain of the raw materials we use in the manufacturing of our products directly or indirectly from outside of the United States. The imposition of tariffs and other potential changes in U.S. trade policy could increase the cost or limit the availability of raw materials, which could hurt our competitive position and adversely impact our business, financial condition and results of operations.
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We operate in select non-U.S. markets and are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, as well anti-corruption laws and regulations in other countries, in addition to laws and regulations relating to export controls and economic sanctions. Violations of these laws and regulations could have a material adverse effect on our business, financial condition and results of operations.
We are subject to various U.S. and non-U.S. anti-corruption laws, including the FCPA, collectively, the Anti-Corruption Laws. These laws generally prohibit companies and their intermediaries from engaging in bribery or making other improper payments of cash (or anything else of value) to government officials and other persons in order to obtain or retain business. Our business operations also must be conducted in compliance with applicable export control and economic sanctions laws and regulations, collectively, the Trade Controls, including rules administered by the U.S. Department of the Treasurys Office of Foreign Assets Control, the U.S. Department of State, the U.S. Department of Commerce, the United Nations Security Council, and other relevant authorities.
We strive to conduct our business activities in compliance with applicable Anti-Corruption Laws and Trade Controls, and we are not aware of issues of historical noncompliance. However, full compliance cannot be guaranteed. Further expansion outside the United States would likely increase our future legal exposure. Violations of Anti-Corruption Laws or Trade Controls, or even allegations of such violations, could result in civil or criminal penalties, as well as disrupt our business, operations, financial condition and results of operations. Further, changes to the applicable laws and regulations, and/or significant business growth, may result in the need for increased compliance-related resources and costs.
Risks Relating to Our Indebtedness
Our substantial indebtedness could materially adversely affect our financial condition.
We have a significant amount of indebtedness. As of June 30, 2020, our total indebtedness was $506.6 million, including $467.1 million under the Term Loan Agreement and $44.0 million outstanding under the Revolving Credit Facility. During the second quarter of fiscal 2020, we borrowed $129.0 million under the Revolving Credit Facility, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic.
Our substantial indebtedness could have important consequences to the holders of our Class A common stock, including the following:
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making it more difficult for us to satisfy our obligations with respect to our other debt; |
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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements; |
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requiring us to dedicate a substantial portion of our cash flows to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes; |
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increasing our vulnerability to general adverse economic and industry conditions; |
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exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under the Senior Secured Credit Facilities, are at variable rates of interest; |
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limiting our flexibility in planning for and reacting to changes in the industry in which we compete; |
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placing us at a disadvantage compared to other, less leveraged competitors; and |
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increasing our cost of borrowing. |
In addition, the credit agreements that govern the Senior Secured Credit Facilities contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt. See Managements Discussion and Analysis of Financial Condition and Results of OperationsIndebtedness.
The Term Loan Agreement will mature on May 5, 2024, and the Revolving Credit Facility will mature on March 9, 2022. We may need to refinance all or a portion of our indebtedness on or before the maturity thereof. We may not be able to obtain such financing on commercially reasonable terms or at all. Failure to refinance our indebtedness could have a material adverse effect on us.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory and other factors, some of which are beyond our control. We cannot be sure that our business will generate sufficient cash flows from operating activities, or that future borrowings will be available, to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreements that govern the Senior Secured Credit Facilities restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due. See Managements Discussion and Analysis of Financial Condition and Results of OperationsIndebtedness.
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Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would have a material adverse effect on our financial condition and results of operations.
If we cannot make scheduled payments on our debt, we will be in default, and the lenders under the Senior Secured Credit Facilities could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. Any of these events could result in you losing all or a portion of your investment in the Class A common stock.
Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described herein.
We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the credit agreements that govern the Senior Secured Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. As of June 30, 2020 and September 30, 2019, we had commitments available for borrowing under the Revolving Credit Facility of up to $150.0 million. During the second quarter of fiscal 2020, we borrowed $129.0 million under the Revolving Credit Facility, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. We also have the option to increase the commitments under the Revolving Credit Facility by up to $100.0 million, subject to certain conditions.
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 of commitments may not reflect actual borrowing capacity. In addition, the Term Loan Agreement provides for additional uncommitted incremental term loans of up to $150.0 million, with additional incremental term loans available if certain leverage ratios are maintained. All of those borrowings would be secured by first-priority liens on our property.
The terms of the credit agreements that govern the Senior Secured Credit Facilities restrict our current and future operations, including our ability to respond to changes or to take certain actions.
The credit agreements that govern the Senior Secured Credit Facilities contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest. See Managements Discussion and Analysis of Financial Condition and Results of OperationsIndebtedness. The restrictive covenants under the Senior Secured Credit Facilities include restrictions on our ability to:
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incur additional indebtedness and guarantee indebtedness; |
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pay dividends or make other distributions or repurchase or redeem our capital stock; |
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prepay, redeem or repurchase junior debt; |
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issue certain preferred stock or similar equity securities; |
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make loans and investments; |
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sell assets or property, except in certain circumstances; |
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incur liens; |
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enter into transactions with affiliates; |
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modify or waive certain material agreements in a manner that is adverse in any material respect to the lenders; |
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enter into agreements restricting our subsidiaries ability to pay dividends; and |
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make fundamental changes in our business, corporate structure or capital structure, including, among other things, entering into mergers, acquisitions, consolidations and other business combinations or selling all or substantially all of our assets. |
As a result of these restrictions, we may be:
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limited in how we conduct our business; |
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unable to raise additional debt or equity financing to operate during general economic or business downturns; or |
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unable to compete effectively or to take advantage of new business opportunities. |
These restrictions may affect our ability to grow in accordance with our strategy. If we incur indebtedness provided or guaranteed by the U.S. Government, including pursuant to the CARES Act, we may be subject to additional restrictions on our operations, including limitations on employee headcount and compensation reductions and other cost reduction activities.
A breach of the covenants or restrictions under the credit agreements that govern the Senior Secured Credit Facilities could result in a default or an event of default. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the Senior Secured Credit Facilities would permit the lenders under the Revolving Credit Facility to terminate all commitments to extend further credit under such facility. Furthermore, if we were unable to repay the amounts due and payable under the Senior Secured Credit Facilities, those lenders under each facility could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders were to accelerate the repayment of our indebtedness, we and our subsidiaries may not have sufficient assets to repay that indebtedness. In exacerbated or prolonged circumstances, one or more of these events could result in our bankruptcy or liquidation.
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We rely on available borrowings under the Revolving Credit Facility for cash to operate our business, and the availability of credit under the Revolving Credit Facility may be subject to significant fluctuation.
In addition to cash we generate from our business, our principal existing source of cash is borrowings available under the Revolving Credit Facility. As of June 30, 2020 and September 30, 2019, we had commitments available to be borrowed under the Revolving Credit Facility of up to $150.0 million. During the second quarter of fiscal 2020, we borrowed $129.0 million under the Revolving Credit Facility, including, on March 16, 2020, $89.0 million to enhance our financial flexibility in light of uncertainties resulting from the COVID-19 pandemic. We also have the option to increase the commitments under the Revolving Credit Facility by up to $100.0 million, subject to certain conditions. There are limitations on our ability to incur the full $150.0 million of existing commitments under the Revolving Credit Facility. Availability will be limited to the lesser of a borrowing base and $150.0 million. The borrowing base is calculated on a monthly (or more frequent under certain circumstances) valuation of our inventory, accounts receivable and certain cash balances. As a result, our access to credit under the Revolving Credit Facility is potentially subject to significant fluctuation, depending on the value of the borrowing base-eligible assets as of any measurement date. On June 5, 2020, we entered into an Amendment, which established $8.5 million of commitments for FILO Loans under the Revolving Credit Facility. The FILO Loans are available to be drawn in a single disbursement on or prior to December 31, 2020. The availability of the FILO Loans will be subject to satisfaction of certain conditions at the time of borrowing, including the value of borrowing-base eligible assets at the time of borrowing. Under the terms of the Revolving Credit Facility as amended by the Amendment, FILO Loans may be borrowed against increased percentages of borrowing-base eligible assets (as compared to the percentages of borrowing-base eligible assets applicable to all other loans under the Revolving Credit Facility). The Amendment did not increase the total aggregate amount of commitments under the Revolving Credit Facility. Borrowing of FILO Loans under the Revolving Credit Facility will reduce the total aggregate commitments available for revolving loans for so long as the FILO Loans remain outstanding. If borrowed, the FILO Loans will mature on December 4, 2021. As of June 30, 2020, we have not drawn on the FILO loans. There is no assurance that we will be able to draw on the FILO Loans at any time. The inability to borrow under the Revolving Credit Facility may adversely affect our liquidity, financial position and results of operations.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under the Senior Secured Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Based on amounts outstanding as of June 30, 2020 and September 30, 2019, each 100 basis point change in interest rates would result in a $5.1 million and $8.1 million change, respectively, in annual interest expense on our indebtedness under the Senior Secured Credit Facilities. See Managements Discussion and Analysis of Financial Condition and Results of OperationsIndebtedness. We do not currently hedge the risk of changes in the interest rate under the Senior Secured Credit Facilities. In the future, we may
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enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments or other instruments in order to reduce interest rate volatility. However, even if we do enter into interest rate swaps, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps or other instruments we enter into may not fully mitigate our interest rate risk.
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR in the future may adversely affect our financing costs.
Currently, the Revolving Credit Facility and the Term Loan Agreement utilize the London Interbank Offered Rate, or LIBOR, or various alternative methods set forth in the Revolving Credit Facility and the Term Loan Agreement to calculate interest on any borrowings. National and international regulators and law enforcement agencies have conducted investigations into a number of rates or indices known as reference rates. Actions by such regulators and law enforcement agencies may result in changes to the manner in which certain reference rates are determined, their discontinuance or the establishment of alternative reference rates. In particular, on July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, or the FCA, which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. As a result, it appears highly likely that LIBOR will be discontinued or modified by 2021.
At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates may have on LIBOR, other benchmarks or LIBOR-based debt instruments. Uncertainty as to the nature of such potential discontinuance, modification, alternative reference rates or other reforms could cause the interest rate calculated for the Revolving Credit Facility and the Term Loan Agreement to be materially different than expected, which could have a material adverse effect on our financing costs.
A lowering or withdrawal of the ratings assigned to our debt by rating agencies may increase our future borrowing costs and reduce our access to capital.
Our debt currently has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agencys judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing.
Risks Relating to Ownership of Our Class A Common Stock
The market price of our Class A common stock may be volatile or may decline steeply or suddenly regardless of our operating performance, and we may not be able to meet investor or analyst expectations. You may not be able to resell your shares at or above the price you paid and may lose all or part of your investment.
If you purchase shares of Class A common stock, you may not be able to resell those shares at or above the price you paid. The market price of our Class A common stock may fluctuate or decline significantly in response to numerous factors, many of which are beyond our control, including:
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the impacts of the COVID-19 pandemic on us and the national and global economies; |
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actual or anticipated fluctuations in our revenues or other operating results; |
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variations between our actual operating results and the expectations of securities analysts, investors and the financial community; |
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any forward-looking financial or operating information we may provide to the public or securities analysts, any changes in this information or our failure to meet expectations based on this information; |
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actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow us or our failure to meet these estimates or the expectations of investors; |
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additional shares of Class A common stock being sold into the market by us or our pre-IPO stockholders, or the anticipation of such sales, including if pre-IPO stockholders sell shares into the market when the applicable lock-up periods end; |
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announcements by us or our competitors of significant products or features, innovations, acquisitions, strategic partnerships, joint ventures, capital commitments, divestitures or other dispositions; |
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loss of relationships with significant distributors, dealers or other customers; |
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changes in operating performance and stock market valuations of companies in our industry, including our competitors; |
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increases in interest rates or changes in tax laws that make it more costly for consumers to finance home renovation or purchases; |
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difficulties in integrating any new acquisitions we may make; |
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loss of services from members of management or employees or difficulty in recruiting additional employees; |
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continued worsening of economic conditions in the United States and reduction in demand for our products; |
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price and volume fluctuations in the overall stock market, including as a result of general economic trends; |
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lawsuits threatened or filed against us, or events that negatively impact our reputation; and |
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developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies. |
In addition, extreme price and volume fluctuations in the stock markets have affected and continue to affect the stock prices of many companies. Often, their stock prices have fluctuated in ways unrelated or disproportionate to their operating performance. In the past, stockholders have filed securities class action litigation against companies following periods of market volatility. Such securities litigation, if instituted against us, could subject us to substantial costs, divert resources and the attention of management from our business and seriously harm our business.
An active trading market for our Class A common stock may not be sustained.
Our Class A common stock is listed on the NYSE under the symbol AZEK. However, we cannot be certain that an active trading market for our Class A common stock will be sustained on that exchange or elsewhere. Furthermore, we cannot be certain that we will continue to satisfy the continued listing standards of the NYSE. If we fail to satisfy the continued listing standards, we could be de-listed, which would have a material adverse effect on the liquidity and price of our Class A common stock.
Future sales of our Class A common stock and other actions by pre-IPO stockholders could cause our stock price to decline.
If our pre-IPO stockholders, including employees, who had equity prior to or obtained equity concurrently with the IPO, sell or indicate an intention to sell, substantial amounts of our Class A common stock in the public market, the trading price of our Class A common stock could decline. The shares of Class A common stock sold in the IPO are freely tradable without restrictions or further registration under the Securities Act.
Subject to certain exceptions described in the Prospectus, we and substantially all of our pre-IPO stockholders have entered into agreements with the IPO underwriters under which we and they have agreed, subject to certain exceptions, not to dispose of any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into or exchangeable for or that represent the right to receive shares of common stock during the period from the date of the Prospectus continuing through the date 180 days after the date of the Prospectus.
When the lock up period in these agreements expires, we and our pre-IPO stockholders will be able to sell shares in the public market. In addition, Barclays Capital Inc. and BofA Securities, Inc., as representatives of the underwriters in the IPO, may, together in their sole discretion, release all or some portion of the shares subject to the lock up agreements prior to the expiration of the lock-up period. Sales of a substantial number of such shares, or the perception that such sales may occur, upon the expiration or early release of the securities subject to the lock up agreements could cause the price of our Class A common stock to decline or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate. In addition, the Sponsors (as defined in the Prospectus) have demand and piggy-back registration rights with respect to our common stock, which give them the right to require us to file registration statements for public resale of the shares of our common stock that they own or to include such shares in registration statements that we may file for us or other stockholders. See Shares Eligible for Future Sale in the Prospectus for a discussion of the shares of our common stock that may be sold into the public market in the future, including our common stock held by the Sponsors.
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We currently do not intend to pay dividends on our Class A common stock, and our indebtedness could limit our ability to pay dividends on our Class A common stock.
We currently do not anticipate paying any cash dividends for the foreseeable future. In addition, the terms of our indebtedness limit our ability to pay dividends or make other distributions on, or to repurchase or redeem, shares of our capital stock. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our Class A common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our Class A common stock that will prevail in the market will ever exceed the price that you pay. We cannot be sure that we will pay dividends in the future or continue to pay dividends if we do commence paying dividends.
If securities or industry analysts either do not publish research about us or publish inaccurate or unfavorable research about us, our business or our market, if they adversely change their recommendations regarding our Class A common stock, or if our operating results do not meet their expectations or any financial guidance we may provide, the trading price or trading volume of our Class A common stock could decline.
The trading market for our Class A common stock is influenced in part by the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We do not have any control over these analysts. If one or more of the analysts initiate research with an unfavorable rating or downgrade our Class A common stock, provide a more favorable recommendation regarding our competitors or publish inaccurate or unfavorable research about our business, our Class A common stock price would likely decline. If one or more analysts who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price or trading volume of our Class A common stock to decline.
In addition, if we do not meet any financial guidance that we may provide to the public or if we do not meet expectations of securities analysts or investors, the trading price of our Class A common stock could decline significantly. Our operating results may fluctuate significantly from period to period as a result of changes in a variety of factors affecting us or our industry, many of which are difficult to predict. As a result, we may experience challenges in forecasting our operating results for future periods.
Future issuances of our Class A common stock, including upon conversion of our Class B common stock, could result in significant dilution to our stockholders, dilute the voting power of our Class A common stock and depress the market price of our Class A common stock.
Future issuances of our Class A common stock could result in dilution to existing holders of our Class A common stock. Such issuances, or the perception that such issuances may occur, could depress the market price of our Class A common stock. We may issue additional equity securities from time to time, including equity securities that could have rights senior to those of our Class A common stock. As a result, purchasers of shares of Class A common stock bear the risk that future issuances of equity securities may reduce the value of their shares and dilute their ownership interests. Also, to the extent outstanding stock-based awards are issued or become vested, there will be further dilution to the holders of our Class A common stock.
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We have a dual-class capitalization structure, which may pose a particular risk of dilution to the holders of our Class A common stock. Each share of our Class B common stock, which is not entitled to vote for the election, removal and replacement of our directors, is convertible at any time at the option of the holder of the Class B common stock into one share of Class A common stock, which is entitled to vote for the election, removal and replacement of our directors. Accordingly, conversion of shares of our Class B common stock into shares of our Class A common stock would dilute holders of Class A common stock in terms of voting power in connection with the election, removal and replacement of our directors.
We are incurring and will continue to incur increased costs and will continue to devote substantial management time as a result of operating as a public company.
As a public company, we are subject to the reporting requirements of the Exchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and the NYSE, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Operating as a public company and complying with these requirements has increased our legal and financial compliance and investor relations costs and is making some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to continue to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we are incurring significant expenses and devoting substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company, as defined by the JOBS Act. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of those costs.
Public company reporting and disclosure obligations and a broader shareholder base as a result of our status as a public company may expose us to a greater risk of claims by shareholders, and we may experience threatened or actual litigation from time to time. If claims asserted in such litigation are successful, our business and operating results could be adversely affected, and, even if claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them and the diversion of management resources, could adversely affect our business and operating results.
We are an emerging growth company and are availing ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and we are taking advantage of and may continue to take advantage of, for as long as five years following the completion of our IPO, certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, under the JOBS Act, emerging growth companies can delay the adoption of certain new or revised accounting standards until those standards would otherwise apply to private companies.
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We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are not and will continue not to be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies or that have opted out of using such extended transition period, which may make comparison of our financial statements with those of other public companies more difficult. We cannot predict if investors will find our Class A common stock less attractive because we are relying on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
Risks Relating to Our Organizational Structure
Provisions in our certificate of incorporation and bylaws, could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our Class A common stock.
Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our Class A common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that our stockholders may deem advantageous. In particular, our certificate of incorporation and bylaws:
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establish a classified board of directors so that not all members are elected at one time, which could delay the ability of stockholders to change the membership of a majority of our board of directors; |
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permit our board of directors to establish the number of directors and fill any vacancies (including vacancies resulting from an expansion in the size of our board of directors), except in the case of the vacancy of a Sponsor-designated director (in which case the Sponsor that designated the director will be able to fill the vacancy); |
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establish limitations on the removal of directors; |
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authorize the issuance of blank check preferred stock that our board of directors could use to implement a stockholder rights plan; |
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provide that our board of directors is expressly authorized to make, alter or repeal our bylaws; |
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restrict the forum for certain litigation against us to Delaware; |
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provide that stockholders may not act by written consent following the time when the Sponsors collectively cease to beneficially own at least a majority of the shares of our outstanding common stock, which time we refer to as the Trigger Date, which would require stockholder action to be taken at an annual or special meeting of our stockholders; |
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prohibit stockholders from calling special meetings following the Trigger Date, which would delay the ability of our stockholders to force consideration of a proposal or to take action, including with respect to the removal of directors; and |
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establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of us. |
Section 203 of the Delaware General Corporation Law, or the DGCL, prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person, individually or together with any other interested stockholder, who owns or within the last three years has owned 15% of our voting stock, unless the business combination is approved in a prescribed manner. We have elected to opt out of Section 203 of the DGCL. However, our certificate of incorporation contains a provision that is of similar effect, except that it exempts from its scope the Sponsors, any of their affiliates and certain of their respective direct or indirect transferees.
Any provision of our certificate of incorporation, our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of Class A common stock and could also affect the price that some investors are willing to pay for our Class A common stock.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for a wide range of disputes between us and our stockholders, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:
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any derivative action or proceeding brought on our behalf; |
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any action asserting a breach of fiduciary duty owed by any director or officer or other employee to us or our stockholders; |
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any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws (as they may be amended from time to time); |
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any action asserting a claim against us or any of our directors, officers or other employees governed by the internal-affairs doctrine; |
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any action or proceeding to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws (including any right, obligation or remedy under our certificate of incorporation or our bylaws); and |
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any action or proceeding as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware. |
This provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the exclusive-forum provisions in our certificate of incorporation.
The exclusive-forum provisions also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such exclusive-forum provision. However, there is substantial uncertainty as to whether a court would enforce the exclusive-forum provisions relating to causes of action arising under the Securities Act. If a court were to find any of the exclusive-forum provisions in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.
These exclusive-forum provisions may limit a stockholders ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or employees, which may discourage lawsuits against us and our directors, officers and employees, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder.
Our certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities.
Under our certificate of incorporation, neither of the Sponsors nor any of their respective portfolio companies, funds or other affiliates, nor any of their officers, directors, employees, agents, stockholders, members or partners currently have or will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities, or lines of business in which we operate. In addition, our certificate of incorporation provides that, to the fullest extent permitted by law, no officer or director of ours who is also an officer, director, employee, agent, stockholder, member, partner or affiliate of either of the Sponsors is or will be liable to us or our stockholders for breach of any fiduciary duty by reason of the fact that any such individual directs a corporate opportunity to a Sponsor, instead of to us, or does not communicate information regarding a corporate opportunity to us that the officer, director, employee, agent, stockholder, member, partner or affiliate has directed to such Sponsor. For example, a director of our company who also serves as an officer, director, employee, agent, stockholder, member, partner or affiliate of one of the Sponsors, or any of their respective portfolio companies, funds, or other affiliates may pursue certain acquisitions or other opportunities that may be complementary to our business
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and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by either of the Sponsors to itself or themselves or their respective portfolio companies, funds or other affiliates instead of to us.
We are a holding company and rely on dividends, distributions, and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.
We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash distributions and other transfers from our direct and indirect subsidiaries to meet our obligations. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries ability to pay dividends or other distributions to us. See Managements Discussion and Analysis of Financial Condition and Results of OperationsHolding Company Status. Each of our subsidiaries is a distinct legal entity, and under certain circumstances legal and contractual restrictions may limit our ability to obtain cash from them and we may be limited in our ability to cause any future joint ventures to distribute their earnings to us. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could impair their ability to make distributions to us.
We continue to be controlled by the Sponsors, and the Sponsors interests may conflict with our interests and the interests of other stockholders.
The Sponsors beneficially own a majority of our common stock. Pursuant to the stockholders agreement entered into by us and the Sponsors prior to the IPO, the Sponsors have the right to designate a number of individuals to be included in the slate of nominees for election to our board of directors equal to the greater of up to six directors and the number of directors comprising a majority of our board of directors for so long as the Sponsors collectively own 50% or more of the outstanding shares of our common stock. Subject to certain exceptions, for so long as the Sponsors collectively own less than 50% of the outstanding shares of our common stock, the Sponsors will have the right to designate that number of individuals to be included in the slate of nominees for election to our board of directors (rounded up to the nearest whole number or, if such rounding would cause the Sponsors to have the right to elect a majority of our board of directors, rounded to the nearest whole number) that is the same percentage of the total number of directors comprising our board as the collective percentage of common stock owned by the Sponsors. Because our board of directors is divided into three staggered classes, the Sponsors may be able to influence or control our affairs and policies even after they cease to own a majority of our outstanding Class A common stock during the period in which the Sponsors nominees finish their terms as members of our board, but in any event no longer than would be permitted under applicable law and the NYSE listing requirements. Therefore, for so long as the Sponsors continue to own 50% or more of our common stock, individuals affiliated with the Sponsors will have the power to elect a majority of our directors and will have effective control over the outcome of votes on all matters requiring approval by our board of directors or our stockholders regardless of whether other stockholders believe such matter is in our best interests.
In addition, the stockholders agreement provides that, for so long as the Sponsors collectively own at least 30% of the outstanding shares of our common stock, certain significant corporate actions require the prior written consent of each of the Sponsors, subject to certain exceptions. If either Sponsor owns less than 10% of the outstanding shares of our common stock, such action will not be subject to the approval of such Sponsor and the shares of common stock owned by such Sponsor will be excluded in calculating the 30% threshold.
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These actions include:
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merging or consolidating with or into any other entity, or transferring all or substantially all of our assets, taken as a whole, to another entity, or undertaking any transaction that would constitute a Change of Control as defined in our debt agreements; |
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acquiring or disposing of assets, in a single transaction or a series of related transactions, or entering into joint ventures, in each case with a value in excess of $75.0 million; |
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incurring indebtedness in a single transaction or a series of related transactions in an aggregate principal amount in excess of $100.0 million; |
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issuing our or our subsidiaries equity other than pursuant to an equity compensation plan approved by our stockholders or a majority of the directors designated by the Sponsors; |
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terminating the employment of our chief executive officer or hiring or designating a new chief executive officer; |
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entering into any transactions, agreements, arrangements or payments with either of the Sponsors or any other person who owns greater than or equal to 10% of our common stock then outstanding that are material or involve aggregate payments or receipts in excess of $500,000; |
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amending, modifying or waiving any provision of our organizational documents in a manner that adversely affects the Sponsors; |
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commencing any liquidation, dissolution or voluntary bankruptcy, administration, recapitalization or reorganization; |
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increasing or decreasing the size of our board of directors; and |
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entering into of any agreement to do any of the foregoing. |
The interests of the Sponsors and their affiliates, including funds affiliated with the Sponsors, could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership held by the Sponsors could delay, defer or prevent a change in control of our company or impede a merger, takeover or other business combination which may otherwise be favorable for us. Additionally, the Sponsors and their affiliates are in the business of making investments in companies and may, from time to time, acquire and hold interests in or provide advice to businesses that compete directly or indirectly with us, or are suppliers or customers of ours. Any such investment may increase the potential for the conflicts of interest discussed in this risk factor. So long as the Sponsors continue to directly or indirectly own a significant amount of our equity, even if such amount is less than 50%, the Sponsors will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions.
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We are a controlled company within the meaning of the NYSE rules and, as a result, qualify for and are relying on exemptions from certain corporate governance requirements.
Affiliates of the Sponsors control a majority of the voting power of our outstanding voting stock, and as a result we are a controlled company within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:
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a majority of the board of directors consist of independent directors; |
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the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; and |
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the compensation committee be composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities. |
We are utilizing and intend to utilize these exemptions as long as we remain a controlled company. As a result, until we are no longer a controlled company, we may not have a majority of independent directors and our nominating and corporate governance committee and compensation committee may not consist entirely of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
Pursuant to Rule 10C-1 under the Exchange Act, the NYSE has adopted amendments to its listing standards that require, among other things, that:
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compensation committees be composed of fully independent directors, as determined pursuant to new independence requirements; |
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compensation committees be explicitly charged with hiring and overseeing compensation consultants, legal counsel, and other committee advisors; and |
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compensation committees be required to consider, when engaging compensation consultants, legal counsel, or other advisors, certain independence factors, including factors that examine the relationship between the consultant or advisors employer and us. |
As a controlled company, we are not and will continue not to be subject to these compensation committee independence requirements.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
None.
Use of Proceeds
On June 11, 2020, our registration statement on Form S-1 (File No. 333-236325) was declared effective by the SEC for our IPO. At the closing of the offering on June 16, 2020, we sold 38,237,500 shares of our Class A common stock, which included the exercise by the underwriters of their option to purchase 4,987,500 additional shares, at an initial public offering price of $23.00 per share, which resulted in net proceeds to us of approximately $819.4 million, after deducting underwriting discounts and commissions of $50.6 million and estimated offering expenses of approximately $9.5 million. None of the expenses associated with the IPO were paid to directors, officers, persons owning ten percent or more of any class of equity securities, or to their associates, or to our affiliates. We used the net proceeds from the IPO to redeem $350.0 million in aggregate principal of our then-outstanding 2025 Senior Notes, $70.0 million of the then-outstanding principal amount under the Revolving Credit Facility and effected a $337.7 million prepayment of the then-outstanding principal amount under the Term Loan Agreement. Barclays Capital Inc., BofA Securities, Inc., Goldman Sachs & Co. LLC, Jeffries LLC, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., RBC Capital Markets, LLC, B. Riley FBR, Inc., Robert W. Baird & Co. Incorporated, Stephens Inc., Stifel, Nicolaus & Company, Incorporated, SunTrust Robinson Humphrey, Inc. and William Blair & Company, LLC, acted as underwriters for the offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
None.
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32.2 | Certification of Chief Financial Officer of The AZEK Company Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*+ | |||||||||||||||||
101.INS | XBRL Instance Document* | |||||||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document* | |||||||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | |||||||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | |||||||||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document* | |||||||||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* |
* |
Filed herewith |
+ |
This certification is deemed furnished and not filed for purpose of Section 18 of the Exchange Act or otherwise subject to the liability of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The AZEK Company Inc. | ||||||
Date: August 14, 2020 | By: |
/s/ Ralph Nicoletti |
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Ralph Nicoletti Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
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Exhibit 3.1
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I, JEFFREY W. BULLOCK, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THAT THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF INCORPORATION OF THE AZEK COMPANY INC. FILED IN THIS OFFICE ON THE ELEVENTH DAY OF JUNE, A.D. 2020, AT 1:26 O`CLOCK P.M.
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5384228 8100V | Authentication: 203091545 | |||
SR# 20205641187 | Date: 06-11-20 | |||
You may verify this certificate online at corp.delaware.gov/authver.shtml |
CERTIFICATE OF INCORPORATION
OF
THE AZEK COMPANY INC.
FIRST. The name of the corporation is The AZEK Company Inc. (the Corporation).
SECOND. The address of the Corporations registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the DGCL).
FOURTH. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 1,201,000,000, of which 1,100,000,000 shares of the par value of $0.001 per share shall be designated as Class A Common Stock, 100,000,000 shares of the par value of $0.001 per share shall be designated as Class B Common Stock and 1,000,000 shares of the par value of $0.001 per share shall be designated as Preferred Stock. The Class A Common Stock and Class B Common Stock are collectively referred to as Common Stock.
FIFTH. The following is a statement of the designations, preferences, qualifications, limitations, restrictions and the special or relative rights granted to or imposed upon the shares of each class of Common Stock. Except as otherwise provided in this Certificate of Incorporation, all shares of Class A Common Stock and Class B Common Stock shall be identical and shall entitle the holders of the shares to the same rights and privileges. The terms of the Common Stock set forth below shall be subject to the express terms of any series of Preferred Stock then outstanding.
(a) Dividends. Subject to the prior rights of all classes or series of stock at the time outstanding having prior rights as to dividends or other distributions, or as otherwise provided in this Certificate of Incorporation, holders of Common Stock shall be entitled to
receive ratably on a per share basis such dividends (payable in cash, shares of stock of the Corporation, property or assets of the Corporation or otherwise) as may be declared by the board of directors of the Corporation (the Board of Directors). If dividends are declared that are payable in shares of Class A Common Stock or Class B Common Stock, such dividends shall be declared payable at the same rate on each class of Common Stock, with dividends payable in shares of Class A Common Stock payable to holders of Class A Common Stock, and dividends payable in shares of Class B Common Stock payable to holders of Class B Common Stock.
(b) Conversion.
(i)
(A) Shares of Class A Common Stock shall be convertible at any time into an equal number of shares of Class B Common Stock at the option of the holder of such shares of Class A Common Stock, but only at such time that such holder is, without giving effect to the applicable conversion in question, the record owner of shares of Class B Common Stock. Shares of Class B Common Stock shall be convertible at any time into an equal number of shares of Class A Common Stock at the option of the holder of such shares of Class B Common Stock.
(B) Upon any transfer (excluding the grant of a pledge, lien, charge or grant of a security interest, except as provided in the next succeeding sentence) of shares of Class B Common Stock by Ontario Teachers Pension Plan Board (OTPP) to any person other than OTPP, unless OTPP shall otherwise elect with respect to a specific transfer by written notice delivered to the Corporation at its principal office prior to such transfer, such shares of Class B Common Stock shall automatically convert into shares of Class A Common Stock, effective immediately after such transfer to the transferee thereof. OTPP may elect for the automatic transfer provisions of this subsection (B) to apply to: (i) any pledge, lien, charge or grant of a security interest; or (ii) any transfer to a person included in the definition of OTPP as provided for in Article THIRTEENTH subsection (C)(xi), in each case by written notice delivered to the Corporation at its principal office prior to such pledge, lien, charge, grant of a security interest or transfer, as applicable.
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(ii) In the case of certificated shares, each conversion of shares pursuant to subsection (b)(i)(A) shall be effected by the surrender of the certificate or certificates representing the shares to be converted at the principal office of the Corporation at any time during normal business hours, and, in the case of both certificated and uncertificated shares, by delivery to the Corporation at its principal office, of a written notice by the holder of such shares stating the number of shares that any such holder desires to so convert. Such conversion shall be deemed to have been effected as of the close of business on the date on which such certificate or certificates, if applicable, have been surrendered and such notice has been received by the Corporation, and at such time the rights of any such holder with respect to the converted class of Common Stock shall cease. In the case of any conversion pursuant to subsection (b)(i)(B), such conversion shall be deemed to occur automatically, and without any further action by the holder of the shares of Class B Common Stock effecting such transfer, such transferee or the Corporation, immediately following the transfer of the relevant shares of Class B Common Stock to the transferee thereof. Simultaneously with the conversion, the person or persons in whose name or names the new shares of Common Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of such new shares.
(iii) In the case of certificated shares, promptly after such surrender and the receipt by the Corporation of the written notice from such holder, the Corporation shall issue and deliver, in accordance with the surrendering holders instructions, the certificate or certificates for the Common Stock issuable upon such conversion and a certificate representing any shares of Common Stock that were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but that were not converted. The issuance of certificates for the Common Stock upon conversion shall be made without charge to the holder or holders of such shares. Notwithstanding the previous sentence, the holder shall pay (or reimburse the Corporation for) any and all documentary, stamp or similar issue or transfer taxes in respect of the conversion or other cost incurred by the Corporation or the holder in connection with such conversion.
(iv) Notwithstanding anything contained in this Certificate of Incorporation to the contrary, this subsection (b) of this Article FIFTH may be amended, altered,
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repealed or rescinded, in whole or in part, or any provision inconsistent with this subsection (b) of this Article FIFTH may be adopted, only by the affirmative vote of the holders of at least a majority of the shares of Class B Common Stock then outstanding.
(c) Transfers. The Corporation shall not close its books against the transfer of any share of Common Stock, or of any share of Common Stock issued or issuable upon conversion of shares of Common Stock, in any manner that would interfere with the timely conversion of such shares of Common Stock.
(d) Subdivisions and Combinations of Shares. If the Corporation in any manner subdivides or combines the outstanding shares of any class of Common Stock, the outstanding shares of the other classes of Common Stock shall be proportionately subdivided or combined.
(e) Distribution of Assets. Upon the occurrence of the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of all classes of Common Stock shall be entitled to receive all of the remaining assets of the Corporation available after payments to creditors and to the holders of any Preferred Stock of the Corporation having prior rights as to distributions upon the liquidation, dissolution or winding up of the affairs of the Corporation that may at the time be outstanding, in proportion to the number of shares held by them.
(f) Voting Rights.
(i) Generally. The holders of Class A Common Stock shall have the general right to vote for all purposes, including the election, removal or replacement of directors, as provided by law. The holders of Class B Common Stock shall have the general right to vote for all purposes except, solely with respect to the shares of Class B Common Stock held by them, the election, removal or replacement of directors. Subject to the foregoing limitation on the voting rights attaching to the Class B Common Stock, each holder of Class A Common Stock and each holder of Class B Common Stock shall be entitled to one vote for each share of Common Stock held. The affirmative vote of the holders of a majority of the Class B Common
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Stock then outstanding, voting separately as a class, shall be required to make any amendments or alterations to the Certificate of Incorporation that adversely affect the rights and preferences of the Class B Common Stock as compared to the Class A Common Stock. There shall be no cumulative voting.
(ii) Class Voting. Except as required by the DGCL or as set forth in the Certificate of Incorporation, including, but not limited to, the limitation on the voting rights attaching to the Class B Common Stock pursuant to clause (i) of this subsection (f) of this Article FIFTH:
(A) holders of shares of Class B Common Stock shall be entitled to vote on all matters submitted for a vote or the consent of Class A Common Stock, whether pursuant to law or otherwise;
(B) holders of shares of Class A Common Stock shall be entitled to vote on all matters submitted for a vote or the consent of Class B Common Stock, whether pursuant to law or otherwise; and
(C) the Class A Common Stock and the Class B Common Stock shall vote together as a single class, and not separately as multiple classes, at any annual meeting or special meeting of the stockholders of the Corporation, or in connection with any action taken by written consent.
(g) Merger, etc. In connection with any merger, consolidation or recapitalization, holders of Class A Common Stock and holders of Class B Common Stock shall receive or be given the opportunity to receive the same form of consideration for their shares in the same amount per share.
(h) No Preemptive or Subscription Rights. No holder of shares of Common Stock shall be entitled to preemptive or subscription rights.
SIXTH. Shares of Preferred Stock may be issued in one or more series from time to time by the Board of Directors. The Board of Directors is expressly authorized to fix by
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resolution or resolutions the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions of such powers, preferences and rights, of the shares of each series of Preferred Stock, including without limitation the following:
(a) the distinctive serial designation of such series which shall distinguish it from other series;
(b) the number of shares included in such series;
(c) the dividend rate (or method of determining such rate) payable to the holders of the shares of such series, any conditions upon which such dividends shall be paid and the date or dates upon which such dividends shall be payable;
(d) whether dividends on the shares of such series shall be cumulative and, in the case of shares of any series having cumulative dividend rights, the date or dates or method of determining the date or dates from which dividends on the shares of such series shall be cumulative;
(e) the amount or amounts which shall be payable out of the assets of the corporation to the holders of the shares of such series upon voluntary or involuntary liquidation, dissolution or winding up the corporation, and the relative rights of priority, if any, of payment of the shares of such series;
(f) the price or prices at which, the period or periods within which and the terms and conditions upon which the shares of such series may be redeemed, in whole or in part, at the option of the corporation or at the option of the holder or holders of the shares of Preferred Stock or upon the happening of a specified event or events;
(g) the obligation, if any, of the corporation to purchase or redeem shares of such series pursuant to a sinking fund or otherwise and the price or prices at which, the period or periods within which and the terms and conditions upon which the shares of such series shall be redeemed or purchased, in whole or in part, pursuant to such obligation;
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(h) whether or not the shares of such series shall be convertible into, or exchangeable for, at any time or times at the option of the holder or holders of the shares of Preferred Stock or at the option of the corporation or upon the happening of a specified event or events, shares of any other class or classes or any other series of Preferred Stock or any other class or classes of stock of the corporation, and the price or prices or rate or rates of exchange or conversion and any adjustments applicable to such exchange or conversion;
(i) whether or not the holders of the shares of such series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; and
(j) any other powers, preferences and rights and qualifications, limitations and restrictions not inconsistent with the DGCL.
Unless otherwise provided in the resolution or resolutions of the Board of Directors or a duly authorized committee of the Board of Directors establishing the terms of a series of Preferred Stock, no holder of any share of Preferred Stock shall be entitled as of right to vote on: (i) any amendment or alteration of the Certificate of Incorporation to authorize or create, or increase the authorized amount of, any other class or series of Preferred Stock; or (ii) any alteration, amendment or repeal of any provision of any other series of Preferred Stock that does not adversely affect in any material respect the rights of the series of Preferred Stock held by such holder.
Except as otherwise required by the DGCL or provided in the resolution or resolutions of the Board of Directors or a duly authorized committee of the Board of Directors establishing the terms of a series of Preferred Stock, no holder of Common Stock, as such, shall be entitled to vote on any amendment or alteration of the Certificate of Incorporation that exclusively alters, amends or changes the powers, preferences, rights or other terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other series of Preferred Stock, to vote on the applicable amendment or alteration pursuant to the Certificate of Incorporation or pursuant to the DGCL.
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Subject to the rights of the holders of any series of Preferred Stock, the number of authorized shares of any class or series of Preferred Stock may be increased or decreased (but not below the number of shares of the applicable class or series then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of such class or series, voting together as a single class, irrespective of the provisions of Section 242(b)(2) of the DGCL or any corresponding provision enacted after the effectiveness of this Certificate of Incorporation.
SEVENTH. The Board of Directors is expressly authorized to adopt, amend, alter or repeal the bylaws of the Corporation. By affirmative vote of the holders of a majority of the shares of Common Stock then outstanding, Stockholders may adopt, amend, alter or repeal the bylaws of the Corporation. Notwithstanding the previous sentence, following the Trigger Date (as defined below), any amendment, alteration or repeal of Sections 2.2, 2.9, 2.10, 3.4 and 8.6 and Article VII of the Corporations bylaws shall require the affirmative vote of the holders of at least two-thirds of the shares of Common Stock then outstanding. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, and in addition to any specific requirements contained in this Certificate of Incorporation with respect to any particular Article or provision of this Certificate of Incorporation, at any time following the Trigger Date, Articles SEVENTH, NINTH, TENTH, ELEVENTH, TWELFTH, THIRTEENTH and FIFTEENTH may be amended, altered, repealed or rescinded, in whole or in part, or any provision inconsistent with those provisions or this provision may be adopted, only by the affirmative vote of the holders of at least two-thirds of the voting power of the shares of capital stock of the Corporation entitled to vote on such amendment, alteration, repeal, rescission or adoption, voting together as a single class.
EIGHTH. Elections of directors need not be by written ballot except and to the extent provided in the bylaws of the Corporation.
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NINTH.
(a) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
(b) Subject to the rights granted to holders of any one or more series of Preferred Stock then outstanding or the rights granted pursuant to the Stockholders Agreement, dated on or about the date of this Certificate of Incorporation (as the same may be amended, supplemented, restated or otherwise modified from time to time, the Stockholders Agreement), by and among the Corporation, Ares and OTPP, the Board of Directors shall consist of not less than three nor more than thirteen members. Subject to the Certificate of Incorporation, the Corporations bylaws and the Stockholders Agreement, the exact number of directors of the corporation shall be fixed from time to time pursuant to resolution or resolutions of the Board of Directors. Subject to: (i) the previous sentence, (ii) the rights of the holders of any series of stock with respect to such series of stock and (iii) the rights granted to the Sponsors pursuant to the Stockholders Agreement, except as otherwise required by law and unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled only by a majority vote of the directors then in office, though less than a quorum, or by a sole remaining director, and not by the stockholders. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor.
(c) Upon the effectiveness of this Certificate of Incorporation, the directors of the Corporation shall be divided into three classes, as nearly equal in number as reasonably possible, as determined by the Board of Directors. The initial term of office for the first class of such directors shall expire at the first annual meeting of stockholders. The initial term of office for the second class of such directors shall expire at the second annual meeting of stockholders, while the initial term of office for the third class of such directors shall expire at the third annual meeting of stockholders. The directors of each class shall hold office until their successors have been duly elected and qualified. At each annual meeting of stockholders following such initial
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classification and election, directors elected to succeed the directors whose terms expire at such annual meeting shall be elected to hold office for a term of three years following their election and until their successors have been duly elected and qualified. No change in the date of any annual meeting shall shorten the term of any incumbent director. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain or attain a number of directors in each class as nearly equal as reasonably possible. In no event shall a decrease in the number of directors shorten the term of any incumbent director. Prior to such date when the Sponsors cease to collectively own at least a majority of the outstanding shares of Common Stock (such date, the Trigger Date), and subject to the rights of any class or series of Preferred Stock to elect and remove directors, any director or the entire Board of Directors may be removed, with or without cause, by the affirmative vote of the holders of a majority of the shares of Common Stock then outstanding entitled to vote at an election of directors. Following the Trigger Date, directors or the entire Board of Directors may only be removed for cause by an affirmative vote of the holders of at least two-thirds of the shares of Common Stock then outstanding entitled to vote at an election of directors. Following the Trigger Date, this Article NINTH may not be amended, modified or repealed, except by the affirmative vote of the holders of at least two-thirds of the shares of Common Stock then outstanding.
(d) In the event that the holders of any class or series of stock of the Corporation shall be entitled, voting separately as a class, to elect any directors of the Corporation, then the number of directors that may be elected by such holders shall be in addition to the number fixed pursuant to the bylaws. Except as otherwise expressly provided in the terms of such class or series, the terms of the directors elected by such holders shall expire at the annual meeting of stockholders next succeeding their election without regard to the classification of the remaining directors.
(e) Definitions. Solely for purposes of Articles NINTH and TWELFTH:
(i) Affiliate shall mean: (a) with respect to Ares, any person or entity that, directly or indirectly, is controlled by Ares, controls Ares or is under common control with Ares, and (b) with respect to OTPP, any person or entity that, directly or indirectly, is
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controlled by OTPP, controls OTPP or is under common control with OTPP. With respect to each of Ares and OTPP, Affiliate shall exclude (x) the Corporation and (y) any entity that is controlled by the Corporation (including its direct and indirect subsidiaries). Affiliate shall also mean, with respect to the Corporation, any person or entity that, directly or indirectly, is controlled by the Corporation.
(ii) Ares shall mean Ares Corporate Opportunities Fund IV, L.P.
(iii) OTPP shall mean Ontario Teachers Pension Plan Board.
(iv) Sponsors shall mean (a) Ares and OTPP, (b) each of their respective Affiliates, and (c) any successor by operation of law (including, without limitation, by merger or otherwise) of each of the foregoing or any such successor.
TENTH.
(a) Prior to the Trigger Date, any action required or permitted to be taken by stockholders, including but not limited to the election of directors, may be taken by written consent or consents of the stockholders. Stockholders may only take action by written consent if: (i) such consent or consents are signed by or on behalf of the holders of outstanding shares of stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on the action were present and voted; and (ii) such consent or consents are delivered to the Corporation in accordance with the DGCL. Following the Trigger Date, subject to the rights of the holders of any series of Preferred Stock, any action required or permitted to be taken by stockholders must be effected at a duly called annual or special meeting of stockholders.
(b) Prior to the Trigger Date, special meetings of stockholders shall be called by the Secretary of the Corporation at the written request of the holders of a majority of the shares of Common Stock then outstanding. Following the Trigger Date, except as otherwise required by law and subject to the rights of the holders of any series of Preferred Stock, special meetings of stockholders may be called only by: (i) the Chairman of the Board of Directors; or (ii) the Secretary of the Corporation at the direction of a majority of the directors then in office; and (iii) special meetings of stockholders may not be called by any other person or persons.
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ELEVENTH. A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that such exemption from liability or limitation is not permitted under the DGCL as currently in effect or as the same may be amended after the effectiveness of this Certificate of Incorporation. If the DGCL is amended after the effectiveness of this Certificate of Incorporation to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent authorized by the DGCL, as so amended. No amendment, modification or repeal of this Article ELEVENTH or the adoption of any provision of the Certificate of Incorporation inconsistent with this Article ELEVENTH shall adversely affect any right or protection of a director that exists at the time of such amendment, modification, repeal or adoption.
TWELFTH.
(a) Recognition of Corporate Opportunities. The Corporation recognizes and anticipates that: (i) certain directors, officers, principals, partners, members, managers, employees, agents and/or other representatives of the Sponsors may serve as directors, officers or agents of the Corporation and its Affiliates; and (ii) the Sponsors may now engage and may continue to engage in (x) the same or similar activities or related lines of business as those in which the Corporation and its Affiliates, directly or indirectly, may engage and/or (y) other business activities that overlap with or compete with those in which the Corporation and its Affiliates, directly or indirectly, may engage. The provisions of this Article TWELFTH are set forth to regulate and define the conduct of certain affairs of the Corporation and its Affiliates with respect to certain classes or categories of business opportunities as they may involve the Sponsors and any person or entity who, while a stockholder, director, officer or agent of the Corporation or any of its Affiliates, is a director, officer, principal, partner, member, manager, employee, agent and/or other representative of any of the Sponsors (each, an Identified Person), on the one hand, and the powers, rights, duties and liabilities of the Corporation and its Affiliates and its and their respective stockholders, directors, officers, and agents, on the other.
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To the fullest extent permitted by law (including, without limitation, the DGCL), and notwithstanding any other duty (contractual, fiduciary or otherwise, whether at law or in equity), each Identified Person shall have the right to directly or indirectly, engage in and possess interests in other business ventures of every type and description, including those engaged in the same or similar business activities or lines of business as the Corporation or any of its Affiliates or deemed to be competing with the Corporation or any of its Affiliates. In addition, no Identified Person shall have any duty, whether contractual, fiduciary or otherwise, whether at law or in equity, not to engage in any of the foregoing activities, interests, ventures or opportunities, whether competitive or otherwise. The scope of activities permitted or otherwise authorized by this ARTICLE TWELFTH shall apply without regard to whether the Identified Person pursues such activities, interests, ventures or opportunities on its own account, or in partnership with, or as a direct or indirect equity holder, controlling person, stockholder, director, officer, employee, agent, Affiliate (including any portfolio company), member, financing source, investor, director or indirect manager, general or limited partner or assignee of any other person or entity. Under no circumstances shall any Identified Person have an obligation to offer to the Corporation or its subsidiaries or other Affiliates the right to participate in any of the activities, interests, ventures or opportunities described in this subsection (a). Each Identified Person shall also have the right to invest in, or provide services to, any person that is engaged in the same or similar business activities as the Corporation or its Affiliates or directly or indirectly competes with the Corporation or any of its Affiliates.
(b) Competitive Opportunities. In the event that any Identified Person acquires knowledge of a potential transaction or matter which may be an investment, corporate or business opportunity or prospective economic or competitive advantage in which the Corporation or its Affiliates could have an interest or expectancy (contractual, equitable or otherwise) (a Competitive Opportunity) or otherwise is then exploiting any Competitive Opportunity, to the fullest extent permitted under the DGCL and notwithstanding any other duty existing at law or in equity, the Corporation and its Affiliates will have no interest in, and no expectation (contractual, equitable or otherwise) that such Competitive Opportunity be offered to it. To the fullest extent permitted by law, any such interest or expectation (contractual, equitable or otherwise) is renounced so that such Identified Person shall:
(i) have no duty to communicate or present such Competitive Opportunity to the Corporation or its Affiliates;
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(ii) have the right to either hold any such Competitive Opportunity for such Identified Persons own account and benefit or the account of the former, current or future direct or indirect equity holders, controlling persons, stockholders, directors, officers, employees, agents, Affiliates, members, financing sources, investors, direct or indirect managers, general or limited partners or assignees of any Identified Person or to direct, recommend, assign or otherwise transfer such Competitive Opportunity to persons or entities other than the Corporation or any of its subsidiaries, Affiliates or direct or indirect equity holders; and
(iii) notwithstanding any provision in the Certificate of Incorporation to the contrary, not be obligated or liable to the Corporation, any stockholder, director or officer of the Corporation or any other person or entity by reason of the fact that such Identified Person, directly or indirectly, took any of the actions noted in the immediately preceding clause (ii), pursued or acquired such Competitive Opportunity for itself or any other person or entity or failed to communicate or present such Competitive Opportunity to the Corporation or its Affiliates.
(c) Acknowledgement. Any person or entity purchasing or otherwise acquiring or holding any interest in any shares of capital stock of the Corporation or any other interest in the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article TWELFTH.
(d) Interpretation; Duties. In the event of a conflict or other inconsistency between this Article TWELFTH and any other Article or provision of the Certificate of Incorporation, this Article TWELFTH shall prevail under all circumstances. Notwithstanding anything to the contrary in this Certificate of Incorporation, under no circumstances shall the provisions of this Article TWELFTH limit or eliminate any duty (contractual, fiduciary or otherwise, whether at law or in equity) owed by any employee of the Corporation or any of its Affiliates to the Corporation, even if such employee is an Identified Person. Further, under no circumstances shall the Corporation be deemed to have renounced any Competitive Opportunity
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as to any employee of the Corporation or its Affiliates. The Corporation does not renounce its interest in any Competitive Opportunity offered to any non-employee director (including any non-employee director who serves as an officer of the Corporation) if such opportunity is expressly offered in writing to such person solely in his or her capacity as a director or officer of the Corporation, and the provisions of subsection (b) of this Article TWELFTH shall not apply to any such Competitive Opportunity.
(e) Section 122(17) of the DGCL. For the avoidance of doubt, subject to subsection (d) of this Article TWELFTH, this Article TWELFTH is intended to constitute, with respect to the Identified Persons, a disclaimer and renunciation, to the fullest extent permitted under Section 122(17) of the DGCL, of any right of the Corporation or any of its Affiliates with respect to the matters set forth in this Article TWELFTH. This Article TWELFTH shall be construed to effect such disclaimer and renunciation to the fullest extent permitted under the DGCL.
(f) Business Ventures. The Corporation and its Affiliates do not have any rights in and to the business ventures of any Identified Person, or the income or profits derived from those business ventures. The Corporation agrees that each of the Identified Persons may do business with any potential or actual customer or supplier of the Corporation or may employ or otherwise engage any officer or employee of the Corporation.
(g) No Competitive Opportunity. In addition to and notwithstanding the foregoing provisions of this Article TWELFTH, an investment, corporate or business opportunity shall not be deemed to be a Competitive Opportunity for the Corporation if it is an investment, corporate or business opportunity that: (i) the Corporation is neither financially or legally able, nor contractually permitted to undertake; (ii) from its nature, is not in the line of the Corporations business or is of no practical advantage to the Corporation; or (iii) is one in which the Corporation has no interest or reasonable expectancy.
(h) Amendments. For so long as either of the Sponsors own any shares of Common Stock, this Article TWELFTH may not be amended, modified or repealed, except with the written consent of each of the Sponsors that owns shares of Common Stock at such time.
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THIRTEENTH.
(a) Section 203 of the DGCL. The Corporation expressly elects not to be governed by Section 203 of the DGCL.
(b) Notwithstanding the foregoing, the Corporation shall not engage in any business combination (as defined below), at any point in time at which the Common Stock is registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the Exchange Act), with any interested stockholder (as defined below) for a period of three (3) years following the time that such stockholder became an interested stockholder, unless:
(i) prior to such time, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholde;
(ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock (as defined below) of the Corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (a) by persons who are directors and also officers of the Corporation and (b) employee stock plans of the Corporation in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
(iii) at or subsequent to such time, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock of the Corporation which is not owned by the interested stockholder.
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(c) Definitions. For the purposes of this Article THIRTEENTH only, references to:
(i) affiliate means a person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, another person.
(ii) Ares means Ares Corporate Opportunities Fund IV, L.P. and its affiliates.
(iii) Ares Direct Transferee means any person that acquires (other than in a registered public offering) directly from Ares or any of its affiliates or successors or any group, or any member of any such group, of which such persons are a party under Rule 13d-5 of the Exchange Act, beneficial ownership of 15% or more of the then outstanding voting stock of the Corporation.
(iv) Ares Indirect Transferee means any person that acquires (other than in a registered public offering) directly from any Ares Direct Transferee or any other Ares Indirect Transferee beneficial ownership of 15% or more of the then outstanding voting stock of the Corporation.
(v) associate, when used to indicate a relationship with any person, means: (i) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock; (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.
(vi) business combination, when used in reference to the Corporation and any interested stockholder of the Corporation, means:
(A) any merger or consolidation of the Corporation or any direct or indirect majority-owned subsidiary of the Corporation (a) with the interested stockholder, or (b) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the interested stockholder, and, as a result of such merger or consolidation, this Article THIRTEENTH is not applicable to the surviving entity;
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(B) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a stockholder of the Corporation, to or with the interested stockholder, whether as part of a dissolution or otherwise, of assets of the Corporation or of any direct or indirect majority-owned subsidiary of the Corporation which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the Corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Corporation;
(C) any transaction which results in the issuance or transfer by the Corporation or by any direct or indirect majority-owned subsidiary of the Corporation of any stock of the Corporation or of such subsidiary to the interested stockholder, except: (a) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which securities were outstanding prior to the time that the interested stockholder became such; (b) pursuant to a merger under Section 251(g) of the DGCL; (c) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which security is distributed, pro rata to all holders of a class or series of stock of the Corporation subsequent to the time the interested stockholder became such; (d) pursuant to an exchange offer by the Corporation to purchase stock made on the same terms to all holders of said stock; or (e) any issuance or transfer of stock by the Corporation. In no case under items (c)-(e) of the preceding sentence shall there be an increase in the interested stockholders proportionate share of the stock of any class or series of the Corporation or of the voting stock of the Corporation (except as a result of immaterial changes due to fractional share adjustments);
(D) any transaction involving the Corporation or any direct or indirect majority-owned subsidiary of the Corporation which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the Corporation or of any such subsidiary which is owned
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by the interested stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the interested stockholder; or
(E) any receipt by the interested stockholder of the benefit, directly or indirectly (except proportionately as a stockholder of the Corporation), of any loans, advances, guarantees, pledges, or other financial benefits (other than those expressly permitted in subsections (A)-(D) above) provided by or through the Corporation or any direct or indirect majority-owned subsidiary.
(vii) control, including the terms controlling, controlled by and under common control with, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract, or otherwise. A person who is the owner of 20% or more of the outstanding voting stock of a corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith and not for the purpose of circumventing this Article THIRTEENTH, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity.
(viii) controlled portfolio company means any portfolio company that directly, or indirectly through one or more intermediaries, is controlled by or is under common control with: (A) Ares, an Ares Direct Transferee or an Ares Indirect Transferee or (B) OTPP, an OTPP Direct Transferee or an OTPP Indirect Transferee, as applicable.
(ix) interested stockholder means any person (other than the Corporation or any direct or indirect majority-owned subsidiary of the Corporation) that (i) is the owner of 15% or more of the outstanding voting stock of the Corporation, or (ii) is an affiliate or associate of the Corporation and was the owner of 15% or more of the outstanding voting stock of the Corporation at any time within the three-year period immediately prior to the date on
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which it is sought to be determined whether such person is an interested stockholder; and the affiliates and associates of such person. Interested stockholder shall not include (a) Ares, any Ares Direct Transferee, any Ares Indirect Transferee or any of their respective affiliates, controlled portfolio companies or successors or any group, or any member of any such group, to which such persons are a party under Rule 13d-5 of the Exchange Act, (b) OTPP, any OTPP Direct Transferee, any OTPP Indirect Transferee or any of their respective affiliates, controlled portfolio companies or successors or any group, or any member of any such group, to which such persons are a party under Rule 13d-5 of the Exchange Actor, or (c) any person whose ownership of shares in excess of the 15% limitation set forth in this Certificate of Incorporation is the result of any action taken solely by the Corporation, but such person shall be an interested stockholder if such person then acquires additional shares of voting stock of the Corporation, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an interested stockholder, the voting stock of the Corporation deemed to be outstanding shall include stock deemed to be owned by the person through application of the definition of owner below but shall not include any other unissued stock of the Corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.
(x) owner, including the terms own and owned, when used with respect to any stock, means a person that individually or with or through any of its affiliates or associates:
(A) beneficially owns such stock, directly or indirectly;
(B) has the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, except that a person shall not be deemed the owner of stock tendered pursuant to a tender or exchange offer made by such person or any of such persons affiliates or associates until such tendered stock is accepted for purchase or exchange;
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(C) has the right to vote such stock pursuant to any agreement, arrangement or understanding, except that a person shall not be deemed the owner of any stock because of such persons right to vote such stock if the agreement, arrangement or understanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to ten (10) or more persons; or
(D) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in subsection (C) above), or disposing of such stock with any other person that beneficially owns, or whose affiliates or associates beneficially own, directly or indirectly, such stock.
(xi) OTPP means Ontario Teachers Pension Plan Board and its affiliates.
(xii) OTPP Direct Transferee means any person that acquires (other than in a registered public offering) directly from OTPP or any of its affiliates or successors or any group, or any member of any such group, of which such persons are a party under Rule 13d-5 of the Exchange Act, beneficial ownership of 15% or more of the then outstanding voting stock of the Corporation.
(xiii) OTPP Indirect Transferee means any person that acquires (other than in a registered public offering) directly from any OTPP Direct Transferee or any other OTPP Indirect Transferee beneficial ownership of 15% or more of the then outstanding voting stock of the Corporation.
(xiv) person means any individual, corporation, partnership, unincorporated association or other entity.
(xv) stock means, with respect to any corporation, capital stock and, with respect to any other entity, any equity interest.
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(xvi) voting stock means stock of any class or series entitled to vote generally in the election of directors.
FOURTEENTH, Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for:
(a) any derivative action or proceeding brought on behalf of the Corporation;
(b) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Corporation to the Corporation or its stockholders;
(c) any action asserting a claim against the Corporation or any director, officer or other employee of the Corporation arising pursuant to any provision of the DGCL, the Certificate of Incorporation or the bylaws of the Corporation (in each case, as they may be amended from time to time);
(d) any action asserting a claim against the Corporation or any director, officer or other employee of the Corporation governed by the internal affairs doctrine;
(e) any action or proceeding to interpret, apply, enforce or determine the validity of this Certificate of Incorporation or the bylaws of the Corporation (including any right, obligation or remedy under this Certificate of Incorporation or the bylaws of the Corporation); or
(f) any action or proceeding as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware.
This Article FOURTEENTH shall not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended, subject to and contingent upon a final adjudication in the
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State of Delaware of the enforceability of this provision. Any person or entity that acquires any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article FOURTEENTH.
FIFTEENTH, The Corporation shall indemnify its directors to the fullest extent authorized or permitted by Delaware law, as now or in effect after the effectiveness of this Certificate of Incorporation. Such right to indemnification shall continue as to a person who has ceased to be a director of the Corporation and shall inure to the benefit of his or her heirs, executors and personal and legal representatives. Notwithstanding the previous sentence, except for proceedings to enforce rights to indemnification, the Corporation shall not be obligated to indemnify any director (or his or her heirs, executors or personal or legal representatives) in connection with a proceeding (or part of a proceeding) initiated by such person unless such proceeding (or part of such proceeding) was authorized or consented to by the Board of Directors. The right to indemnification conferred by this Article FIFTEENTH shall include the right to be paid by the Corporation the expenses incurred in defending or otherwise participating in any proceeding in advance of its final disposition. To the extent authorized from time to time by the Board of Directors, the Corporation may provide rights to indemnification and to the advancement of expenses to officers, employees and agents of the Corporation similar to those conferred in this Article FIFTEENTH to the Board of Directors. The rights to indemnification and to the advancement of expenses conferred in this Article FIFTEENTH shall not be exclusive of any other right which any person may have or acquire under the Certificate of Incorporation, the bylaws of the Corporation, any statute, agreement, vote of stockholders or disinterested directors or otherwise. Any repeal or modification of this Article FIFTEENTH by the stockholders of the Corporation shall not adversely affect any rights to indemnification and to the advancement of expenses of a director or officer of the Corporation existing at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification.
SIXTEENTH. The incorporator of the Corporation is Paul J. Kardish, whose mailing address is c/o The AZEK Company Inc., 1330 W Fulton Street, #350, Chicago, IL 60607.
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SEVENTEENTH. The names of the persons who are to serve as the initial directors of the Corporation are:
Initial Class I Directors
Sallie Bailey
James Hirshorn
Ashfaq Qadri
Initial Class II Directors
Brian Klos
Ronald Pace
Blake Sumler
Initial Class III Directors
Russell Hammond
Gary Hendrickson
Bennett Rosenthal
Jesse Singh
The mailing address of each such director is: c/o The AZEK Company Inc., 1330 W Fulton Street, #350, Chicago, IL 60607.
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IN WITNESS WHEREOF, I have signed this Certificate of lncorporation this 11th day of June, 2020.
/s/ Paul J. Kardish |
||
Paul J. Kardish | ||
Incorporator |
Exhibit 3.2
BYLAWS
OF
THE AZEK COMPANY INC.
(Adopted as of June 11, 2020)
ARTICLE I
Offices
Section 1.1. Registered Office. The registered office of The AZEK Company Inc. (the Corporation) in the State of Delaware, and the name of its registered agent at such address, shall be as set forth in the certificate of incorporation of the Corporation, as the same may be amended and/or restated from time to time.
Section 1.2. Other Offices. The Corporation may have a principal or other office or offices at such other place or places, either within or without the State of Delaware, as the board of directors of the Corporation (the Board of Directors or the Board) may from time to time determine or as shall be necessary or appropriate for the conduct of the business of the Corporation.
ARTICLE II
Stockholders
Section 2.1. Annual Meetings. An annual meeting of stockholders shall be held for the election of directors at such date, time and place either within or without the State of Delaware. Alternatively, the annual meeting may not be held at any place, but may instead be held solely by means of remote communication, as may be designated by the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting.
Section 2.2. Special Meetings. Special meetings of stockholders may only be called in the manner provided in the certificate of incorporation. Special meetings of stockholders shall be held at such date, time and place either within or without the State of Delaware. Alternatively, the special meeting may not be held at any place, but may instead be held by means of remote communication, as may be stated in the notice of the meeting. At a special meeting of stockholders, only such business shall be conducted as shall be specified in the notice of meeting (or any supplement to the notice of meeting). Except in the case of a special meeting of stockholders called at the request of the stockholders pursuant to the express terms of the certificate of incorporation, the Board of Directors may postpone, reschedule or cancel any previously scheduled special meeting of stockholders.
Section 2.3. Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given. The
written notice shall state: (i) the place, if any, date and hour of the meeting; (ii) the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting; (iii) the record date for determining the stockholders entitled to vote at the meeting, if such date is different from the record date for determining stockholders entitled to notice of the meeting; and (iv) in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholders address as it appears on the records of the Corporation. In addition, if stockholders have consented to receive notices by a form of electronic transmission, then such notice, by facsimile telecommunication, or by electronic mail, shall be deemed to be given when directed to a number or an electronic mail address, respectively, at which the stockholder has consented to receive notice. If such notice is transmitted by a posting on an electronic network together with separate notice to the stockholder of such specific posting, such notice shall be deemed to be given upon the later of (i) such posting, and (ii) the giving of such separate notice. If such notice is transmitted by any other form of electronic transmission, such notice shall be deemed to be given when directed to the stockholder. Notice shall be deemed to have been given to all stockholders of record who share an address if notice is given in accordance with the householding rules set forth in the rules of the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the Exchange Act) and Section 233 of the Delaware General Corporation Law. For purposes of these by laws, electronic transmission means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient of the communication, and that may be directly reproduced in paper form through an automated process.
Section 2.4. Adjournments. Subject to Section 2.2, any meeting of stockholders, annual or special, may be adjourned from time to time, to reconvene at the same or some other place. In such event, notice of the adjournment need not be given if the time, place, if any, and the means of remote communications, if any, of the adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
Section 2.5. Quorum. Except where otherwise provided by law or the certificate of incorporation or these bylaws, at each meeting of stockholders, the holders of a majority of the outstanding shares of stock entitled to vote on a matter at the meeting, present in person or represented by proxy, shall constitute a quorum. For purposes of the foregoing, where a separate vote by class or classes is required for any matter, the holders of a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum to take action with respect to that vote on that matter. Two or more classes or series of stock shall be considered a single class if the holders of the classes or series of stock are entitled to vote together as a single class at the meeting. In the absence of a quorum of the holders of any
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class of stock entitled to vote on a matter, either: (i) by majority vote, the holders of such class so present or represented may adjourn the meeting of such class from time to time in the manner provided by Section 2.4 of these bylaws until a quorum of such class shall be so present or represented; or (ii) the Chairperson of the meeting may on his or her own motion adjourn the meeting from time to time in the manner provided by Section 2.4 of these bylaws until a quorum of such class shall be so present and represented without the approval of the stockholders who are present in person or represented by proxy and entitled to vote. If the Chairperson adjourns the meeting in accordance with clause (ii) of the preceding sentence, no notice of the adjournment need be given other than announcement at the meeting. If either: (i) the Corporation; or (ii) another corporation of which the Corporation owns, directly or indirectly, a majority of the shares entitled to vote in the election of such other corporations directors owns shares of the Corporations capital stock on the record date for determining stockholders entitled to vote at the meeting, those shares shall not be entitled to vote or counted for quorum purposes. The previous sentence shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity.
Section 2.6. Organization. Meetings of stockholders shall be presided over by the Chairperson of the Board of Directors, if any. In the absence of the Chairperson of the Board of Directors, meetings of stockholders shall be presided over by a chairperson designated by the Board of Directors. In the absence of such chairperson or of such designation, meetings of stockholders shall be presided over by a chairperson chosen at the meeting by the holders of a majority of the shares entitled to vote who are present, in person or by proxy. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting. In the absence of the Secretary and any Assistant Secretary, the chairperson of the meeting may appoint any person to act as secretary of the meeting.
The Board of Directors may adopt by resolution or resolutions such rules and regulations for the conduct of any meeting of the stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the order of business at each such meeting shall be as determined by the chairperson of the meeting. The chairperson of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting. Without limitation with respect to other rules, regulations, procedures, actions or things with respect to the conduct of any stockholder meeting, the chairperson shall have the authority to: (i) establish procedures for the maintenance of order and safety; (ii) limit the time allotted to questions or comments on the affairs of the Corporation; and (iii) restrict entry to such meeting after the time prescribed for the commencement of the meeting and the opening and closing of the voting polls for each item on which a vote is to be taken. Unless and to the extent determined by the Board of Directors or the chairperson presiding over the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.
Section 2.7. Inspectors. Prior to any meeting of stockholders, the Board of Directors or the Chief Executive Officer: (i) shall appoint one or more inspectors to act at such meeting and make a written report of such meeting; and (ii) may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate
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inspector is able to act, the person presiding at the stockholders meeting shall appoint one or more inspectors to act at the meeting. Before entering upon the discharge of his or her duties, each inspector shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall: (i) ascertain the number of shares outstanding and the voting power of each; (ii) determine the shares represented at the meeting and the validity of proxies and ballots; (iii) count all votes and ballots; (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and (v) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons to assist them in the performance of their duties.
The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxy or vote, nor any revocation of or change to a ballot, proxy or vote, shall be accepted by the inspectors after the closing of the polls. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to: (i) an examination of the proxies, and any envelopes submitted with such proxies; (ii) any information provided by a stockholder who submits a proxy by telegram, cablegram, or other electronic transmission from which it can be determined that the proxy was authorized by the stockholder; (iii) any written ballot or, if authorized by the Board, a ballot submitted by electronic transmission together with any information from which it can be determined that the electronic transmission was authorized by the stockholder; (iv) any information provided in a record of a vote if such vote was taken at the meeting by means of remote communication along with any information used to verify that any person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder; and (v) the regular books and records of the Corporation. The inspectors may also consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for such purpose, at the time they make their certification, the inspectors shall specify (i) the precise information considered by them, including the person or persons from whom they obtained the information; (ii) when the information was obtained; (iii) the means by which the information was obtained; and (iv) the basis for the inspectors belief that such information is accurate and reliable.
Section 2.8. Voting; Proxies. Unless otherwise provided in the certificate of incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by such stockholder which has voting power upon the matter in question. If the certificate of incorporation provides for more or less than one vote for any share on any matter, every reference in these bylaws to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy. Notwithstanding the foregoing, no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable but only if the proxy is
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coupled with an interest sufficient in law to support an irrevocable power. Any such interest may be in the stock itself or an interest in the Corporation generally. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing a written instrument revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. Voting at stockholders meetings need not be by written ballot unless the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or represented by proxy at such meeting shall so determine. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. In all other matters, unless otherwise provided by law or by the certificate of incorporation or these bylaws, the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Where a separate vote by class or classes is required, the affirmative vote of the holders of a majority of the shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class or classes, except as otherwise provided by law or by the certificate of incorporation or these bylaws. For purposes of this Section 2.8, votes cast for or against and abstentions with respect to such matter shall be counted as shares of stock of the Corporation entitled to vote on such matter, while broker non-votes (or other shares of stock of the Corporation similarly not entitled to vote) shall not be counted as shares entitled to vote on such matter.
Section 2.9. Notice of Stockholder Business and Nominations.
(a) Annual Meeting of Stockholders.
(i) At any annual meeting of the stockholders, only such nominations of persons for election to the Board of Directors and only other business shall be considered or conducted, as shall have been properly brought before the meeting. For nominations to be properly made at an annual meeting, and proposals of other business to be properly brought before an annual meeting, nominations and proposals of other business must be: (A) pursuant to the Corporations notice of meeting (or any supplement to the notice of meeting) delivered pursuant to Section 2.3 of these bylaws; (B) by or at the direction of the Board of Directors or any duly authorized committee of the Board of Directors; or (C) by any stockholder of the Corporation who (x) was a stockholder of record at the time of giving of notice provided for in these bylaws and at the time of the annual meeting, (y) is entitled to vote at the meeting and (z) complies with the notice procedures set forth in this bylaw as to such business or nomination. Subject to the Stockholders Agreement, dated on or about the date of these bylaws, by and among the Company, Ares Corporate Opportunities Fund IV, L.P., a Delaware limited partnership (Ares), and Ontario Teachers Pension Plan Board (OTPP, and, together with Ares, the Sponsors) (such agreement, the Stockholders Agreement), clause (C) of this Section 2.9(a)(i) shall be the exclusive means for a stockholder to make nominations or submit other business (other than matters properly brought under Rule 14a-8 under the Exchange Act and included in the Corporations notice of meeting) before an annual meeting of stockholders.
(ii) Without qualification or limitation, for any nominations or any other business to be properly brought before an annual meeting by a stockholder pursuant to paragraph (a)(i)(C)
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of this bylaw, the stockholder must have given timely notice of the nominations or other business in writing to the Secretary, and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholders notice shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the one hundred twentieth day and not later than the close of business on the ninetieth day prior to the first anniversary of the preceding years annual meeting. Notwithstanding the previous sentence, in the event that the date of the annual meeting is more than thirty days before or more than sixty days after such anniversary date, or if no annual meeting was held in the preceding year, notice by the stockholder to be timely must be so delivered not earlier than the opening of business on the one hundred twentieth day prior to the date of such annual meeting and not later than the close of business on the later of the ninetieth day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than one hundred days prior to the date of such annual meeting, the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall any adjournment or postponement of an annual meeting or the announcement of any adjournment or postponement of an annual meeting commence a new time period for the giving of a stockholders notice as described above. In addition, to be timely, a stockholders notice shall further be updated and supplemented, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for the meeting and as of the date that is ten business days prior to the meeting or any adjournment or postponement of the meeting. Such update and supplement shall be delivered to the Secretary at the principal executive offices of the Corporation not later than five business days after the record date for the meeting in the case of the update and supplement required to be made as of the record date, and not later than eight business days prior to the date for the meeting, any adjournment or postponement of the meeting in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement of the meeting. Whether given pursuant to this paragraph (a)(ii) or paragraph (b), to be in proper form, a stockholders notice to the Secretary must set forth, as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made: (A) the name and address of such stockholder, as they appear on the Corporations books and records, of such beneficial owner, if any, and of their respective affiliates or associates or others acting in concert therewith; (B) the class or series and number of shares of the Corporation which are, directly or indirectly, owned beneficially and of record by such stockholder, such beneficial owner, and of their respective affiliates or associates or others acting in concert therewith; (C) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation directly or indirectly owned beneficially by such stockholder, the beneficial owner, if any, or any affiliates or associates or others acting in concert therewith; (D) any derivative or synthetic arrangement having the characteristics of a long position in any class or series of shares of the Corporation directly or indirectly owned beneficially by such stockholder, the beneficial owner, if any, or any affiliates or associates or others acting in concert therewith; (E) any contract, derivative, swap or other transaction or series of transactions designed to produce economic benefits and risks that correspond substantially to the ownership of any class or series of shares of the Corporation, including due
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to the fact that the value of such contract, derivative, swap or other transaction or series of transactions is determined by reference to the price, value or volatility of any class or series of shares of the Corporation, whether or not such instrument, contract or right shall be subject to settlement in the underlying class or series of capital stock of the Corporation or otherwise, through the delivery of cash or other property, or otherwise, and without regard of whether the stockholder of record, the beneficial owner, if any, or any affiliates or associates or others acting in concert therewith, may have entered into transactions that hedge or mitigate the economic effect of such instrument, contract or right, or any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the Corporation (any of the foregoing, a Derivative Instrument) directly or indirectly owned beneficially by such stockholder, the beneficial owner, if any, or any affiliates or associates or others acting in concert therewith; (F) any proxy, contract, arrangement, understanding, or relationship pursuant to which such stockholder has a right to vote any shares of any security of the Corporation; (G) any contract, arrangement, understanding, relationship or otherwise, including any repurchase or similar so-called stock borrowing agreement or arrangement, engaged in, directly or indirectly, by such stockholder, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of any class or series of the shares of the Corporation by, manage the risk of share price changes for, or increase or decrease the voting power of, such stockholder with respect to any class or series of the shares of the Corporation, or which provides, directly or indirectly, the opportunity to profit or share in any profit derived from any decrease in the price or value of any security of the Corporation (any of the foregoing, a Short Interest); (H) any rights to dividends on the shares of the Corporation owned beneficially by such stockholder that are separated or separable from the underlying shares of the Corporation; (I) any proportionate interest in shares of the Corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which such stockholder is a general partner or, directly or indirectly, beneficially owns an interest in a general partner of such general or limited partnership; (J) any performance-related fees (other than an asset-based fee) that such stockholder is directly or indirectly entitled to based on any increase or decrease in the value of shares of the Corporation or Derivative Instruments, if any, as of the date of such notice, including without limitation any such interests held by members of such stockholders immediate family sharing the same household; (K) any significant equity interests or any Derivative Instruments or Short Interests in any principal competitor of the Corporation held by such stockholder; and (L) any direct or indirect interest of such stockholder in any contract with the Corporation, any affiliate of the Corporation or any principal competitor of the Corporation (including, in any such case, any employment agreement, collective bargaining agreement or consulting agreement). The notice described in the preceding sentence shall also set forth, as to each person, if any, whom the stockholder proposes to nominate for election or reelection to the Board of Directors (i) all information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder (including such persons written consent to being named in the Corporations proxy statement as a nominee and to serving as a director if elected) and (ii) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such stockholder
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and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert with them, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert the proposed nominee, on the other hand, including, without limitation, all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any affiliate or associate of them, or person acting in concert with them, were the registrant for purposes of such rule and the nominee were a director or executive officer of such registrant. In addition, with respect to each nominee for election or reelection to the Board of Directors, each such nomination must include, at the time made, a completed and signed questionnaire, representation and agreement required by Section 2.10 of these bylaws. At its sole discretion, the Corporation may also require any proposed nominee to furnish such information as may reasonably be required by the Corporation to determine: (x) the qualifications of such proposed nominee; (y) the eligibility of such proposed nominee to serve as an independent director of the Corporation; or (z) that could be material to a reasonable stockholders understanding of the qualifications and independence, or lack thereof, of such nominee. The Corporation may also require any proposed nominee to furnish such information as may reasonably be required, pursuant to applicable law, to be disclosed in the proxy materials concerning all persons nominated (by the Corporation or otherwise) for election as a director of the Corporation, whether or not the nominee is to be included in the Corporations proxy statement. The proposed nominee shall furnish to the Corporation the requested information pursuant to the preceding two sentences within ten days after receipt of any such request.
(iii) If the notice described in Section 2.9(a)(ii) relates to any business other than a nomination of a director or directors that the stockholder proposes to bring before the meeting, then, to be in proper form, the notice shall set forth: (i) a brief description of the business desired to be brought before the meeting; (ii) the reasons for conducting such business at the meeting and any material interest of such stockholder and beneficial owner, if any, in such business; (iii) the text of the proposal or business (including the text of any resolutions proposed for consideration, and, in the event that such business includes a proposal to amend the bylaws, the text of such proposed amendment); and (iv) a description of all agreements, arrangements and understandings between such stockholder and beneficial owner, if any, and any other person or persons (including their names) in connection with the proposal of such business by such stockholder. For the avoidance of doubt, if the notice described in Section 2.9(a)(ii) relates to both a nomination of a director or directors and other business, the notice shall set forth all of the required information pursuant to this paragraph and the immediately preceding paragraph.
(iv) Notwithstanding anything in the second sentence of paragraph (a)(ii) of this bylaw to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least one hundred days prior to the first anniversary of the preceding years annual meeting, a stockholders notice required by this bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation.
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(b) Special Meetings of Stockholders. The only business that shall be conducted at a special meeting of stockholders shall be as set forth in the Corporations notice of meeting, delivered prior to the special meeting in accordance with these bylaws. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporations notice of meeting: (A) by or at the direction of the Board of Directors; or (B) as provided in the Stockholders Agreement. In addition, nominations for election of directors at a special meeting may be made by any stockholder of the Corporation who: (i) is a stockholder of record at the time of giving of notice provided for in this bylaw and at the time of the special meeting; (ii) is entitled to vote at the meeting, and (iii) complies with the notice procedures set forth in this bylaw as to such nomination. With respect to the immediately preceding sentence, however, such nominations by stockholders shall only be made where the Board of Directors or the Sponsors pursuant to Article TENTH subsection (b) of the certificate of incorporation have determined that directors will be elected at the meeting. The immediately preceding two sentences shall be the exclusive means by which a stockholder may make nominations before a special meeting of stockholders at which directors are to be elected or appointed. In the event that the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, other than with respect to any nomination made in the manner provided in the Stockholders Agreement, any stockholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporations notice of meeting only if the stockholders notice required by paragraph (a)(ii) of this bylaw with respect to any nomination shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the one hundred twentieth day prior to the date of such special meeting and not later than the close of business on the later of the ninetieth day prior to the date of such special meeting. For the avoidance of doubt, the stockholders notice so delivered shall include the completed and signed questionnaire, representation and agreement required by Section 2.10 of these bylaws. If the first public announcement of the date of such special meeting is less than one hundred days prior to the date of such special meeting, such notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the tenth day following the day on which the Corporation first makes a public announcement of the date of the special meeting at which directors are to be elected. In no event shall any adjournment or postponement of a special meeting or the announcement of any adjournment or postponement of a special meeting commence a new time period for the giving of a stockholders notice as described in the immediately preceding sentence.
(c) General.
(i) Only such persons who are nominated in accordance with the procedures set forth in this bylaw or in the Stockholders Agreement shall be eligible to be elected as directors. Only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this bylaw. Except as otherwise provided by law, the certificate of incorporation or these bylaws, the chairperson of the meeting shall have the power and duty to determine whether a nomination or any business
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proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this bylaw. In the event any proposed nomination or business is not in compliance with this bylaw, the chairperson shall declare the defective proposal or nomination to be invalid. Unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the Corporations annual or special meeting of stockholders to make a nomination or present a proposal of other business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this bylaw, to be considered a qualified representative of the stockholder, a person must be authorized by a writing executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders. Such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting of stockholders.
(ii) For purposes of this bylaw, public announcement shall mean disclosure in a press release reported by a national news service or in a document publicly filed or furnished by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act and the rules and regulations promulgated thereunder.
(iii) Notwithstanding the foregoing provisions of this bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this bylaw. Notwithstanding the previous sentence, any references in these bylaws to the Exchange Act or the rules promulgated thereunder are not intended to and shall not limit the requirements applicable to nominations or proposals as to any other business to be considered pursuant to paragraph (a)(i)(C) or paragraph (b) of this bylaw. Nothing in this bylaw shall be deemed to affect any rights: (i) of stockholders to request inclusion of proposals in the Corporations proxy statement pursuant to Rule 14a-8 under the Exchange Act; or (ii) of the holders of any series of Preferred Stock, if and to the extent provided for under law, the certificate of incorporation or these bylaws. Subject to Rule 14a-8 under the Exchange Act, nothing in these bylaws shall be construed to permit any stockholder, or give any stockholder the right, to include or have disseminated or described in the Corporations proxy statement any nomination of director or directors or any other business proposal.
(iv) Notwithstanding anything to the contrary contained in this Section 2.9 or in Section 2.10, at any time when the Stockholders Agreement remains in effect, the requirements of this Section 2.9 and of Section 2.10 shall not apply to the exercise by a Sponsor of its rights to designate persons for nomination for election to the Board of Directors pursuant to the Stockholders Agreement.
Section 2.10. Submission of Questionnaire, Representation and Agreement. To be eligible to be a nominee of any stockholder for election or reelection as a director of the Corporation and qualified to serve as a director, a person must deliver to the Secretary at the principal executive offices of the Corporation a written questionnaire with respect to the background and qualification of such person and the background of any other persons or entities on whose behalf the nomination is being made pursuant to paragraph (a)(1)(C) or paragraph (b)
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of Section 2.9 of these bylaws. In the case of a person nominated for election as a director of the Corporation, such delivery shall be made, pursuant to paragraph (a)(1)(C) or paragraph (b) of Section 2.9 of these bylaws, in accordance with the time periods prescribed for delivery of notice under Section 2.9 of these bylaws. The questionnaire shall be provided by the Secretary to the proposed nominee upon written request by the proposed nominee or the nominating stockholder on such persons behalf. To be eligible to be a nominee of a stockholder for election or reelection as a director of the Corporation and qualified to serve as a director, a person must also deliver a written representation and agreement that such person: (A) is not and will not become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a Voting Commitment) that has not been disclosed to the Corporation or (2) any Voting Commitment that could limit or interfere with such persons ability to comply, if elected as a director of the Corporation, with such persons fiduciary duties under applicable law; (B) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed in the questionnaire; and (C) in such persons individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director of the Corporation, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation. The form of written representation and agreement shall also be provided by the Secretary to the proposed nominee upon written request by the proposed nominee or the nominating stockholder on such persons behalf.
Section 2.11. Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment of a meeting of stockholders, the Board of Directors may fix a record date. The record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and the record date shall not be more than sixty nor less than ten days before the meeting date. If the Board fixes a date, that date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting. Notwithstanding the previous sentence, the Board may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting. In such case, the Board shall also fix the record date for stockholders entitled to notice of such adjourned meeting as the same or an earlier date as that fixed for determination of stockholders entitled to vote at the adjourned meeting in accordance with this Section 2.11.
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In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date. The record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and the record date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board. If no record date has been fixed by the Board and when no prior action by the Board is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporations registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board and prior action by the Board is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board adopts the resolution taking such prior action.
In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date. The record date shall not precede the date upon which the resolution fixing the record date is adopted, and the record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating to that purpose.
Section 2.12. List of Stockholders Entitled to Vote. At least ten days before every meeting of stockholders, the Secretary shall prepare and make a complete list of the stockholders entitled to vote at the meeting. Notwithstanding the previous sentence, if the record date for determining the stockholders entitled to vote is less than ten days before the meeting date, the list shall reflect the stockholders entitled to vote as of the tenth day before the meeting date. The list shall be arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Nothing in this Section shall require the Corporation to include electronic mail addresses or other electronic content information on such list. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting for a period of at least ten days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting; or (ii) during ordinary business hours, at the principal place of business of the Corporation. In the event that the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation. If the meeting is to be held at a place, then a list of stockholders entitled to vote at the meeting shall be produced and kept at the time and place of the meeting during the entire meeting and may be examined by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then such list shall also be open to the examination of any stockholder during the entire meeting on a reasonably accessible electronic network. The information required to access such list shall be provided with the notice of the meeting.
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ARTICLE III
Board of Directors
Section 3.1. Powers; Number; Qualifications. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law or in the certificate of incorporation. The Board shall consist of one or more members, each of whom shall be a natural person. From time to time, the Board shall determine the number of members.
Section 3.2. Election; Term of Office; Resignation; Removal; Vacancies. Each director shall hold office until the next election of the class for which such director shall have been chosen, and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any director may resign at any time upon notice given in writing or by electronic transmission to the Board of Directors or to the Chief Executive Officer or the Secretary of the Corporation. Such resignation shall be effective upon delivery, unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events. Unless otherwise specified in the resignation, no acceptance of such resignation shall be necessary to make the resignation effective. Any director or the entire Board may be removed in accordance with the certificate of incorporation. Unless otherwise provided in the certificate of incorporation or these bylaws, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class or from any other cause may be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director. Whenever the holders of any class or classes of stock or series of stock are entitled to elect one or more directors by the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series then in office, or by the sole remaining director so elected. Any director elected or appointed to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor.
Section 3.3. Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board may from time to time determine, and, if so determined, notice of the meetings need not be given.
Section 3.4. Special Meetings. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairperson of the Board, if any, the Chief Executive Officer or by any two or more directors. Special meetings of the Board of Directors may be also called by the Sponsors at any time when the Sponsors, together with their affiliates, beneficially own, in the aggregate, at least 35% of the common stock of the Corporation. Reasonable notice of special meetings shall be given by the person or persons calling the meeting.
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Section 3.5. Participation in Meetings by Conference Telephone Permitted. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of the Board or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this bylaw shall constitute presence in person at such meeting.
Section 3.6. Quorum; Vote Required for Action. At all meetings of the Board of Directors, a majority of the entire Board shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board unless the certificate of incorporation or these bylaws shall require a vote of a greater number. If, at any meeting of the Board a quorum shall not be present, the members of the Board present may adjourn the meeting from time to time until a quorum shall be present.
Section 3.7. Organization. Meetings of the Board of Directors shall be presided over by the Chairperson of the Board, if any. In the absence of the Chairperson of the Board, meetings of the Board shall be presided over by the Chief Executive Officer, or, in his or her absence, by a chairperson chosen at the meeting. The Secretary, or in the absence of the Secretary, an Assistant Secretary, shall act as secretary of the meeting. In the absence of the Secretary and all Assistant Secretaries, the chairperson of the meeting may appoint any person to act as secretary of the meeting.
Section 3.8. Action by Directors Without a Meeting. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee of the Board of Directors, may be taken without a meeting if all members of the Board or of such committee consent in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
Section 3.9. Compensation of Directors. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix the compensation, including fees, reimbursement of expenses and equity compensation, of directors for services to the Corporation in any capacity, including for attendance of meetings of the Board or participation on any committees. Directors who are officers or employees of the Corporation may receive, if the Board desires, compensation for service as directors. Nothing in these bylaws shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation for such service.
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ARTICLE IV
Committees
Section 4.1. Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of an alternate member to replace the absent or disqualified member, the member or members of the committee present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent permitted by law and provided in the resolution of the Board establishing such committee or in these bylaws, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. No committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of directors) expressly required by law to be submitted to stockholders for approval; (ii) adopting, amending or repealing these bylaws; or (iii) indemnifying directors.
Section 4.2. Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board may adopt, amend and repeal rules for the conduct of its business. In the absence of a provision by the Board or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business. The vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee. In other respects, each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article III of these bylaws.
Section 4.3. Audit Committee. The Board of Directors shall have an Audit Committee composed of three (3) or more directors, each of whom shall satisfy any securities exchange independence requirements then in effect and applicable to the Corporation. The responsibilities of the Audit Committee shall be stated in the Audit Committees charter, as approved by the Board of Directors.
Section 4.4. Compensation Committee. The Board of Directors shall have a Compensation Committee composed of three (3) or more directors, each of whom shall satisfy any securities exchange independence requirements then in effect and applicable to the Corporation. The responsibilities of the Compensation Committee shall be stated in the Compensation Committees charter, as approved by the Board of Directors.
Section 4.5. Nominating and Corporate Governance Committee. The Board of Directors shall have a Nominating and Corporate Governance Committee composed of three (3)
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or more directors, each of whom shall satisfy any securities exchange independence requirements then in effect and applicable to the Corporation. The responsibilities of the Nominating and Corporate Governance Committee shall be stated in the Nominating and Corporate Governance Committees charter, as approved by the Board of Directors.
ARTICLE V
Officers
Section 5.1. Officers; Election. As soon as practicable after the annual meeting of stockholders in each year, the Board of Directors shall elect a Chief Executive Officer and a Secretary, and it may, if it so determines, elect from among its members a Chairperson of the Board and a Vice Chairperson of the Board. The Board may also elect one or more Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, one or more Assistant Secretaries, a Chief Financial Officer, a Chief Legal Officer, a Chief Human Resource Officer, a Chief Marketing Officer, a Treasurer and one or more Assistant Treasurers and such other officers as the Board may deem desirable or appropriate and may give any of them such further designations or alternate titles as it considers desirable. Any number of offices may be held by the same person unless prohibited by law or the certificate of incorporation or these bylaws otherwise provide.
Section 5.2. Term of Office; Resignation; Removal; Vacancies. Unless otherwise provided in the resolution of the Board of Directors electing any officer, each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice or electronic transmission to the Board or to the Chief Executive Officer or the Secretary of the Corporation. Such resignation shall be effective upon delivery, unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events. Unless otherwise specified in the resignation, no acceptance of such resignation shall be necessary to make it effective. The Board may remove any officer with or without cause at any time. Any such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation. The election of an officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, may be filled by the Board at any regular or special meeting.
Section 5.3. Chairperson of the Board. The Chairperson of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she is present. The Chairperson of the Board shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Board or as may be provided by law.
Section 5.4. Vice Chairperson of the Board. In the absence of the Chairperson of the Board, the Vice Chairperson of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she is present. The Vice Chairperson shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Board or as may be provided by law.
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Section 5.5. Chief Executive Officer. In the absence of the Chairperson of the Board and Vice Chairperson of the Board, the Chief Executive Officer shall preside at all meetings of the Board of Directors and of the stockholders at which he or she is present. The Chief Executive Officer shall be the chief executive officer and shall have general charge and supervision of the business of the Corporation. The Chief Executive Officer shall perform all duties incident to the office of president of a corporation and such other duties as may, from time to time, be assigned to him or her by the Board or as may be provided by law.
Section 5.6. President. Each President shall have such general powers and duties of supervision and management as shall be assigned to him or her by the Board of Directors.
Section 5.7. Vice Presidents. Each Vice President shall have such powers and shall perform such duties as shall be assigned to him or her by the Board of Directors.
Section 5.8. Chief Financial Officer. The Board of Directors shall appoint a Chief Financial Officer of the Corporation to serve at the pleasure of the Board of Directors. The Chief Financial Officer of the Corporation shall: (a) have the custody of the corporate funds and securities, except as otherwise provided by the Board of Directors; (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; (c) deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors; (d) disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements; and (e) render to the Chief Executive Officer and the Board of Directors, whenever they may require it, an account of all his or her transactions as Chief Financial Officer and of the financial condition of the Corporation.
Section 5.9. Secretary. The Secretary shall have the duty to record the proceedings of the meetings of the stockholders, the Board of Directors and any committees in a book to be kept for that purpose. The Secretary (a) shall see that all notices are given in accordance with the provisions of these bylaws or as required by law; (b) shall be custodian of the records of the Corporation; and (c) may affix the corporate seal to any document, the execution of which, on behalf of the Corporation, is duly authorized, and when so affixed may attest to that authorization. The Secretary shall perform all other duties incident to the office of secretary of a corporation and such other duties as may, from time to time, be assigned to him or her by the Board or the Chief Executive Officer or as may be provided by law.
Section 5.10. Other Officers. The Corporations other officers shall have such powers and duties in the management of the Corporation as shall be stated in a resolution of the Board of Directors. Any such resolution shall not be inconsistent with these bylaws and, to the extent not so stated, such other officers shall have such powers and duties as generally pertain to their respective offices and shall be subject to the Boards control. The Board may require any officer, agent or employee to give security for the faithful performance of his or her duties.
Section 5.11. Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors or a committee of the Board of Directors appointed for such purpose.
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ARTICLE VI
Stock
Section 6.1. Stock Certificates and Uncertificated Shares. The shares of stock in the Corporation may be represented by certificates. The Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the Corporations stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate previously issued until such certificate is surrendered to the Corporation. Every holder of stock represented by certificates shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairperson or Vice Chairperson of the Board, if any, the Chief Executive Officer, or a President or a Vice President, and by the Treasurer or an Assistant Treasurer, if any, or the Secretary or an Assistant Secretary, of the Corporation, representing the number of shares of stock registered in certificate form owned by such holder. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. The Corporation may not issue stock certificates in bearer form.
If the Corporation is authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class or series of stock and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock. Except as otherwise provided by law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate, which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series of stock and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated shares, the Corporation shall send to the registered owner of the shares a written notice containing the information required by law to be set forth or stated on certificates or a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series of stock and the qualifications, limitations or restrictions of such preferences and/or rights.
Except as otherwise expressly provided by law, the rights and obligations of the holders of uncertificated shares and the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical.
Section 6.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed.
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The Corporation may require the owner of the lost, stolen or destroyed certificate, or such owners legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
Section 6.3. Transfer. The shares of the stock of the Corporation shall be transferable in the manner prescribed by law and in these bylaws. In the case of certificated shares of stock, transfers shall be made on the books of the Corporation only by the holder of the shares or by such holders attorney duly authorized in writing, upon surrender for cancellation of certificate(s) for at least the same number of shares, with an assignment and power of transfer endorsed on or attached to the certificate, duly executed, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. In the case of uncertificated shares of stock, transfers shall be made on the books of the Corporation only upon receipt of proper transfer instructions from the registered holder of the shares or by such persons attorney duly authorized in writing, and upon compliance with appropriate procedures for transferring shares in uncertificated form. No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. Notwithstanding anything to the contrary in these bylaws, at all times that the Corporations stock is listed on a stock exchange, the shares of the stock of the Corporation shall comply with all direct registration system eligibility requirements established by such exchange, including any requirement that shares of the Corporations stock be eligible for issue in uncertificated or book-entry form. All issuances and transfers of shares of the Corporations stock shall be entered on the books of the Corporation with all information necessary to comply with such direct registration system eligibility requirements, including the name and address of the person to whom the shares of stock are issued, the number of shares of stock issued and the date of issue. The Board of Directors shall have the power and authority to make such rules and regulations as it may deem necessary or proper concerning the issue, transfer and registration of shares of stock of the Corporation in both the certificated and uncertificated form.
Section 6.4. Record Owners. The stock ledger shall be the only evidence as to who are the stockholders of the Corporation. The Corporation shall be entitled to recognize the exclusive right of a person registered on its stock ledger as the owner of shares to receive dividends, to vote and to receive notice, and otherwise to exercise all of the rights and powers of an owner of such shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice of the claim, except as otherwise required by law.
ARTICLE VII
Indemnification
Section 7.1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ( a proceeding), by reason of the fact
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that he or she is or was a director or an officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee, agent or trustee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (an indemnitee), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee, agent or trustee or in any other capacity while serving as a director, officer, employee, agent or trustee, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by Delaware law, as the same exists or may be amended. In the case of any such amendment, the amendment shall, if permitted, be limited to the Corporation providing broader indemnification rights than such law permitted the Corporation to provide prior to such amendment. The right to indemnification shall cover any expense, liability and loss (including attorneys fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith. Notwithstanding anything to the contrary in this Section 7.1, except as provided in Section 7.3 with respect to proceedings to enforce rights to indemnification or advancement of expenses or with respect to any compulsory counterclaim brought by such indemnitee, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part of a proceeding) initiated by such indemnitee only if such proceeding (or part of such proceeding) was authorized by the Board of Directors.
Section 7.2. Right to Advancement of Expenses. In addition to the right to indemnification conferred in Section 7.1, an indemnitee shall also have the right to be paid by the Corporation for the expenses (including attorneys fees) incurred in appearing at, participating in or defending any such proceeding referred to in Section 7.1 in advance of its final disposition or in connection with a proceeding brought to establish or enforce a right to indemnification or advancement of expenses under this Article VII which shall be governed by Section 7.3 (an advancement of expenses). Notwithstanding the previous sentence, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer shall be made solely upon delivery to the Corporation of an undertaking (an undertaking), by or on behalf of such indemnitee, if: (i) the General Corporation Law of the State of Delaware (the DGCL) requires; or (ii), in the case of an advance made in a proceeding brought to establish or enforce a right to indemnification or advancement. The undertaking required by the previous sentence shall not be required with respect to an advancement of expenses incurred by an indemnitee in any capacity other than as a director or officer. The indemnitee shall undertake to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (a final adjudication) that such indemnitee is not entitled to be indemnified or entitled to advancement of expenses under Sections 7.1 and 7.2 or otherwise.
Section 7.3. Right of Indemnitee to Bring Suit. If a claim under Section 7.1 or 7.2 is not paid in full by the Corporation within (a) sixty days after a written claim for indemnification has been received by the Corporation or (b) twenty days after a claim for an advancement of expenses has been received by the Corporation, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim or to obtain advancement of expenses, as applicable. To the fullest extent permitted by law, if the indemnitee is successful in whole or in part in: (i) any suit to enforce his or her indemnification rights under these bylaws; or (ii) any suit brought by the Corporation to recover an advancement
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of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be reimbursed for all of the costs and expenses incurred in prosecuting or defending such suit, including, without limitation, reasonable attorneys fees. In any suit brought by the indemnitee to enforce a right to indemnification under these bylaws it shall be a defense that the indemnitee has not met any applicable standard for indemnification set forth in the DGCL. No such defense shall apply, however, with respect to a suit brought by the indemnitee to enforce a right to an advancement of expenses. In any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that the indemnitee has not met any applicable standard for indemnification set forth in the DGCL. For the avoidance of doubt, such expenses shall include, without limitation, reasonable attorneys fees. Neither: (i) the failure of the Corporation to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the DGCL; nor (ii) an actual determination by the Corporation that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct, or, in the case of such a suit brought by the indemnitee, be a defense to such suit. For the avoidance of doubt, the term Corporation as used in the immediately preceding sentence shall include the Corporations directors who are not parties to such action, a committee of such directors, independent legal counsel or the Corporations stockholders. Whether in an action brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses under these bylaws, or in an action brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article VII or otherwise shall be on the Corporation.
Section 7.4. Indemnification Not Exclusive.
(a) The provision of indemnification to or the advancement of expenses and costs to any indemnitee under this Article VII, or the entitlement of any indemnitee to indemnification or advancement of expenses and costs under this Article VII, shall not limit or restrict in any way the power of the Corporation to indemnify or advance expenses and costs to such indemnitee in any other way permitted by law. Nor shall the provision of such indemnification or advancement be deemed exclusive of, or invalidate, any right to which any indemnitee seeking indemnification or advancement of expenses and costs may be entitled under any law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such indemnitees capacity as an officer, director, employee or agent of the Corporation and as to action in any other capacity.
(b) Given that certain jointly indemnifiable claims (as defined below) may arise due to the service of the indemnitee as a director and/or officer of the Corporation at the request of the indemnitee-related entities (as defined below), the Corporation shall be fully and primarily responsible for the payment to the indemnitee in respect of indemnification or advancement of all expenses, judgments, penalties, fines and amounts paid in settlement to the extent legally permitted and as required by the terms of the certificate of incorporation or these bylaws of the Corporation (or any other agreement between the Corporation and such persons, including the
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Stockholders Agreement) in connection with any such jointly indemnifiable claims, pursuant to and in accordance with the terms of this Article VII, irrespective of any right of recovery the indemnitee may have from the indemnitee-related entities. Any obligation on the part of any indemnitee-related entities to indemnify or advance expenses to any indemnitee shall be secondary to the Corporations obligation and shall be reduced by any amount that the indemnitee may collect as indemnification or advancement from the Corporation. The Corporation irrevocably waives, relinquishes and releases the indemnitee-related entities from any and all claims it may have against the indemnitee-related entities for contribution, subrogation or any other recovery of any kind in respect of contribution or subrogation. Under no circumstance shall the Corporation be entitled to any right of subrogation or contribution by the indemnitee-related entities. No right of advancement or recovery the indemnitee may have from the indemnitee-related entities shall reduce or otherwise alter the rights of the indemnitee or the obligations of the Corporation regardless of source. In the event that any of the indemnitee-related entities shall make any payment to the indemnitee in respect of indemnification or advancement of expenses with respect to any jointly indemnifiable claim, the indemnitee-related entity making such payment shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnitee against the Corporation. The indemnitee shall execute all papers reasonably required and shall do all things that may be reasonably necessary to secure such rights, including the execution of such documents as may be necessary to enable the indemnitee-related entities effectively to bring suit to enforce such rights. Each of the indemnitee-related entities shall be third-party beneficiaries with respect to this Section 7.4(b), entitled to enforce this Section 7.4(b).
For purposes of this Section 7.4(b), the following terms shall have the following meanings:
(1) The term indemnitee-related entities means any corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise (other than the Corporation or any other corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise for which the indemnitee has agreed, on behalf of the Corporation or at the Corporations request, to serve as a director, officer, employee or agent and which service is covered by the indemnity described in these bylaws) from whom an indemnitee may be entitled to indemnification or advancement of expenses with respect to which, in whole or in part, the Corporation may also have an indemnification or advancement obligation. For the avoidance of doubt, the Sponsors and their respective affiliates shall be indemnitee-related entities.
(2) The term jointly indemnifiable claims shall be broadly construed and shall include, without limitation, any action, suit or proceeding for which the indemnitee shall be entitled to indemnification or advancement of expenses from both the indemnitee-related entities and the Corporation pursuant to Delaware law, any agreement or certificate of incorporation, bylaws, partnership agreement, operating agreement, certificate of formation, certificate of limited partnership or comparable organizational documents of the Corporation or the indemnitee-related entities, as applicable.
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Section 7.5. Corporate Obligations; Reliance. The rights granted pursuant to the provisions of this Article VII shall vest at the time a person becomes a director or officer of the Corporation. Such vested rights shall be deemed to create a binding contractual obligation on the part of the Corporation to the persons who from time to time are elected as officers or directors of the Corporation. Persons acting in their capacities as officers or directors of the Corporation or any subsidiary shall be entitled to rely on such provisions of this Article VII without giving notice of their reliance to the Corporation. Such rights shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitees heirs, executors and administrators. Any amendment, alteration or repeal of this Article VII that adversely affects any right of an indemnitee or its successors shall be prospective only. Any such amendment, alteration or repeal shall not limit, eliminate or impair any such right with respect to any proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment or repeal.
Section 7.6. Insurance. At its expense, the Corporation may maintain insurance to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.
Section 7.7. Indemnification of Employees and Agents of the Corporation. To the extent authorized from time to time by the Board of Directors, the Corporation may grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article VII with respect to the indemnification and advancement of expenses of directors and officers of the Corporation.
ARTICLE VIII
Miscellaneous
Section 8.1. Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors.
Section 8.2. Seal. The Corporation may have a corporate seal which shall have the name of the Corporation inscribed thereon. The seal shall be in such form as approved from time to time by the Board of Directors. The corporate seal may be used by causing it or a facsimile of the seal to be impressed or affixed or in any other manner reproduced.
Section 8.3. Waiver of Notice of Meetings of Stockholders, Directors and Committees. Whenever notice is required to be given by law or under any provision of the certificate of incorporation or these bylaws, a written waiver of the notice, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time that the notice is given or required to be given, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at
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the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the certificate of incorporation or these bylaws.
Section 8.4. Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee of the Board of Directors which authorizes the contract or transaction, or solely because such directors or officers votes are counted for such purpose, if: (1) the material facts as to directors or officers relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to directors or officers relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board, a committee of the Board of Directors or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction.
Section 8.5. Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or by means of, or be in the form of, any information storage device, or method. Records so kept must be convertible into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records in accordance with law.
Section 8.6. Amendment of Bylaws. These bylaws may be amended, altered or repealed, and new bylaws adopted, only in the manner set forth in the certificate of incorporation.
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Exhibit 4.1
EXECUTION VERSION
STOCKHOLDERS AGREEMENT
By and Among
THE AZEK COMPANY INC.,
ARES CORPORATE OPPORTUNITIES FUND IV, L.P.
AND
ONTARIO TEACHERS PENSION PLAN BOARD
Dated as of June 11, 2020
TABLE OF CONTENTS
ARTICLE I DEFINITIONS; RULES OF CONSTRUCTION |
1 | |||
SECTION 1.01 Definitions |
1 | |||
SECTION 1.02 Rules of Construction |
4 | |||
ARTICLE II REPRESENTATIONS AND WARRANTIES |
5 | |||
ARTICLE III BOARD OF DIRECTORS |
5 | |||
SECTION 3.01 Size and Composition |
5 | |||
SECTION 3.02 Sponsor Designees |
6 | |||
ARTICLE IV MATTERS REQUIRING SPONSOR CONSENT |
7 | |||
SECTION 4.01 Matters Requiring Sponsor Consent |
7 | |||
SECTION 4.02 Controlled Company. |
8 | |||
SECTION 4.03 Permitted Disclosure. |
9 | |||
ARTICLE V SPONSOR TRANSFER RESTRICTIONS |
9 | |||
SECTION 5.01 Rule 144 Transfer Restrictions |
9 | |||
SECTION 5.02 Rule 144 Transfer Procedures |
9 | |||
SECTION 5.03 Rule 144 Transfer Volume Limitations |
10 | |||
SECTION 5.04 Coordination Period |
10 | |||
ARTICLE VI INFORMATION |
10 | |||
SECTION 6.01 Books and Records; Access |
10 | |||
SECTION 6.02 Sharing of Information |
11 | |||
SECTION 6.03 Certain Reports |
11 | |||
ARTICLE VII MISCELLANEOUS |
11 | |||
SECTION 7.01 Notices |
11 | |||
SECTION 7.02 Binding Effect; Benefits |
13 | |||
SECTION 7.03 Amendment |
13 | |||
SECTION 7.04 Assignability |
13 | |||
SECTION 7.05 Governing Law; Submission to Jurisdiction |
13 | |||
SECTION 7.06 Enforcement |
14 | |||
SECTION 7.07 Severability |
14 | |||
SECTION 7.08 Additional Securities Subject to Agreement |
14 |
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SECTION 7.09 Section and Other Headings |
14 | |||
SECTION 7.10 Counterparts |
14 | |||
SECTION 7.11 Waiver of Jury Trial |
14 | |||
SECTION 7.12 Entire Agreement |
14 | |||
SECTION 7.13 Further Assurances |
14 |
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STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (this Agreement), dated as of June 11, 2020 (the Effective Date), is by and among The AZEK Company Inc. (successor to CPG Newco LLC), a Delaware corporation (the Company), Ares Corporate Opportunities Fund IV, L.P., a Delaware limited partnership (Ares), and Ontario Teachers Pension Plan Board (OTPP) (each of Ares and OTPP, individually, a Sponsor and, together, the Sponsors).
RECITALS
WHEREAS, the Company is currently contemplating an underwritten initial public offering of shares of its Class A Common Stock (as defined below); and
WHEREAS, in connection with, and effective upon, the date of the pricing of the IPO (as defined below), the Company and the Sponsors wish to set forth certain understandings between such parties, including with respect to certain governance matters.
NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties to this Agreement agree as follows:
ARTICLE I
DEFINITIONS; RULES OF CONSTRUCTION
SECTION 1.01 Definitions. The terms set forth below have the following meanings as used in this Agreement:
Affiliate of any specified Person means any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, control when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms controlling and controlled have meanings correlative to the foregoing. No Person shall be deemed to be an Affiliate of another Person solely by virtue of the fact that both Persons own shares of the Capital Stock of the Company.
Agreement has the meaning set forth in the preamble.
Ares has the meaning set forth in the preamble.
Board means the Board of Directors of the Company.
Capital Stock with respect to any Person means any and all shares, interests, participations, rights in or other equivalents (however designated) of such Persons capital stock, and any rights, warrants or options exercisable or exchangeable for or convertible into such capital stock.
Change of Control shall be deemed to occur if:
(i) at any time, the Company shall fail to own, directly or indirectly, beneficially and of record, 100% of the issued and outstanding equity interests of the Companys wholly-owned, direct subsidiary, CPG International LLC, a Delaware limited liability company; or
(ii) any person or group other than the Permitted Holders or any underwriter participating in the IPO, shall have acquired beneficial ownership of more than 35% of the outstanding shares of Class A Common Stock and the percentage of the outstanding shares of Class A Common Stock so held by such person or group is greater than the percentage of the outstanding shares of Class A Common Stock beneficially owned, directly or indirectly, in the aggregate by the Permitted Holders. For purposes of determining the percentage of Class A Common Stock held by any person, group or the Permitted Holders (beneficially or otherwise) in the immediately preceding sentence, share count shall be calculated on a fully diluted basis but not giving effect to contingent voting rights that have not yet vested. Notwithstanding anything to the contrary in this definition, a Change of Control shall not be deemed to occur if, in the case of clause (ii) above, the Permitted Holders have, at such time, the right or the ability by voting power, contract or otherwise to elect or designate for election at least a majority of the Board. Notwithstanding the preceding sentence or any provision of Rule 13d-3 of the Exchange Act (as in effect on September 30, 2013), (i) a person or group shall not be deemed to beneficially own securities (1) subject to an equity or asset purchase agreement, merger agreement or similar agreement (or voting or option or similar agreement related thereto) until the consummation of the transactions contemplated by such agreement or (2) as a result of veto or approval rights in any joint venture agreement, shareholder agreement or other similar agreement and (ii) if any
group includes one or more Permitted Holders, any issued and outstanding Class A Common Stock beneficially owned, directly or indirectly, by any Permitted Holders that are a part of such group shall not be treated as being beneficially owned by any other member of such group for purposes of determining whether a Change of Control has occurred. The terms group, beneficially owned and beneficial ownership for the purpose of this Change of Control definition shall have the meanings given those terms in Rules 13d-3 and 13d-5 under the
Exchange Act as in effect on September 30, 2013, and the term person shall not include any employee benefit plan of such person and its subsidiaries and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan.
Class A Common Stock means the Class A Common Stock, par value $0.001 per share, of the Company.
Class B Common Stock means the Class B Common Stock, par value $0.001 per share, of the Company.
Common Stock means the Class A Common Stock and the Class B Common Stock.
Company has the meaning set forth in the preamble.
Coordination Period has the meaning set forth in Section 5.04.
Effective Date has the meaning set forth in the preamble.
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IPO means the Companys underwritten public offering of Class A Common Stock that results in the shares of Class A Common Stock that are sold in such public offering being listed on the New York Stock Exchange, the NASDAQ Stock Market or any other securities exchange.
Law means any law, statute, ordinance, rule, regulation, code, order, judgment, injunction or decree enacted, issued, promulgated, enforced or entered by any government entity, quasi-governmental entities or self-regulatory organization exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government or by any stock exchange authority.
Material Subsidiary means each Significant Subsidiary of the Company, as defined in Rule 1-02 of Regulation S-X promulgated under the Securities Act.
Notified Sponsor has the meaning set forth in Section 5.02.
Notifying Sponsor has the meaning set forth in Section 5.02.
OTPP has the meaning set forth in the preamble.
Permitted Holder means any of: (a) the Sponsors and any of their Affiliates; (b) funds or partnerships managed or advised by either of the Sponsors and any of their Affiliates (but not including any of their portfolio companies); (c) the Sponsor Designees; (d) family members or trusts of any person listed in clauses (a) and (c); and (e) any person that forms a group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision) with any of the persons listed in clauses (a), (c) and (d) so long as the persons described in clauses (a), (c) and (d) form the majority in interest of any group formed in accordance with this clause (e).
Permitted Transferee shall mean any Affiliate of Ares or OTPP, as the case may be. Any Permitted Transferee of Ares shall be bound by the terms of this Agreement and treated as Ares for all purposes of this Agreement. Any Permitted Transferee of OTPP shall also be bound by the terms of this Agreement and treated as OTPP for all purposes of this Agreement.
Person means an individual, a corporation, a general or limited partnership, a limited liability company, a joint stock company, an association, a trust or any other entity or organization, including a government, a political subdivision or an agency or instrumentality of such government.
Private Block Transfer means a Transfer of shares of Common Stock pursuant to Sections 4(a)(i) or 4(d) of the Securities Act or pursuant to any other exemption (other than Rule 144) under the Securities Act.
Related Person with respect to any Person means: (a) an Affiliate of such Person; (b) any investment manager, investment advisor or general partner of such Person; (c) any investment fund, investment account or investment entity whose investment manager, investment advisor or general partner is such Person or a Related Person of such Person; and
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(d) any equity investor, partner, member or manager of such Person. Notwithstanding the previous sentence, no Person shall be deemed an Affiliate of another Person solely by virtue of the fact that both Persons own shares of the Capital Stock of the Company.
Rule 144 means Rule 144 under the Securities Act (or any successor rule or regulation).
Rule 144 Transfer means a Transfer of shares of Common Stock pursuant to Rule 144.
Sale Notice has the meaning set forth in Section 5.02.
Securities Act means the Securities Act of 1933.
Significant Action has the meaning set forth in Section 4.01.
Sponsor has the meaning set forth in the preamble.
Sponsor Designees has the meaning set forth in Section 3.02(a).
Transfer (including its correlative meanings, Transferor, Transferee and Transferred) shall mean, with respect to any security, directly or indirectly, to sell, contract to sell, give, assign, hypothecate, pledge, encumber, grant a security interest in, offer, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any economic, voting or other rights in or to such security. When used as a noun, Transfer shall have such correlative meaning as the context may require.
SECTION 1.02 Rules of Construction. Any provision of this Agreement that refers to the words include, includes or including shall be deemed to be followed by the words without limitation. References to dollars or $ shall mean dollars in lawful currency of the United States of America. References to numbered or letter articles, sections and subsections refer to articles, sections and subsections, respectively, of this Agreement unless expressly stated otherwise. References to a Section or paragraph shall be to a Section or paragraph of this Agreement unless otherwise indicated. Any agreement, instrument, law or statute defined or referred to in this Agreement or in any agreement or instrument that is referred to in this Agreement means such agreement, instrument, or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and references to all attachments to and instruments incorporated in such agreement, instrument, or statute, as applicable. References to a Person are also to its permitted successors and assigns. In the event that any claim is made by any Person relating to any conflict, omission or ambiguity in this Agreement, no presumption or burden of proof or persuasion shall be implied by virtue of the fact that this Agreement was prepared by or at the request of a particular Person or its counsel.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
Each of the parties severally represents and warrants to each of the other parties as follows:
(a) Authority; Enforceability. Such party: (i) has the legal capacity or organizational power and authority to execute, deliver and perform its obligations under this Agreement; and (ii) is duly organized and validly existing and in good standing under the Laws of its jurisdiction of organization. This Agreement has been duly executed and delivered by such party and constitutes a legal, valid and binding obligation of such party, enforceable against it in accordance with the terms of this Agreement, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other Laws affecting the rights of creditors generally and to the exercise of judicial discretion in accordance with general principles of equity (whether applied by a court of law or of equity).
(b) Consent. No consent, waiver, approval, authorization, exemption, registration, license or declaration is required to be made or obtained by such party, other than those that have been made or obtained on or prior to the date of this Agreement, in connection with (i) the execution or delivery of this Agreement or (ii) the consummation of any of the transactions contemplated by this Agreement.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01 Size and Composition. From and after the Effective Date, (1) for so long as it owns more than 5% of the then outstanding shares of Common Stock, each Sponsor shall: (i) vote or otherwise give such Sponsors consent in respect of all shares of Common Stock (whether now owned or hereafter acquired) owned by such Sponsor, and (ii) take all other appropriate action; and (2) the Company shall take all necessary and desirable actions (subject to any applicable securities exchange or equivalent listing requirements), including at each annual or special meeting of the stockholders of the Company called for the election of directors, and whenever the stockholders of the Company act by written consent with respect to the election of directors, to cause:
(a) the bylaws of the Company to provide that the authorized number of directors on the Board shall be not less than three and not more than thirteen;
(b) the election to the Board of any Sponsor Designees designated by the Sponsors in accordance with Section 3.02; and
(c) the removal from the Board of any director elected in accordance with clause (b) above, with or without cause, upon the written request of the Sponsor that designated such director (or, in the case of a jointly nominated Sponsor Designee pursuant to Section 3.02(b)(i), upon the written request of each of the Sponsors).
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SECTION 3.02 Sponsor Designees.
(a) The Sponsors shall have the right, but not the obligation, to nominate to the Board (such nominees, the Sponsor Designees) (subject to their election by the stockholders of the Company):
(i) for so long as the Sponsors collectively own 50% or more of the then outstanding shares of Common Stock, the greater of up to (A) six directors and (B) the number of directors comprising a majority of the Board; and
(ii) for so long as the Sponsors collectively own less than 50% of the then outstanding shares of Common Stock, that number of directors (rounded up to the nearest whole number or, if such rounding would cause the Sponsors to have the right to elect a majority of the Board, rounded to the nearest whole number) equal to the product of (x) the authorized number of directors on the Board times (y) a fraction, the numerator of which is the total number of shares of Common Stock collectively owned by the Sponsors, and the denominator of which is the total number of shares of Common Stock then outstanding. Notwithstanding the previous sentence, in the event that any Sponsor ceases to own more than 5% of the then outstanding shares of Common Stock, (x) such Sponsor shall not have the right to nominate any Sponsor Designees; (y) the shares of outstanding Common Stock owned by such Sponsor shall be excluded from any numerator for purposes of calculating the amounts set forth in clauses (i) and (ii) of this Section 3.02(a); and (z) the right to nominate Sponsor Designees in accordance with this Section 3.02 shall only be available to the Sponsor that owns the applicable percentage of shares of Common Stock.
(b) For purposes of this Section 3.02, each Sponsor shall nominate one half of the aggregate number of Sponsor Designees. Notwithstanding the previous sentence, in the event that:
(i) the number of Sponsor Designees is odd, the Sponsors shall jointly nominate one Sponsor Designee, and each Sponsor shall nominate one half of the remainder of such Sponsor Designees, except that in the event that any Sponsor ceases to own more than 5% of the then outstanding shares of Common Stock, such Sponsor shall not have the right to nominate any Sponsor Designees; and
(ii) any Sponsor owns more than 5%, but less than or equal to 10%, of the then outstanding shares of Common Stock, one Sponsor Designee shall be nominated by such Sponsor, and the remainder of the Sponsor Designees shall be nominated by the other Sponsor.
(c) If any Sponsor has nominated less than the total number of Sponsor Designees such Sponsor is entitled to nominate pursuant to this Section 3.02, such Sponsor shall have the right, at any time, to nominate such additional number of Sponsor Designees to which it is entitled. In such event, the directors of the Company shall take all necessary action to: (i) increase the size of the Board as required to enable such Sponsor to so nominate such additional Sponsor Designees; and (ii) designate such additional Sponsor Designees nominated by such Sponsor to fill such newly-created vacancy or vacancies, as applicable.
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(d) For purposes of this Section 3.02 and Article IV below, each Sponsor shall be deemed to own all shares of Common Stock owned by such Sponsors Affiliates.
ARTICLE IV
MATTERS REQUIRING SPONSOR CONSENT
SECTION 4.01 Matters Requiring Sponsor Consent. For so long as the Sponsors collectively own at least thirty percent (30%) of the then outstanding shares of Common Stock, neither the Company nor any of its subsidiaries shall take, or be permitted to take, any of the actions enumerated in this Section 4.01 (each, a Significant Action) without the prior written approval of each of the Sponsors. Notwithstanding the previous sentence, in the event that either Sponsor owns less than ten percent (10%) of the then outstanding shares of Common Stock, (x) the shares of Common Stock owned by such Sponsor shall be excluded from the numerator for purposes of calculating the thirty percent (30%) threshold and (y) Significant Actions shall not require the prior written approval of such Sponsor owning less than ten percent (10%) of the then outstanding Common Stock:
(a) merging or consolidating with or into any other Person, or transferring all or substantially all assets of the Company and its subsidiaries, taken as a whole, to another entity, or undertaking any transaction that would constitute a Change of Control, other than, in each case, transactions among the Company and its wholly-owned subsidiaries;
(b) (i) entering into any joint venture, investment (other than an investment in, contract with or acquisition of any securities or assets of any of the Companys wholly owned subsidiaries), recapitalization, reorganization or contract with any other Person (other than a wholly owned subsidiary), (ii) the acquisition of any securities or assets of another Person (other than a wholly owned subsidiary of the Company), in the case of any of the transactions set forth in clause (i) or (ii), whether in a single transaction or series of related transactions, with a fair market value, or for a purchase price, in excess of $75.0 million, or (iii) the exercise of any ownership rights in respect of any of the foregoing in this Section 4.01(b);
(c) Transferring assets of the Company or its subsidiaries in any transaction or series of related transactions (other than any Transfer of assets of any wholly owned subsidiary of the Company to the Company or any of the Companys other wholly owned subsidiaries), in each case other than (i) inventory sold in the ordinary course of business, or (ii) any Transfer of assets in a single transaction or series of related transactions with a fair market value of less than or equal to $75.0 million;
(d) guaranteeing, assuming, incurring or refinancing indebtedness for borrowed money by the Company or any of its subsidiaries (including indebtedness of any other Person existing at the time such other Person merged with or into or became a subsidiary of, or substantially all of its business and assets were acquired by, the Company or such subsidiary, and indebtedness secured by a lien encumbering any asset acquired by the Company or any such subsidiary) or the pledge of, or granting of a security interest in, any of the assets of the Company or any of its subsidiaries in excess of $100.0 million in any 12-month period (other than trade indebtedness incurred in the ordinary course of business by the Company and its subsidiaries);
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(e) issuing Capital Stock of the Company or the Companys subsidiaries other than (i) issuances to the Company or any of the Companys wholly owned subsidiaries or (ii) pursuant to an equity compensation plan approved by the Companys stockholders or a majority of the directors on the Board designated by the Sponsors pursuant to Section 3.02;
(f) terminating the employment of the Chief Executive Officer of the Company or hiring or designating a new Chief Executive Officer of the Company;
(g) entering into any transactions, agreements, arrangements or payments (including the purchase, sale, lease or exchange of any property, or rendering of any service or modification or amendment of any existing agreement or arrangement) with (i) either of the Sponsors (or their Affiliates or Related Persons) (other than transactions in which a Sponsor or an Affiliate or Related Person of a Sponsor becomes a lender under a credit facility, indenture or other form of indebtedness with institutional lenders of the Company or any of its subsidiaries, including replacements or refinancings of such indebtedness), (ii) any officer, director or employee of the Company or any subsidiary of the Company (other than in the ordinary course of business as part of travel advances, relocation advances or salary) or (iii) any other Person who beneficially owns greater than or equal to ten percent (10%) of the Common Stock then outstanding (including such Persons Affiliates), in each case that are material or involve aggregate payments or receipts in excess of $500,000;
(h) amending, modifying, waiving or repealing (whether by merger, consolidation or otherwise) any provision of the certificate of incorporation, the bylaws or equivalent organizational documents of the Company or any of the Companys subsidiaries in a manner that adversely affects either of the Sponsors;
(i) commencing any liquidation, dissolution or voluntary bankruptcy, administration, recapitalization or reorganization of the Company or any of its subsidiaries in any form of transaction, making arrangements with creditors, or consenting to the entry of an order for relief in any involuntary case, or taking the conversion of an involuntary case to a voluntary case, or consenting to the appointment or taking possession by a receiver, trustee or other custodian for all or substantially all of its property, or otherwise seeking the protection of any applicable bankruptcy or insolvency law, other than any such actions with respect to a non-Material Subsidiary where, in the good faith judgment of the Board, the maintenance or preservation of such subsidiary is no longer desirable in the conduct of the business of the Company or any of its Material Subsidiaries; and
(j) subject to Section 3.02, increasing or decreasing the size of the Board; and
(k) entering into of any agreement to do any of the foregoing.
SECTION 4.02 Controlled Company.
(a) The Sponsors acknowledge and agree that, (i) by virtue of this Agreement, they are acting as a group within the meaning of the New York Stock Exchange (the NYSE) rules as of the date hereof, and (ii) by virtue of the combined voting power of Class A Common Stock held by the Sponsors representing more than 50% of the total voting power of the Class A Common Stock outstanding as of the date of the pricing of the IPO (the Pricing Date), the Company qualifies as a controlled company within the meaning of NYSE rules as of the Pricing Date.
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(b) So long as the Company qualifies as a controlled company for purposes of NYSE rules, the Company will elect to be a controlled company for purposes of NYSE rules, and will disclose in its annual meeting proxy statement that it is a controlled company and the basis for that determination. If the Company ceases to qualify as a controlled company for purposes of NYSE rules, the Sponsors and the Company will take whatever action may be reasonably necessary in relation to such party, if any, to cause the Company to comply with NYSE rules as then in effect within the timeframe for compliance available under such rules.
SECTION 4.03 Permitted Disclosure.
(a) Each Sponsor Designee designated by Ares is permitted to disclose to Ares and its Affiliates information about the Company and its Affiliates that he or she receives as a result of being a director, subject to his or her fiduciary duties under Delaware law. Each Sponsor Designee designated by OTPP is permitted to disclose to OTPP and its Affiliates information about the Company and its Affiliates that he or she receives as a result of being a director, subject to his or her fiduciary duties under Delaware law.
ARTICLE V
SPONSOR TRANSFER RESTRICTIONS
SECTION 5.01 Rule 144 Transfer Restrictions. After the closing of the IPO, and prior to the expiration of the Coordination Period, no Sponsor shall Transfer any or all of its shares of Common Stock pursuant to Rule 144, other than in compliance with Sections 5.02 and 5.03. Notwithstanding anything to the contrary contained in this Agreement, either Sponsor may Transfer any of its shares of Common Stock to a Permitted Transferee without restriction or the consent of the other Sponsor.
SECTION 5.02 Rule 144 Transfer Procedures. Following the closing of the IPO, and prior to the expiration of the Coordination Period, either Sponsor intending to Transfer any of its shares of Common Stock in a Rule 144 Transfer or a Private Block Transfer (such Sponsor, the Notifying Sponsor) shall provide the other Sponsor (the Notified Sponsor) with at least five (5) business days prior written notice (via electronic mail, facsimile or otherwise in accordance with Section 7.01) (a Sale Notice) of the Notifying Sponsors intention to effect such a Transfer. Each Sale Notice shall specify the earliest time at which the Notifying Sponsor intends to commence such a Transfer and the number of shares of Common Stock proposed to be Transferred by the Notifying Sponsor in such Transfer. The Sale Notice is intended to permit the Sponsors electing to Transfer shares of Common Stock held by them at such time to coordinate the timing and process for Transferring such shares of Common Stock in an orderly fashion. Upon receipt of the Sale Notice by the Notified Sponsor, the Notified Sponsor shall have the right to participate in the contemplated Transfer by Transferring its shares of Common Stock up to a number equal to (x) the number of shares of Common Stock proposed to be Transferred by the Notifying Sponsor in such Transfer multiplied by (y) a fraction, the numerator of which shall be the number of shares of Common Stock owned by the Notified Sponsor
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immediately following the closing of the IPO and the denominator of which shall be the aggregate number of shares of Common Stock owned by both Sponsors immediately following the closing of the IPO; it being understood that if such product is fractional, it shall be rounded down to the nearest whole number. The Notified Sponsor must provide the Notifying Sponsor with written notice of the Notified Sponsors intention to participate in such Transfer within three (3) business days of receipt of the Sale Notice.
SECTION 5.03 Rule 144 Transfer Volume Limitations. For any given measurement period applicable to the measurement of the volume limitation applicable pursuant to Rule 144(e) under the Securities Act, no Sponsor shall be permitted to effect Rule 144 Transfers in excess of its pro rata share of all shares of Common Stock that may be Transferred pursuant to Rule 144 by the Sponsors in the aggregate during the applicable measurement period. Each Sponsors pro rata share shall be calculated as the number of shares of Common Stock owned by such Sponsor immediately following the closing of the IPO divided by the aggregate number of shares of Common Stock owned by both Sponsors immediately following the closing of the IPO. In the event either Sponsor wishes to Transfer shares of Common Stock pursuant to Rule 144 in excess of such number, such Sponsor must receive written consent from the other Sponsor prior to effecting such Transfer.
SECTION 5.04 Coordination Period. The restrictions set forth in this Article V shall terminate at such time when either Sponsor owns less than 5% of the then-outstanding shares of Common Stock (the Coordination Period).
ARTICLE VI
INFORMATION
SECTION 6.01 Books and Records; Access. The Company shall, and shall cause its subsidiaries to, keep proper books, records and accounts, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and each of its subsidiaries in accordance with generally accepted accounting principles. For so long as a Sponsor has at least one of its respective Sponsor Designees serving as a director of the Board, the Company shall, and shall cause its subsidiaries to, permit such Sponsor whose Sponsor Designee is then serving as a director and such Sponsor Designees respective designated representatives, at reasonable times and upon reasonable prior notice to the Company, to inspect, review and/or make copies and extracts from the books and records of the Company or any of the Companys subsidiaries and to discuss the affairs, finances and condition of the Company or any of the Companys subsidiaries with the officers of the Company or any the Companys subsidiaries. For the avoidance of doubt, each Sponsor shall lose the right to Company information granted under this Section 6.01 if such Sponsor owns less than five percent (5%) of the then-outstanding shares of Common Stock. Subject to Section 6.02, any Sponsor (and any party receiving information from a Sponsor) who shall receive information shall maintain the confidentiality of such information. Taking into account the common interest and joint defense doctrine as may be applicable that would permit the sharing of potentially privileged information without a resulting waiver, the Company shall not be required under this Section 6.01 to disclose any privileged information where such disclosure would result in a waiver of the applicable privilege so long as the Company has used its best efforts to enter into an arrangement pursuant to which it may provide such information to such Sponsor or Sponsors without the loss of any such privilege and has notified such Sponsor or Sponsors that such information has not been provided.
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SECTION 6.02 Sharing of Information. Individuals associated with the Sponsors may from time to time serve on the Board or the equivalent governing body of the Companys subsidiaries. The Company, on its behalf and on behalf of its subsidiaries, recognizes that such individuals: (i) will from time to time receive non-public information concerning the Company and its subsidiaries; and (ii) may (subject to the obligation to maintain the confidentiality of such information in accordance with Section 6.01) share such information with other individuals associated with the applicable Sponsor. Such sharing will be for the dual purpose of facilitating support to such individuals in their capacity as directors (or members of the governing body of any subsidiary) and enabling the Sponsors, as equityholders, to better evaluate the Companys performance and prospects. The Company, on behalf of itself and its subsidiaries, irrevocably consents to such sharing.
SECTION 6.03 Certain Reports. So long as a Sponsor Designee is then serving as a director, the Company shall deliver or cause to be delivered to the Sponsors whose Sponsor Designees are then serving as directors, as applicable, at their request: (i) to the extent otherwise prepared by the Company, operating and capital expenditure budgets and periodic information packages relating to the operations and cash flows of the Company and its subsidiaries, and (ii) such other reports and information as may be reasonably requested by the Sponsors, as applicable. Notwithstanding the previous sentence but taking into account both the common interest and joint defense doctrine that permits the sharing of privileged information without waiver, the Company shall not be required to disclose any privileged information of the Company where such disclosure would result in a waiver of the applicable privilege so long as the Company has used its best efforts to enter into an arrangement pursuant to which it may provide such information to such Sponsor or Sponsors without the loss of any such privilege and has notified such Sponsor or Sponsors that such information has not been provided.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01 Notices. Except as otherwise specified in this Agreement, all notices and other communications required or permitted hereunder shall be in writing. Such notices and other communications shall be mailed by registered or certified mail, return receipt requested, postage prepaid or otherwise delivered by hand, messenger, facsimile transmission or electronic mail and shall be given to such party at its address or facsimile number set forth on the signature pages to this Agreement or such other address or facsimile number as such party may hereafter specify in writing in accordance with this Section 7.01. Notwithstanding the previous sentence:
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(a) unless otherwise specified by Ares in a notice delivered by Ares in accordance with this Section 7.01, any notice required to be delivered to Ares shall be properly delivered if delivered to:
Ares Corporate Opportunities Fund IV, L.P.
c/o ACOF Operating Manager IV, LLC
2000 Avenue of the Stars, 12th Floor
Los Angeles, CA 90067 Fax: (310) 201-4157
Attention: Eric Waxman, Brian Klos and Natasha Li
Email: ewaxman@aresmgmt.com; bklos@aresmgmt.com;
nli@aresmgmt.com
with a copy (which shall not constitute notice) to:
Sullivan & Cromwell LLP
1888 Century Park East
Los Angeles, CA 90067
Fax: 1-310-712-8800
Attention: Rita-Anne ONeill
Email: oneillr@sullcrom.com
(b) unless otherwise specified by OTPP in a notice delivered by OTPP in accordance with this Section 7.01, any notice required to be delivered to OTPP shall be properly delivered if delivered to:
Ontario Teachers Pension Plan Board
5650 Yonge Street, 3rd Floor
Toronto, ON M2M 4H5
Fax: 416-730-5082
Attention: Ashfaq Qadri and Blake Sumler
Email: ashfaq_qadri@otpp.com; blake_sumler@otpp.com
with copies (which shall not constitute notice) to:
Ontario Teachers Pension Plan Board
5650 Yonge Street, 3rd Floor
Toronto, ON M2M 4H5
Fax: 416-730-3771
Attention: Legal Department
Email: law_investments@otpp.com
(c) unless otherwise specified by the Company in a notice delivered by the Company in accordance with this Section 7.01, any notice required to be delivered to the Company shall be properly delivered if delivered to:
The AZEK Company Inc.
1330 W Fulton Street, #350
Chicago, IL 60607
Attention: Chief Legal Officer
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with a copy (which shall not constitute notice) to:
Sullivan & Cromwell LLP
1888 Century Park East
Los Angeles, CA 90067
Fax: 1-310-712-8800
Attention: Rita-Anne ONeill
Email: oneillr@sullcrom.com
SECTION 7.02 Binding Effect; Benefits. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any Person other than the parties to this Agreement or their respective successors or permitted assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained in this Agreement.
SECTION 7.03 Amendment. This Agreement may not be amended, restated, modified or supplemented in any respect and the observance of any term of this Agreement may not be waived except by a written instrument executed by the Company and each Sponsor that owns more than 5% of the then outstanding shares of Common Stock. Notwithstanding the previous sentence, in the event any Sponsor ceases to own more than 5% of the then outstanding shares of Common Stock, no amendment, restatement, modification, supplement or waiver of this Agreement that uniquely and adversely affects such Sponsor shall be effective without the written consent of such Sponsor.
SECTION 7.04 Assignability. Neither this Agreement nor any right, remedy, obligation or liability arising under or by reason of this Agreement shall be assignable by any party to this Agreement except as otherwise expressly stated in this Agreement.
SECTION 7.05 Governing Law; Submission to Jurisdiction.
(a) This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, applicable to contracts executed in and to be performed entirely within that State, without giving effect to principles or rules of conflict of laws.
(b) In any judicial proceeding involving any dispute, controversy or claim arising out of or relating to this Agreement, each of the parties unconditionally accepts the jurisdiction and venue of the Delaware Court of Chancery, or, but only in the event the Delaware Chancery Court declines jurisdiction, the Superior Court of the State of Delaware (Complex Commercial Division), or, if jurisdiction over the matter is vested exclusively in federal courts, the United States District Court for the District of Delaware, and the appellate courts to which orders and judgments thereof may be appealed. In any such judicial proceeding, the parties agree that in addition to any method for the service of process permitted or required by such courts, to the fullest extent permitted by Law, service of process may be made by delivery provided pursuant to the directions in Section 7.01.
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SECTION 7.06 Enforcement. The parties agree that irreparable damage (for which monetary damages, even if available, would not be an adequate remedy) would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms on a timely basis or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction, specific performance and other equitable relief to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court identified in Section 7.05 above without the need to post bond, this being in addition to any other remedy to which they are entitled at law or in equity.
SECTION 7.07 Severability. If any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 7.08 Additional Securities Subject to Agreement. All shares of Common Stock of the Company that any Sponsor hereafter acquires by means of a stock split, stock dividend, distribution, exercise of options or warrants or otherwise (other than pursuant to a public offering), whether by merger, consolidation or otherwise (including shares of a surviving corporation into which the shares of Common Stock are exchanged in such transaction) will be subject to the provisions of this Agreement to the same extent as if held on the date of the this Agreement.
SECTION 7.09 Section and Other Headings. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
SECTION 7.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the parties to this Agreement. Each such counterpart shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument.
SECTION 7.11 Waiver of Jury Trial. To the fullest extent permitted by applicable law, each party to this Agreement, for itself and its Related Persons, irrevocably and unconditionally waives all right to trial by jury in any action, proceeding or counterclaim arising out of or relating to the actions of the parties to this Agreement or their respective Related Persons pursuant to this Agreement or in the negotiation, administration, performance or enforcement of this Agreement. The foregoing waiver shall apply regardless of whether any such claim or counterclaim is based on contract, tort or otherwise.
SECTION 7.12 Entire Agreement. This Agreement supersedes all prior agreements, whether written or oral, between the parties with respect to its subject matter (including this Agreement). This Agreement constitutes a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter.
SECTION 7.13 Further Assurances. The parties to this Agreement will sign such further documents, cause such meetings to be held, resolutions passed, exercise their votes and do and perform and cause to be done such further acts and things necessary, proper or advisable in order to give full effect to this Agreement and every provision of this Agreement. To the
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fullest extent permitted by law, the Company shall not directly or indirectly take any action that is intended to, or would reasonably be expected to result in, any Sponsor being deprived of the rights contemplated by this Agreement.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the Company and each Sponsor have executed this Agreement as of the day and year first above written.
THE AZEK COMPANY INC. | ||||
By: |
/s/ Paul J. Kardish |
|||
Name: | Paul J. Kardish | |||
Title: | Chief Legal Officer |
[Signature Page to Stockholders Agreement]
ARES CORPORATE OPPORTUNITIES FUND IV, L.P. | ||||
By: ACOF Operating Manager IV, LLC, its managers | ||||
By: |
/s/ Brian Klos |
|||
Name: | Brian Klos | |||
Title: | Authorized Signatory |
[Signature Page to Stockholders Agreement]
ONTARIO TEACHERS PENSION PLAN BOARD | ||||
By: |
/s/ Rusell Hammond |
|||
Name: | Russell Hammond | |||
Title: | Authorized Signatory |
[Signature Page to Stockholders Agreement]
Exhibit 4.2
EXECUTION VERSION
REGISTRATION RIGHTS AGREEMENT
by and among
THE AZEK COMPANY INC.,
ARES CORPORATE OPPORTUNITIES FUND IV, L.P.,
ONTARIO TEACHERS PENSION PLAN BOARD,
and
THE OTHER STOCKHOLDERS PARTY HERETO
Dated as of June 11, 2020
TABLE OF CONTENTS
Page | ||||||
Section 1. | Definitions | 1 | ||||
Section 2. | Demand Registrations | 5 | ||||
Section 3. | Inclusion of Other Securities; Priority | 7 | ||||
Section 4. | Piggyback Registrations | 8 | ||||
Section 5. | Holdback Agreements | 9 | ||||
Section 6. | Suspensions | 10 | ||||
Section 7. | Registration Procedures | 11 | ||||
Section 8. | Participation in Underwritten Offerings | 15 | ||||
Section 9. | Registration Expenses | 16 | ||||
Section 10. | Executive Officer Transfer Restrictions | 17 | ||||
Section 11. | Indemnification; Contribution | 18 | ||||
Section 12. | Rule 144 Compliance | 21 | ||||
Section 13. | Miscellaneous | 22 | ||||
Exhibit A | Form of Counterpart | |||||
Exhibit B | Schedule of Other Stockholders |
THIS REGISTRATION RIGHTS AGREEMENT is made and entered into as of June 11, 2020, by and among The AZEK Company Inc., a Delaware corporation (the Company), Ares Corporate Opportunities Fund IV, L.P., a Delaware limited partnership (Ares), Ontario Teachers Pension Plan Board (OTPP), each of the other stockholders listed on Exhibit B (the Other Stockholders) and any transferee that becomes a party to this Agreement by executing and delivering a counterpart to this Agreement in the form attached as Exhibit A.
RECITALS
WHEREAS, in connection with the consummation of the IPO of the Company, the parties desire to enter into this Agreement in order to grant certain registration rights to the Holders of Registrable Securities as set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement and other good and valid consideration, the receipt and sufficiency of which are acknowledged, the parties to this Agreement agree as follows:
Section 1. Definitions.
(a) As used in this Agreement, the following terms shall have the following meanings:
Affiliate of a Person has the meaning set forth in Rule 12b-2 under the Exchange Act, and Affiliated shall have a correlative meaning. For purposes of this definition, the term control (including the correlative meanings of the terms controlled by and under common control with), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of such Person, whether through the ownership of voting securities or by contract or otherwise. Notwithstanding anything to the contrary set forth in this Agreement: (a) the Company and Ares and their respective Affiliates shall not be deemed to be Affiliates of OTPP or the Other Stockholders; (b) the Company and OTPP and their respective Affiliates shall not be deemed to be Affiliates of Ares or the Other Stockholders; and (c) Ares, OTPP and the Other Stockholders and their respective Affiliates shall not be deemed to be Affiliates of the Company.
Agreement means this Registration Rights Agreement, as amended, modified or supplemented from time to time, in accordance with the terms of this Registration Rights Agreement, together with any exhibits, schedules or other attachments to this Registration Rights Agreement.
Ares has the meaning set forth in the Preamble.
Class A Common Stock means shares of the Companys Class A common stock.
Class B Common Stock means shares of the Companys Class B common stock.
Common Stock means the common stock, par value $0.001 per share, of the Company, including Class A Common Stock and Class B Common Stock, and any other shares of stock issued or issuable with respect to the common stock of the Company (whether by way of a stock dividend or stock split or in exchange for or upon conversion of such shares or otherwise in connection with a combination of shares, distribution, recapitalization, merger, consolidation, other corporate reorganization or other similar event).
Company has the meaning set forth in the Preamble and includes the Companys successors by merger, acquisition, reorganization or otherwise.
Controlling Person has the meaning set forth in Section 11(a).
Covered Person has the meaning set forth in Section 11(a).
Demand Registration has the meaning set forth in Section 2(a).
Demand Registration Request has the meaning set forth in Section 2(a).
Equity Securities means shares of Common Stock, shares of any other class of common or preferred stock of the Company and any options, warrants, rights or securities of the Company convertible into or exchangeable for common or preferred stock of the Company.
Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated under the Securities Exchange Act of 1934.
Executive Officer has the meaning as set forth in Rule 16a-1(f) or any successor rule, as promulgated by the SEC under the Exchange Act.
Executive Officer Permitted Transferee means, with respect to any Executive Officer, (i) any executor, administrator or testamentary trustee of that Executive Officers estate if that Executive Officer dies, (ii) any Person receiving Common Stock of that Executive Officer by will, intestacy laws or the laws of descent or survivorship, or (iii) any trustee (so long as the trustee agrees to be bound by the terms of Section 10 as though the trustee were an Executive Officer) of a trust (including an inter vivos trust) of which there are no principal beneficiaries other than that Executive Officer or one or more Family Members of that Executive Officer.
Family Member means, with respect to any Person who is an individual, any spouse or lineal descendants, including adoptive relationships.
Governmental Entity means any United States or foreign (i) federal, state, local, municipal or other government, (ii) governmental or quasi-governmental entity of any nature (including, without limitation, any governmental agency, branch, department, official or entity and any court or other tribunal) or (iii) body exercising or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature, including, without limitation, any arbitral tribunal.
Holder means Ares, OTPP, the Other Stockholders and any direct or indirect transferee of Ares, OTPP or the Other Stockholders that has become a party to this Agreement by executing and delivering a counterpart to this Agreement in the form attached as Exhibit A, in each case to the extent such Person is a holder or beneficial owner of Registrable Securities.
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IPO means the Companys first underwritten public offering of its Class A Common Stock under the Securities Act occurring simultaneously with or after the date of this Agreement.
IPO Lock-Up Period means the period ending 180 days after the date of the Prospectus relating to the IPO.
Other Stockholders has the meaning set forth in the Preamble.
OTPP has the meaning set forth in the Preamble.
Person means any natural person, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, foundation, unincorporated organization or government or other agency or political subdivision of such government.
Piggyback Registration has the meaning set forth in Section 4(a).
Piggyback Shelf Registration Statement has the meaning set forth in Section 4(a).
Piggyback Shelf Takedown has the meaning set forth in Section 4(a).
Prospectus means the prospectus or prospectuses (whether preliminary or final) included in any Registration Statement and relating to Registrable Securities, as amended or supplemented and including all material incorporated by reference in such prospectus or prospectuses.
Registrable Securities means, at any time, (i) any shares of Class A Common Stock held or beneficially owned by any Holder, (ii) any shares of Class A Common Stock issued or issuable to any Holder upon the conversion, exercise or exchange, as applicable, of any other Equity Securities held or beneficially owned by any Holder and (iii) any shares of Class A Common Stock issued or issuable to any Holder with respect to any shares described in clauses (i) and (ii) above by way of a stock dividend or stock split or in exchange for or upon conversion of such shares or otherwise in connection with a combination of shares, distribution, recapitalization, merger, consolidation, other reorganization or other similar event (it being understood that, for purposes of this Agreement, a Person shall be deemed to be a Holder of Registrable Securities whenever such Person in its sole discretion has the right to then acquire or obtain from the Company any Registrable Securities, whether or not such acquisition has actually been effected). As to any particular Registrable Securities, the shares described in the preceding sentence shall cease to constitute Registrable Securities when such shares become eligible for resale under Rule 144 without volume or manner-of-sale restrictions and without the requirement for the Company to be in compliance with the current public information requirement under Rule 144(c)(1).
Registration Expenses has the meaning set forth in Section 9(a).
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Registration Statement means any registration statement of the Company under the Securities Act which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, all amendments and supplements to that Registration Statement, including post-effective amendments, all exhibits and all documents incorporated by reference in that Registration Statement.
Rule 144 means Rule 144 under the Securities Act or any successor rule.
SEC means the Securities and Exchange Commission or any successor agency administering the Securities Act and the Exchange Act at the time.
Securities Act means the Securities Act of 1933, as amended, and the rules and regulations promulgated under the Securities Act of 1933.
Selling Expenses means all underwriting discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Securities.
Sponsor means Ares or OTPP, and Sponsors means Ares and OTPP.
Sponsor Holder means Ares or OTPP and any direct or indirect transferee of Ares or OTPP that has become a party to this Agreement by executing and delivering a counterpart to this Agreement in the form attached to this Agreement as Exhibit A, in each case to the extent that Person is a holder or beneficial owner of Registrable Securities.
Sponsor Permitted Transferee shall mean any Affiliate of Ares or OTPP, as the case may be, and (i) any Sponsor Permitted Transferee of Ares shall be bound by the terms of this Agreement and treated as Ares for all purposes of this Agreement and (ii) any Sponsor Permitted Transferee of OTPP shall be shall be bound by the terms of this Agreement and treated as OTPP for all purposes of this Agreement.
Suspension has the meaning set forth in Section 6.
Transfer means, when used as a noun, any direct or indirect, voluntary or involuntary, sale, disposition, hypothecation, mortgage, gift, pledge, assignment, attachment or other transfer (including the creation of any derivative or synthetic interest, including a participation or other similar interest) and, when used as a verb, voluntarily to directly or indirectly sell, dispose, hypothecate, mortgage, gift, pledge, assign, attach or otherwise transfer, in any case, whether by operation of law or otherwise.
underwritten offering means a registered offering of securities conducted by one or more underwriters pursuant to the terms of an underwriting agreement.
(b) In addition to the above definitions, unless the context requires otherwise:
(i) any reference to any statute, regulation, rule or form as of any time shall mean such statute, regulation, rule or form as amended or modified and shall also include any successor statute, regulation, rule or form, as amended, from time to time;
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(ii) the words include, includes and including shall be deemed to be followed by the phrase without limitation, in each case notwithstanding the absence of any express statement to such effect, or the presence of such express statement in some contexts and not in others;
(iii) references to Section are references to Sections of this Agreement; and
(iv) references to dollars and $ mean U.S. dollars.
Section 2. Demand Registrations.
(a) Right to Demand Registrations. At any time following the IPO Lock-Up Period, each of the Sponsors may, by providing written notice to the Company, request to sell all or part of its Registrable Securities pursuant to a Registration Statement (a Demand Registration) (such requesting Sponsor, a Demand Holder). Each request for a Demand Registration (a Demand Registration Request) shall specify the number of Registrable Securities intended to be offered and sold by that Demand Holder pursuant to the Demand Registration and the intended method of distribution of those Registrable Securities, including whether the offering is intended to be an underwritten offering. Notwithstanding the prior sentence, the Company may, if the Board of Directors of the Company so determines that, due to a pending or contemplated material acquisition or disposition or public offering or other material event involving the Company or any of its subsidiaries, it would be inadvisable to effect the requested Demand Registration at that time (but in no event after the related Registration Statement has become effective), the Company may, upon providing the Demand Holder written notice (the Delay Notice), defer the Demand Registration for a single period set forth in that Delay Notice not to exceed 120 days. The Company shall not postpone or delay a Demand Registration under this Section 2 more than once in any twelve (12) month period. Promptly (but in any event within three (3) business days) after receipt of a Demand Registration Request, the Company shall give written notice of the Demand Registration Request to all other Holders of Registrable Securities. As promptly as practicable and no later than ten (10) business days after receipt of a Demand Registration Request, the Company shall register all Registrable Securities (i) that have been requested to be registered in the Demand Registration Request and (ii) subject to Section 3, with respect to which the Company has received a written request for inclusion in the Demand Registration from a Holder no later than five (5) business days after the date on which the Company has given notice to Holders of the Demand Registration Request. The Company shall use its reasonable best efforts to cause the Registration Statement filed pursuant to this Section 2(a) to be declared effective by the SEC or otherwise become effective under the Securities Act as promptly as practicable after the filing of the Registration Statement. A Demand Registration may be effected by way of a Registration Statement on Form S-3 or any similar short-form registration statement to the extent the Company is permitted to use such form at such time. The Company shall not be required to effect a Demand Registration unless the expected aggregate gross proceeds from the offering of the Registrable Securities to be registered in connection with such Demand Registration are at least $50 million and shall not be required to effect more than two (2) Demand Registrations in any 12-month period.
The Company shall not be obligated to maintain a Registration Statement pursuant to a Demand Registration effective for more than (x) 360 days or (y) a shorter period when all of the Registrable Securities covered by that Registration Statement have been sold pursuant to that Registration Statement (the Effectiveness Period).
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(b) Number of Demand Registrations. Each of (x) Ares, together with any direct or indirect transferee of Ares that has become a Sponsor Holder, and (y) OTPP, together with any direct or indirect transferee of OTPP that has become a Sponsor Holder, shall be entitled to request up to four (4) Demand Registrations. However, at any time in which the Company is eligible to register Common Stock on Form S-3 (or any successor form), each Sponsor shall have an unlimited number of Demand Registrations on Form S-3. Notwithstanding anything in this Agreement to the contrary, a registration shall not count as a Demand Registration for purposes of this Section 2(b) unless and until the Sponsor Holders of Registrable Securities are able to register and sell at least 90% of the Registrable Securities requested to be included in such registration.
(c) Withdrawal. A Holder may, by written notice to the Company, withdraw its Registrable Securities from a Demand Registration at any time prior to the effectiveness of the applicable Registration Statement. Upon receipt of notices from all applicable Holders to that effect, the Company shall cease all efforts to seek effectiveness of the applicable Registration Statement, unless the Company intends to effect a primary offering of securities pursuant to such Registration Statement. In addition, a Demand Holder may, at any time prior to the effective date of the Registration Statement relating to a Demand Registration, revoke its request by providing a written notice of the revocation to the Company and only if that Demand Holder complies with this Section 2(c). Subject to Section 2(d), the Demand Holder revoking its request shall reimburse the Company for all its reasonable out-of-pocket expenses incurred in the preparation, filing and processing of the Registration Statement. If pursuant to the terms of this Section 2(c), the Demand Holder reimburses the Company for its reasonable out-of-pocket expenses incurred in the preparation, filing and processing of the Registration Statement or if the Demand Holder is not required to pay such expenses pursuant to Section 2(d), the attempted registration shall not be deemed to be a Demand Registration.
(d) Effective Registration. A registration will not count as a Demand Registration, and the Demand Holder shall not be required to reimburse the Company for its expenses incurred in the preparation, filing and processing of any Registration Statement pursuant to Section 2(c) if:
(i) the Demand Holder determines in its sole discretion to withdraw the proposed registration of any Registrable Securities requested to be registered by the Demand Holder due to a material adverse change in the Companys business, financial condition, results of operations or prospects (other than as a result of any action by the Demand Holder);
(ii) such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason (other than as a result of any act by the Demand Holder) and the Company fails to have the stop order, injunction or other order or requirement removed, withdrawn or resolved to the Demand Holders satisfaction;
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(iii) the Demand Holder requests that the Company withdraw the registration at any time during the period specified in a Delay Notice or within ten days after the end of that period; or
(iv) the conditions to closing specified in the underwriting agreement or purchase agreement entered into in connection with the registration relating to the demand are not satisfied (other than as a result of a default or breach under that underwriting agreement or purchase agreement by the Demand Holder).
(e) Selection of Underwriters. If a Demand Registration is an underwritten offering, the Demand Holder requesting the Demand Registration shall have the right to select the investment banking firm(s) to act as the managing underwriter(s) in connection with the related offering, subject to the approval of (i) the other Sponsor, if such Sponsor has requested to participate in such Demand Registration (which approval shall not be unreasonably withheld, conditioned or delayed), and (ii) the Company (which approval shall not be unreasonably withheld, conditioned or delayed).
Section 3. Inclusion of Other Securities; Priority. The Company shall not include in any Demand Registration any securities that are not Registrable Securities without the prior written consent of the Holder(s) (which consent may not be unreasonably withheld or delayed) of the Registrable Securities participating in that Demand Registration. If a Demand Registration involves an underwritten offering and the managing underwriters of such offering advise the Company and the Holders in writing that, in their opinion, the number of Equity Securities proposed to be included in that Demand Registration, including all Registrable Securities and all other Equity Securities proposed to be included in such offering, exceeds the number of Equity Securities that can reasonably be expected to be sold in such offering without adversely affecting the success of the offering (including the price, timing or distribution of the securities to be sold in such offering), the Company shall include in such Demand Registration: (i) first, the Registrable Securities proposed to be sold by Sponsor Holders in the offering; and (ii) second, to the extent additional Equity Securities may, in the opinion of the managing underwriters, be included in the offering without reasonably being expected to adversely affect the success of the offering (including the price, timing or distribution of the securities to be sold in the offering), any Equity Securities proposed to be included in such Demand Registration by any other Persons (including Equity Securities to be sold for the account of the Company and/or any other holders of Equity Securities), allocated, in the case of this clause (ii), among such Persons in such manner as the Company may determine. If more than one Sponsor Holder is participating in such Demand Registration and the managing underwriters of such offering determine that a limited number of Registrable Securities held by the Sponsor Holders may be included in the offering without reasonably being expected to adversely affect the success of the offering (including the price, timing or distribution of the securities to be sold in the offering), then the Registrable Securities that are included in such offering shall be allocated pro rata among the participating Sponsor Holders on the basis of the number of Registrable Securities initially requested to be sold by each such Sponsor Holder in such offering.
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Section 4. Piggyback Registrations.
(a) Whenever the Company proposes to register any Equity Securities under the Securities Act (other than a registration (i) pursuant to a Registration Statement on Form S-8 (or other registration solely relating to an offering or sale to employees or directors of the Company pursuant to any employee stock plan or other employee benefit arrangement), (ii) pursuant to a Registration Statement on Form S-4 (or similar form that relates to a transaction subject to Rule 145 under the Securities Act or any successor rule to Rule 145) or (iii) in connection with any dividend or distribution reinvestment or similar plan), whether for its own account or for the account of one or more stockholders of the Company (other than a Demand Registration (for which participation is provided under Section 2)) (a Piggyback Registration), the Company shall give prompt written notice to each Holder of Registrable Securities of its intention to effect such a registration. The Company shall in no event give that notice in less than ten (10) business days prior to the proposed date of filing of the applicable Registration Statement. Subject to Sections 4(b) and 5(c), the Company shall include in the Registration Statement and in any offering of Equity Securities to be made pursuant to that Registration Statement that number of Registrable Securities requested to be sold in such offering by a Holder for the account of that Holder if the Company has received a written request for inclusion in the Registration Statement from that Holder no later than five (5) business days after the date on which the Company has given notice of the Piggyback Registration to Holders. The Company may terminate or withdraw a Piggyback Registration prior to the effectiveness of such registration at any time in its sole discretion. If a Piggyback Registration is effected pursuant to a Registration Statement on Form S-3 or the then appropriate form for an offering to be made on a delayed or continuous basis pursuant to Rule 415 under the Securities Act or any successor rule to Rule 415 (a Piggyback Shelf Registration Statement), the Holders of Registrable Securities shall be notified by the Company of and shall have the right, but not the obligation, to participate in any offering pursuant to such Piggyback Shelf Registration Statement (a Piggyback Shelf Takedown), subject to the same limitations that are applicable to any other Piggyback Registration as set forth above.
(b) Priority on Primary Piggyback Registrations. If a Piggyback Registration or Piggyback Shelf Takedown is initiated as a primary underwritten offering on behalf of the Company and the managing underwriters of the offering advise the Company in writing that, in their opinion, the number of Equity Securities proposed to be included in that offering, including all Registrable Securities and all other Equity Securities proposed to be included in the offering, exceeds the number of Equity Securities that can reasonably be expected to be sold in the offering without adversely affecting the success of the offering (including the price, timing or distribution of the securities to be sold in the offering), the Company shall include in such Piggyback Registration or Piggyback Shelf Takedown: (i) first, the Equity Securities that the Company proposes to sell in the offering; (ii) second, any Equity Securities proposed to be included in the offering by Holders exercising their rights pursuant to this Section 4, allocated, in the case of this clause (ii), pro rata among those Holders on the basis of the number of Equity Securities initially proposed to be included by each Holder in the offering, up to the number of Equity Securities, if any, that the managing underwriters determine can be included in the offering without reasonably being expected to adversely affect the success of the offering (including the price, timing or distribution of the securities to be offered in the offering); and (iii) third, any Equity Securities proposed to be included in the offering by any other Person to whom the Company has a contractual obligation to facilitate such offering.
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(c) Priority on Secondary Piggyback Registrations. If a Piggyback Registration or a Piggyback Shelf Takedown is initiated as an underwritten offering on behalf of a holder of Equity Securities to whom the Company has a contractual obligation to facilitate such offering, other than Holders of Registrable Securities exercising rights pursuant to Section 2, for which the specified priorities are in Section 3, and the managing underwriters of the offering advise the Company in writing that, in their opinion, the number of Equity Securities proposed to be included in the offering, including all Registrable Securities and all other Equity Securities requested to be included in the offering, exceeds the number of Equity Securities which can reasonably be expected to be sold in the offering without adversely affecting the success of the offering (including the price, timing or distribution of the securities to be sold in the offering), the Company shall include in such Piggyback Registration or Piggyback Shelf Takedown: (i) first, the Equity Securities that the Person demanding the offering pursuant to such contractual right proposes to sell in the offering; and (ii) second, any Equity Securities requested to be included in the offering by a Holder exercising their rights pursuant to this Section 4, allocated, in the case of this clause (ii), pro rata among those Holders on the basis of the number of Equity Securities initially proposed to be included by each of those Holders in the offering, up to the number of Equity Securities, if any, that the managing underwriters determine can be included in the offering without reasonably being expected to adversely affect the success of the offering (including the price, timing or distribution of the securities to be offered in the offering); and (iii) third, any Equity Securities proposed to be included in the offering by any other Person to whom the Company has a contractual obligation to facilitate such offering.
(d) Selection of Underwriters. If a Piggyback Registration or Piggyback Shelf Takedown is initiated as a primary underwritten offering on behalf of the Company, the Company shall have the right to select the investment banking firm(s) to act as the managing underwriter(s) in connection with such offering.
Section 5. Holdback Agreements.
(a) Holders of Registrable Securities. Each Holder of Registrable Securities that holds or beneficially owns at least 10% of the outstanding Common Stock agrees that in connection with any registered underwritten offering of Common Stock, and upon request from the managing underwriter(s) for that offering, that Holder shall not, without the prior written consent of that managing underwriter(s), during such period as is reasonably requested by the managing underwriter(s) (which period shall in no event be longer than three (3) days prior to and ninety (90) days after the pricing of such offering), Transfer any Registrable Securities. The restrictions on Transfers in this Section 5(a) shall not apply to offers or sales of Registrable Securities that are included in an offering pursuant to Sections 2, 3 or 4 of this Agreement and shall be applicable to the Holders of Registrable Securities only if, for so long as and to the extent that the Company, the directors and Executive Officers of the Company, each selling stockholder included in such offering and each other Person holding or beneficially owning at least 10% of the outstanding Common Stock are subject to the same restrictions. Each Holder of Registrable Securities agrees to execute and deliver such other agreements as may be reasonably requested by the managing underwriter(s) that are consistent with the provisions of this Section 5(a)
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and are necessary to give further effect to those provisions. If the Company releases any Holder of Registration Securities from such a holdback agreement, it shall similarly release all other Holders of Registrable Securities on a pro rata basis. Notwithstanding anything to the contrary in this Section 5(a), no Holder shall be subject to a holdback arrangement in excess of 180 days in any calendar year due to the registration of any Registrable Securities pursuant to Section 3.
(b) The Company. To the extent requested by the managing underwriter(s) for the applicable offering, the Company shall not effect any sale registered under the Securities Act of Equity Securities during the period commencing three (3) days prior to and ending ninety (90) days after the pricing of an underwritten offering pursuant to Sections 2 or 4 of this Agreement, other than a registration (i) pursuant to a Registration Statement on Form S-8 (or other registration solely relating to an offering or sale to employees or directors of the Company pursuant to any employee stock plan or other employee benefit arrangement), (ii) pursuant to a Registration Statement on Form S-4 (or similar form that relates to a transaction subject to Rule 145 under the Securities Act or any successor rule to Rule 145), (iii) in connection with any dividend or distribution reinvestment or similar plan or (iv) as consideration to any third party seller in connection with the bona fide acquisition by the Company or any subsidiary of the Company of the assets or securities of any Person in any transaction approved by the Board of Directors of the Company. Notwithstanding the foregoing, the Company shall not be subject to a restriction in excess of 180 days in any calendar year due to the registration of any Registrable Securities pursuant to Section 3.
Section 6. Suspensions. Upon giving no less than five (5) days prior written notice to the Holders of Registrable Securities, the Company shall be entitled to delay or suspend the filing, effectiveness or use of a Registration Statement or Prospectus (a Suspension) if the board of directors of the Company determines in good faith that (i) proceeding with the filing, effectiveness or use of such Registration Statement or Prospectus would reasonably be expected to require the Company to disclose any information the disclosure of which would have a material adverse effect on the Company and that the Company would not otherwise be required to disclose at such time, (ii) the registration or offering proposed to be delayed or suspended would reasonably be expected to, if not delayed or suspended, have a material adverse effect on any pending negotiation or plan of the Company to effect a merger, acquisition, disposition, financing, reorganization, recapitalization or other similar transaction, in each case that, if consummated, would be material to the Company or (iii) due to any other material event involving the Company or any of its subsidiaries, it would be inadvisable to effect the filing or use such Registration Statement or Prospectus. The Company shall not be entitled to exercise a Suspension (i) more than twice during any 12-month period or (ii) for a period exceeding 60 (sixty) days on any one occasion. Each Holder who is notified by the Company of a Suspension pursuant to this Section 6 shall keep the existence of such Suspension confidential and shall immediately discontinue (and direct any other Person making offers or sales of Registrable Securities on behalf of such Holder to immediately discontinue) offers and sales of Registrable Securities pursuant to such Registration Statement or Prospectus until such time as it is advised in writing by the Company that the use of the Registration Statement or Prospectus may be resumed and, if applicable, is furnished by the Company with a supplemented or amended Prospectus as contemplated by Section 7(g). If the Company delays or suspends a Demand Registration, the Holder that initiated such Demand Registration shall be entitled to withdraw its
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Demand Registration Request and, if it does so, such Demand Registration Request shall not count against the limitation on the number of such Holders Demand Registrations set forth in Section 2(b).
Section 7. Registration Procedures. If and whenever the Company is required to effect the registration of any Registrable Securities pursuant to this Agreement, the Company shall use its reasonable best efforts to effect and facilitate the registration, offering and sale of such Registrable Securities in accordance with the intended method of disposition of those Registrable Securities as promptly as is practicable, and, the Company shall as expeditiously as possible and as applicable:
(a) prepare and file with the SEC a Registration Statement with respect to those Registrable Securities, make all required filings required in connection with that Registration Statement and (if the Registration Statement is not automatically effective upon filing) use its reasonable best efforts to cause the Registration Statement to become effective as promptly as practicable. Before filing a Registration Statement or any amendments or supplements to that Registration Statement, the Company shall furnish to counsel to the Holders for such registration copies of all documents proposed to be filed, which documents shall be subject to review by counsel to the Holders at the Companys expense, and give the Holders participating in such registration an opportunity to comment on such documents and keep such Holders reasonably informed as to the registration process. The Company shall not be obligated to maintain such registration effective for a period longer than the Effectiveness Period;
(b) prepare and file with the SEC such amendments and supplements to any Registration Statement and the Prospectus used in connection with that Registration Statement as may be necessary to keep the Registration Statement effective for a period of not less than the Effectiveness Period (but not prior to the expiration of the time period referred to in Section 4(3) of the Securities Act and Rule 174 under the Securities Act, if applicable) and comply with the applicable requirements of the Securities Act with respect to the disposition of the Registrable Securities covered by such Registration Statement in accordance with the intended method or methods of disposition by the sellers of such Registrable Securities set forth in such Registration Statement or supplement to the Prospectus;
(c) furnish to each Holder participating in the registration, without charge, such number of copies of the Registration Statement and any post-effective amendment to such Registration Statement and such number of copies of the Prospectus included in such Registration Statement (including each preliminary Prospectus) and any supplement to that Registration Statement (in each case including all exhibits in and all documents incorporated by reference in the Registration Statement and any supplement to the Registration Statement) and such other documents as such Holder may reasonably request, including in order to facilitate the disposition of the Registrable Securities owned by such Holder (it being understood that the Company consents to the use of the Prospectus and any amendment or supplement to the Prospectus by the Holders covered by the Registration Statement and the underwriter or underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendments or supplements to the Prospectus);
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(d) use its reasonable best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such U.S. jurisdiction(s) as any Holder participating in the registration or any managing underwriter reasonably requests and do any and all other acts and things that may be necessary or reasonably advisable to enable such Holder and each underwriter, if any, to consummate the disposition of that Holders Registrable Securities in such jurisdiction(s), except that the Company shall not be required to qualify generally to do business, subject itself to taxation or consent to general service of process in any jurisdiction where it would not otherwise be required to do so but for its obligations pursuant to this Section 7(d);
(e) use its reasonable best efforts to cause all Registrable Securities covered by any Registration Statement to be registered with or approved by such other Governmental Entities or self-regulatory bodies as may be necessary or reasonably advisable in light of the business and operations of the Company to enable each Holder participating in the registration to consummate the disposition of such Registrable Securities in accordance with the intended method or methods of disposition of such Registrable Securities;
(f) promptly notify each Holder participating in the registration and the managing underwriters of any underwritten offering:
(i) each time when the Registration Statement, any pre-effective amendment to the Registration Statement, the Prospectus or any Prospectus supplement or any post- effective amendment to the Registration Statement has been filed and, with respect to the Registration Statement or any post-effective amendment to the Registration Statement, when the same has become effective;
(ii) of any oral or written comments by the SEC or of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for any additional information regarding such Holder;
(iii) of the issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement or the initiation or threatening of any proceedings for any such purpose; and
(iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the applicable securities or blue sky laws of any jurisdiction;
(g) notify each Holder participating in such registration, at any time when a Prospectus relating to the registration is required to be delivered under the Securities Act, of the occurrence of any event that would cause the Prospectus included in the related Registration Statement to contain an untrue statement of a material fact or to omit any fact necessary to make the statements made in the Prospectus not misleading in light of the circumstances under which they were made, and, as promptly as practicable, prepare, file with the SEC and furnish to that Holder a reasonable number of copies of a supplement or amendment to the Prospectus so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain any untrue statement of a material fact or omit to state any fact necessary to make the statements made in the Prospectus not misleading in light of the circumstances under which they were made;
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(h) in the event of the issuance of any stop order suspending the effectiveness of a Registration Statement, any order suspending or preventing the use of any related Prospectus or any suspension of the qualification or exemption from qualification of any Registrable Securities for sale in any jurisdiction, use its reasonable best efforts to promptly obtain the withdrawal or lifting of any such order or suspension;
(i) not file or make any amendment to any Registration Statement with respect to any Registrable Securities, or any amendment of or supplement to the Prospectus used in connection such Registration Statement, that refers to any Holder covered by the Registration Statement by name or otherwise identifies that Holder as the holder of any securities of the Company without the consent of that Holder (which consent may not be unreasonably withheld or delayed), unless and to the extent that disclosure is required by law. Notwithstanding the previous sentence, (i) each Holder shall furnish to the Company in writing such information regarding itself and the distribution proposed by it as the Company may reasonably request for use in connection with a Registration Statement or Prospectus and (ii) each Holder agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished to the Company by that Holder or of the occurrence of any event that would cause the Prospectus included in the Registration Statement to contain an untrue statement of a material fact regarding that Holder or the distribution of those Registrable Securities or to omit to state any material fact regarding that Holder or the distribution of those Registrable Securities required to be stated in the Prospectus or necessary to make the statements made in the Prospectus not misleading in light of the circumstances under which they were made. The Holder agrees to furnish to the Company, as promptly as practicable, any additional information required to correct and update the information previously furnished by that Holder such that the Prospectus shall not contain any untrue statement of a material fact regarding that Holder or the distribution of those Registrable Securities or omit to state a material fact regarding that Holder or the distribution of those Registrable Securities necessary to make the statements made in the Prospectus not misleading in light of the circumstances under which they were made;
(j) cause the Registrable Securities to be listed on each securities exchange on which the Common Stock is then listed or, if the Common Stock is not then listed on any securities exchange, use its reasonable best efforts to cause those Registrable Securities to be listed on a national securities exchange selected by the Company after consultation with the Holders participating in such registration;
(k) provide a transfer agent and registrar (which may be the same entity) for all the Registrable Securities not later than the effective date of the Registration Statement;
(l) make available for inspection by any Holder participating in the registration, any underwriter participating in any underwritten offering pursuant to the Registration Statement and any attorney, accountant or other agent retained by any Holder or underwriter, all corporate documents, financial and other records relating to the Company and its business reasonably requested by that Holder or underwriter, cause the Companys officers, directors, employees and independent accountants to supply all information reasonably requested by any such Holder,
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underwriter, attorney, accountant or agent in connection with that registration or offering and make senior management of the Company and the Companys independent accountants available for customary due diligence and drafting sessions. Any Person gaining access to information or personnel of the Company pursuant to this Section 7(l) shall (i) reasonably cooperate with the Company to limit any resulting disruption to the Companys business and (ii) protect the confidentiality of any information regarding the Company which the Company determines in good faith to be confidential and of which determination the Person is notified, unless the information (A) is or becomes known to the public without a breach of this Agreement, (B) is or becomes available to the Person on a non-confidential basis from a source other than the Company, (C) is independently developed by the Person, (D) is requested or required by a deposition, interrogatory, request for information or documents by a Governmental Entity, subpoena or similar process or (E) is otherwise required to be disclosed by law;
(m) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC, and make available to its stockholders, as soon as reasonably practicable, an earnings statement (in a form that satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 under the Securities Act or any successor rule to Rule 158) covering the period of at least 12 months beginning with the first day of the Companys first full fiscal quarter after the effective date of the applicable Registration Statement. This requirement will be deemed satisfied if the Company timely files complete and accurate information on Forms 10-K, 10-Q and 8-K under the Exchange Act and otherwise complies with Rule 158 under the Securities Act or any successor rule to Rule 158;
(n) in the case of an underwritten offering of Registrable Securities, promptly incorporate in a supplement to the Prospectus or a post-effective amendment to the Registration Statement such information as is reasonably requested by the managing underwriter(s) or any Holder participating in such underwritten offering to be included in such Prospectus or post-effective amendment, the purchase price for the securities to be paid by the underwriters and any other applicable terms of such underwritten offering, and promptly make all required filings of such supplement or post-effective amendment after being notified of the matters to be incorporated in such supplement or amendment;
(o) in the case of an underwritten offering of Registrable Securities, enter into such customary agreements (including underwriting and lock-up agreements in customary form) and take all such other customary actions as any Holder participating in the offering or the managing underwriter(s) of the offering reasonably requests in order to expedite or facilitate the disposition of the Registrable Securities;
(p) furnish to each Holder and each underwriter, if any, participating in an offering of Registrable Securities (i) (A) all legal opinions of outside counsel to the Company required to be included in the Registration Statement and (B), in the case of an underwritten offering, a written legal opinion of outside counsel to the Company, dated the closing date of the offering, in form and substance as is customarily given in opinions of outside counsel to the Company to underwriters in underwritten registered offerings; and (ii) (A) obtain all consents of independent public accountants required to be included in the Registration Statement and (B), in the case of an underwritten offering, on the date of the applicable Prospectus, on the effective date of any post-effective amendment to the Registration Statement and at the closing of the offering, dated
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the respective dates of delivery of each of the foregoing, a comfort letter signed by the Companys independent public accountants in form and substance as is customarily given in accountants letters to underwriters in underwritten registered offerings;
(q) in the case of an underwritten offering of Registrable Securities, make senior management of the Company available, to the extent requested by the managing underwriter(s), to assist in the marketing of the Registrable Securities to be sold in such underwritten offering, including the participation of such members of senior management of the Company in road show presentations and other customary marketing activities, including one-on-one meetings with prospective purchasers of the Registrable Securities to be sold in such underwritten offering, and otherwise facilitate, cooperate with, and participate in such underwritten offering and customary selling efforts related to such underwritten offering, in each case to the same extent as if the Company were engaged in a primary underwritten registered offering of its Common Stock;
(r) cooperate with the Holders of the Registrable Securities to facilitate the timely preparation and delivery of certificates representing the Registrable Securities to be sold pursuant to such Registration Statement free of any restrictive legends and representing such number of shares of Common Stock and registered in such names as the Holders of the Registrable Securities may reasonably request a reasonable period of time prior to sales of Registrable Securities pursuant to such Registration Statement. Notwithstanding anything in this Agreement to the contrary, the Company may satisfy its obligations under this Agreement without issuing physical stock certificates through the use of The Depository Trust Companys Direct Registration System;
(s) not later than the effective date of the Registration Statement, provide a CUSIP number for all Registrable Securities covered thereby and provide the applicable transfer agent with printed certificates for the Registrable Securities in a form eligible for deposit with The Depository Trust Company. Notwithstanding anything in this Agreement to the contrary, the Company may satisfy its obligations under this Agreement without issuing physical stock certificates through the use of The Depository Trust Companys Direct Registration System; and
(t) otherwise use its reasonable best efforts to take or cause to be taken all other actions necessary or reasonably advisable to effect the registration, marketing and sale of such Registrable Securities contemplated by this Agreement.
Section 8. Participation in Underwritten Offerings. No Person may participate in any underwritten offering pursuant to this Agreement unless that Person (i) agrees to sell that Persons securities on the basis provided in any underwriting arrangements in customary form approved by the Persons entitled under this Agreement to approve those arrangements and (ii) completes and executes all questionnaires, powers of attorney (subject to compliance with the applicable regulations and standard of care required under the Pension Benefits Act (Ontario) in the case of any power of attorney to be granted by OTPP), indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. No Holder of Registrable Securities included in any underwritten offering shall be required to make any representations or warranties to the Company or the underwriters (other than representations and warranties regarding (A) that Holders ownership of its Registrable
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Securities to be sold in the offering, (B) that Holders power and authority to effect the relevant Transfer and (C) such matters pertaining to compliance with securities laws as may be reasonably requested by the managing underwriter(s)). In addition, no Holder of Registrable Securities included in an underwritten offering will be required to undertake any indemnification obligations to the Company or the underwriters, except to the extent otherwise provided in Section 11. Any liability of any Holder under an underwriting agreement entered into pursuant to this Section 8 shall be limited to liability arising from the breach of its representations and warranties contained in that underwriting agreement and shall be limited to an amount equal to the net amount received by that Holder from the sale of Registrable Securities pursuant to such Registration Statement.
Section 9. Registration Expenses.
(a) Subject to Section 2(c), the Company shall pay directly or promptly reimburse all costs, fees and expenses (other than Selling Expenses) incident to the Companys performance of or compliance with this Agreement, including, (i) all SEC, Financial Industry Regulation Authority and other registration and filing fees; (ii) all fees and expenses associated with filings to be made with, or the listing of any Registrable Securities on, any securities exchange or over-the-counter trading market on which the Registrable Securities are to be listed or quoted; (iii) all fees and expenses of complying with securities and blue sky laws (including fees and disbursements of counsel for the Company in connection with complying with securities and blue sky laws); (iv) all printing, messenger, telephone and delivery expenses (including the cost of distributing Prospectuses in preliminary and final form as well as any supplements to the Prospectuses); (v) all fees and expenses incurred in connection with any road show for underwritten offerings, including all costs of travel, lodging and meals; (vi) all transfer agents and registrars fees; (vii) all fees and expenses of counsel to the Company; (viii) all fees and expenses of the Companys independent public accountants (including any fees and expenses arising from any special audits or comfort letters) and any other Persons retained by the Company in connection with or incident to any registration of Registrable Securities pursuant to this Agreement; and (ix) all fees and expenses of underwriters (other than Selling Expenses) customarily paid by the issuers or sellers of securities (all such costs, fees and expenses, Registration Expenses). In connection with each registration initiated pursuant to this Agreement (whether a Demand Registration or a Piggyback Registration), the Company shall reimburse the Holders covered by such registration for the reasonable fees and disbursements of one law firm chosen by a majority of the number of shares of Registrable Securities included in the Demand Registration Request, in the event of a Demand Registration, and, in the case of a Piggyback Registration, the Holders of a majority of the number of shares of Registrable Securities included in such registration. Each Holder shall pay the fees and expenses of any additional counsel engaged by that Holder and shall bear its respective Selling Expenses associated with a registered sale of its Registrable Securities pursuant to this Agreement.
(b) The obligation of the Company to bear and pay the Registration Expenses shall apply irrespective of whether a registration, once properly demanded or requested, becomes effective or is withdrawn or suspended. Notwithstanding the previous sentence, the Registration Expenses for any Registration Statement withdrawn solely at the request of one or more Holder(s) (unless withdrawn following commencement of a Suspension) shall be borne by such Holder(s) in accordance with Section 2(c).
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Section 10. Executive Officer Transfer Restrictions.
Notwithstanding anything in this Agreement to the contrary:
(a) Subject to applicable securities laws, rules and regulations and applicable Company policies as in effect from time to time, until the earlier of (i) such time as each of the Sponsors owns less than 17.5% of the Equity Securities owned by such Sponsor immediately following the IPO and (ii) the third anniversary of the IPO, no Executive Officer shall, without the prior written consent of each of the Sponsors, Transfer any Common Stock (other than to Executive Officer Permitted Transferees pursuant to Section 10(c)) to the extent that such Transfer would result in the Relative Ownership Percentage (as defined below) of such Executive Officer immediately following the effective time of such Transfer (the Determination Time) being less than the Relative Ownership Percentage of the Sponsors immediately following the Determination Time. For purposes of this Section 10(a), Relative Ownership Percentage means:
(i) with respect to an Executive Officer, a fraction (expressed as a percentage), (A) the numerator of which is the number of shares of vested and unvested Common Stock owned by such Executive Officer immediately following the Determination Time and (B) the denominator of which is the number of shares of vested and unvested Common Stock owned by such Executive Officer immediately following the IPO; and
(ii) with respect to the Sponsors, a fraction (expressed as a percentage), (A) the numerator of which is the aggregate number of Common Stock owned by the Sponsors immediately following the Determination Time and (B) the denominator of which is the aggregate number of Common Stock owned by the Sponsors immediately following the IPO.
(b) Any attempt by an Executive Officer to Transfer any Common Stock not in compliance with this Section 10 shall be null and void and have no force or effect, and the Company shall not, and shall cause any transfer agent not to, give any effect in the Companys stock records to such attempted Transfer. The parties acknowledge that the transfer restrictions contained in this Agreement are reasonable and in the best interests of the Company.
(c) Executive Officer Permitted Transferees.
(i) Any Executive Officer may at any time Transfer any or all of his or her Common Stock to an Executive Officer Permitted Transferee without the consent of any Person and without compliance with Sections 10(a) or (b), so long as such Executive Officer Permitted Transferee shall have agreed in writing to be bound by the terms of this Agreement by executing a Joinder Agreement. Such Executive Officer must give prior written notice to the Company of any proposed Transfer to an Executive Officer Permitted Transferee, including the identity of such proposed Executive Officer Permitted Transferee and such other documentation reasonably requested by the Company, to ensure compliance with the terms of this Agreement.
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(ii) If, while an Executive Officer Permitted Transferee holds any Common Stock, such Executive Officer Permitted Transferee ceases to qualify as an Executive Officer Permitted Transferee in relation to the initial transferring Executive Officer from whom or which such Executive Officer Permitted Transferee or any previous Executive Officer Permitted Transferee of such initial transferring Executive Officer received such shares (an Unwinding Event), then:
(1) the relevant initial transferor Executive Officer shall forthwith notify the other Holders and the Company of the pending occurrence of such Unwinding Event; and
(2) immediately following such Unwinding Event, without limiting any other rights or remedies, such initial transferor Executive Officer shall take all actions necessary to effect a Transfer of all the Common Stock held by the relevant Executive Officer Permitted Transferee either back to such Executive Officer or, pursuant to this Section 10(c), to another Person that qualifies as an Executive Officer Permitted Transferee of such initial transferring Executive Officer.
Section 11. Indemnification; Contribution.
(a) The Company shall, to the fullest extent permitted by law, indemnify and hold harmless each Holder of Registrable Securities, any Person who is or might be deemed to be a controlling person of the Company or any of its subsidiaries within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each such Person, a Controlling Person), their respective direct and indirect general and limited partners, advisory board members, directors, officers, trustees, managers, members, employees, agents, Affiliates and shareholders, and each other Person, if any, who acts on behalf of or controls any such Holder or Controlling Person (each of the foregoing, a Covered Person) against any losses, claims, actions, damages, liabilities and expenses, joint or several, to which such Covered Person may become subject under the Securities Act, the Exchange Act, any state blue sky securities laws, any equivalent non-U.S. securities laws or otherwise, insofar as such losses, claims, actions, damages, liabilities or expenses arise out of or are based upon (i) any untrue or alleged untrue statement of a material fact contained in or incorporated by reference in any Registration Statement, Prospectus, preliminary Prospectus, free writing prospectus (as defined in Rule 405 under the Securities Act or any successor rule to Rule 405) or any amendment or supplement to or any document incorporated by reference in the same, (ii) any omission or alleged omission of a material fact required to be stated in any such Registration Statement, Prospectus, preliminary Prospectus or free writing prospectus or necessary to make the statements made in the same not misleading or (iii) any violation or alleged violation by the Company of the Securities Act or any other similar federal or state securities laws or any rule or regulation promulgated under such federal or state securities laws applicable to the Company and relating to any action or inaction required of the Company in connection with any registration of securities. In addition, the Company shall reimburse each Covered Person for any legal or other expenses reasonably incurred by such Covered Person in connection with investigating, defending or settling any such loss, claim, action, damage or liability. Notwithstanding the previous sentence, the Company shall not be so liable in any such case to the extent that any loss, claim, action, damage, liability
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or expense arises out of or is based upon any such untrue statement or alleged untrue statement, or omission or alleged omission, made or incorporated by reference in any such Registration Statement, Prospectus, preliminary Prospectus, free writing prospectus or any amendment or supplement to or any document incorporated by reference in the same in reliance upon, and in conformity with, written information prepared and furnished to the Company by such Covered Person expressly for use in such Registration Statement, Prospectus, preliminary Prospectus or free writing prospectus. This indemnity shall be in addition to any liability the Company may otherwise have.
(b) In connection with any registration in which a Holder of Registrable Securities is participating, each such Holder shall furnish to the Company in writing such information as the Company reasonably requests for use in connection with any such Registration Statement or Prospectus. Each Holder shall, to the fullest extent permitted by law, indemnify and hold harmless the Company, its directors and officers, employees, agents and any Person who is or might be deemed to be a Controlling Person against any losses, claims, actions, damages, liabilities and expenses, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act, any state blue sky securities laws, any equivalent non-U.S. securities laws or otherwise, insofar as such losses, claims, actions, damages, liabilities or expenses arise out of or are based upon (i) any untrue or alleged untrue statement of a material fact contained in the Registration Statement, Prospectus, preliminary Prospectus, free writing prospectus (as defined in Rule 405 under the Securities Act or any successor rule to Rule 405) or any amendment of or supplement to the same or (ii) any omission or alleged omission of a material fact required to be stated in such Registration Statement, Prospectus, preliminary Prospectus or free writing prospectus or necessary to make the statements made in the same not misleading, but, in the case of each of clauses (i) and (ii), only to the extent that such untrue statement or alleged untrue statement, or omission or alleged omission, is made in such Registration Statement, Prospectus, preliminary Prospectus, free writing prospectus or any amendment or supplement to the same in reliance upon, and in conformity with, written information prepared and furnished to the Company by such Holder expressly for use in such Registration Statement, Prospectus, preliminary Prospectus or free writing prospectus. In addition, such Holder shall reimburse the Company, its directors and officers, employees, agents and any Person who is or might be deemed to be a Controlling Person for any legal or other expenses reasonably incurred by them in connection with investigating, defending or settling any such loss, claim, action, damage or liability. The obligation to indemnify pursuant to this Section 11(b) shall be individual and several, not joint and several, for each participating Holder and shall be proportional to and shall not exceed an amount equal to the net proceeds (after deducting Selling Expenses) actually received by such Holder in the sale of Registrable Securities to which such Registration Statement or Prospectus relates. The indemnity agreement contained in this Section 11(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, action or proceeding if such settlement is effected without the consent of such Holder. The Company and the Holders of the Registrable Securities hereby acknowledge and agree that, unless otherwise expressly agreed to in writing by such Holders, the only information furnished or to be furnished to the Company for use in any Registration Statement or Prospectus relating to the Registrable Securities or in any amendment, supplement or preliminary materials associated with the same are statements specifically relating to (a) the beneficial ownership of shares of Common Stock by such Holder and its Affiliates, (b) the name and address of such Holder and (c) any additional information about such Holder or the plan of
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distribution (other than for an underwritten offering) required by law or regulation to be disclosed in any such document. This indemnity shall be in addition to any liability which such Holder may otherwise have.
(c) Any Person entitled to indemnification pursuant to this Agreement shall give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification. Notwithstanding the previous sentence, any failure or delay to so notify the indemnifying party shall not relieve the indemnifying party of its obligations under this Agreement, except to the extent that the indemnifying party is actually and materially prejudiced by reason of such failure or delay. In case a claim or an action that is subject or potentially subject to indemnification pursuant to this Agreement is brought against an indemnified party, the indemnifying party shall be entitled to participate in and shall have the right, exercisable by giving written notice to the indemnified party as promptly as practicable after receipt of written notice from such indemnified party of such claim or action, to assume, at the indemnifying partys expense, the defense of any such claim or action, with counsel reasonably acceptable to the indemnified party. Notwithstanding the previous sentence, any indemnified party shall continue to be entitled to participate in the defense of such claim or action, with counsel of its own choice, but the indemnifying party shall not be obligated to reimburse the indemnified party for any fees, costs and expenses subsequently incurred by the indemnified party in connection with such defense unless (A) the indemnifying party has agreed in writing to pay such fees, costs and expenses, (B) the indemnifying party has failed to assume the defense of such claim or action within a reasonable time after receipt of notice of such claim or action, (C) having assumed the defense of such claim or action, the indemnifying party fails to employ counsel reasonably acceptable to the indemnified party or to pursue the defense of such claim or action in a reasonably vigorous manner, (D) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest or (E) the indemnified party has reasonably concluded that there may be one or more legal or equitable defenses available to it and/or other any other indemnified party which are different from or additional to those available to the indemnifying party. Subject to the foregoing sentence, no indemnifying party shall, in connection with any one claim or action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general circumstances or allegations, be liable for the fees, costs and expenses of more than one firm of attorneys (in addition to any local counsel) for all indemnified parties. The indemnifying party shall not have the right to settle a claim or action for which any indemnified party is entitled to indemnification pursuant to this Agreement without the consent of the indemnified party, The indemnifying party shall not consent to the entry of any judgment or enter into or agree to any settlement relating to such claim or action unless such judgment or settlement does not impose any admission of wrongdoing or ongoing obligations on any indemnified party and includes as an unconditional term of such judgment or settlement the giving by the claimant or plaintiff in such judgment or settlement to such indemnified party, in form and substance reasonably satisfactory to such indemnified party, of a full and final release from all liability in respect of such claim or action. The indemnifying party shall not be liable under this Agreement for any amount paid or payable or incurred pursuant to or in connection with any judgment entered or settlement effected with the consent of an indemnified party unless the indemnifying party has also consented to such judgment or settlement (such consent not to be unreasonably withheld, conditioned or delayed).
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(d) If the indemnification provided for in this Section 11 is held by a court of competent jurisdiction to be unavailable to, or unenforceable by, an indemnified party in respect of any loss, claim, action, damage, liability or expense referred to in this Section 11, then the applicable indemnifying party, in lieu of indemnifying such indemnified party under this Agreement, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, action, damage, liability or expense in such proportion as is appropriate to reflect the relative benefits received by the indemnified party and the indemnifying party. If the allocation provided by the preceding sentence is not permitted by applicable law, the indemnifying party shall contribute to such amount in such proportion as is appropriate to reflect not only the relative benefits referred to in the preceding sentence but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. The relative fault of the indemnifying party, on the one hand, and of the indemnified party, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party, whether the violation of the Securities Act or any other federal or state securities law or rule or regulation promulgated under such federal or state securities law applicable to the Company, and, relating to any action or inaction required of the Company in connection with any registration of securities, whether such action or inaction was perpetrated by the indemnifying party or the indemnified party. The relative fault shall also be determined by reference to the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement, omission or violation. The parties agree that it would not be just and equitable if contribution pursuant to this Agreement were determined by pro rata allocation or by any other method or allocation that does not take into account the equitable considerations referred to in this Section 11(c). In no event shall the amount which a Holder of Registrable Securities may be obligated to contribute pursuant to this Section 11(c) exceed an amount equal to the net proceeds (after deducting Selling Expenses) actually received by such Holder in the sale of Registrable Securities that gives rise to such obligation to contribute. No indemnified party guilty or liable of fraudulent misrepresentation within the meaning of Section 11(f) of the Securities Act shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.
(e) The provisions of this Section 11 shall remain in full force and effect regardless of any investigation made by or on behalf of any indemnified party or any officer, director or controlling person of such indemnified party and shall survive the Transfer of any Registrable Securities by any Holder.
Section 12. Rule 144 Compliance. With a view to making available to the Holders of Registrable Securities the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company shall:
(a) make and keep public information available, as those terms are understood and defined in Rule 144;
(b) use reasonable best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and
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(c) furnish to any Holder of Registrable Securities, promptly upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144 and of the Securities Act and the Exchange Act.
Section 13. Miscellaneous.
(a) No Inconsistent Agreements. The Company represents and warrants that it has not entered into, and agrees that it will not enter into, any agreement with respect to its securities that violates or subordinates or is otherwise inconsistent with the rights granted to the Holders of Registrable Securities under this Agreement.
(b) Adjustments Affecting Registrable Securities. The Company shall not take any action, or permit any change to occur, with respect to its Equity Securities which would materially and adversely affect the ability of the Holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agreement or which would materially and adversely affect the marketability of such Registrable Securities in any such registration (including effecting a stock split or a combination of shares that would reasonably be expected to have such an effect).
(c) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and permitted assigns and transferees. Other than with respect to Transfers of Equity Securities to Sponsor Permitted Transferees or Executive Officer Permitted Transferees, as applicable, neither this Agreement nor any right, benefit, remedy, obligation or liability arising under this Agreement may be assigned by any party without the prior written consent of the other parties, and any attempted assignment without such consent shall be null and void and of no effect, except that the Company may assign this Agreement at any time in connection with a sale or acquisition of the Company, whether by merger, consolidation, sale of all or substantially all of the Companys assets, or similar transaction, without the consent of the Holders, so long as the successor or acquiring Person agrees in writing to assume all of the Companys rights and obligations under this Agreement.
(d) No Third Party Beneficiaries. This Agreement is for the sole benefit of the parties and their respective successors and permitted assigns and transferees and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any legal or equitable right, benefit or remedy of any nature whatsoever, under or by reason of this Agreement Notwithstanding the previous sentence, the parties acknowledge that the Persons set forth in Section 11 shall be express third-party beneficiaries of the obligations of the parties set forth in Section 11.
(e) Remedies; Specific Performance. In the event of a breach or a threatened breach by any party to this Agreement of its obligations under this Agreement, any party injured or to be injured by such breach shall be entitled to specific performance of its rights under this Agreement or to injunctive relief, in addition to being entitled to exercise all rights provided in this Agreement and granted by law, it being agreed by the parties that the remedy at law, including monetary damages, for breach of any such provision will be inadequate compensation for any loss and that any defense or objection in any action for specific performance or injunctive relief for which a remedy at law would be adequate is hereby waived.
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(f) No Waivers. No failure or delay by any party in exercising any right, power or privilege under this Agreement shall operate as a waiver of such right, power or privilege nor shall any single or partial exercise of such right, power or privilege preclude any other or further exercise of the same or the exercise of any other right, power or privilege.
(g) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the law of any jurisdiction other than the State of New York.
(h) Jurisdiction and Venue. The parties irrevocably submit to the jurisdiction of the courts of the State of New York or, in the event (but only in the event) that such court does not have subject matter jurisdiction over such action or proceeding, in the United States District Court for the Southern District of New York in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement of this Agreement or of any such document, that it is not subject to such jurisdiction or that such action, suit or proceeding may not be brought or is not maintainable in the courts of the State of New York, or in the event (but only in the event) that such court does not have subject matter jurisdiction over such action or proceeding, in the United States District Court for the Southern District of New York, or that this Agreement or any such document may not be enforced in or by such courts, and the parties irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in the courts of the State of New York, or in the event (but only in the event) that such court does not have subject matter jurisdiction over such action or proceeding, in the United States District Court for the Southern District of New York. The parties hereby consent to and grant the courts of the State of New York, or in the event (but only in the event) that such court does not have subject matter jurisdiction over such action or proceeding, the United States District Court for the Southern District of New York, jurisdiction over the person of such parties and, to the extent permitted by law, over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 13(i) or in such other manner as may be permitted by law shall be valid and sufficient service of process. EACH OF THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHTS TO TRIAL BY JURY IN CONNECTION WITH ANY PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
(i) Notices. Any notice, demand, request, waiver, or other communication under this Agreement shall be in writing and shall be deemed to have been duly given on the date of service, if personally served or sent by facsimile; on the business day after such communication is delivered to a courier or mailed by express mail, if sent by courier delivery service or express mail for next day delivery; and on the third day after mailing, if mailed to the party to whom
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notice is to be given by first class mail, registered, return receipt requested, postage prepaid and addressed as follows:
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If to any other Holder, to such address as is designated by such Holder in the counterpart to this Agreement in the form attached as Exhibit A.
(j) Headings. The headings and other captions in this Agreement are for convenience and reference only and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect.
(k) Counterparts. This Agreement may be signed in any number of identical counterparts, each of which shall be deemed an original instrument (including signatures delivered via facsimile or electronic mail) and all of which together shall constitute one and the same instrument. The parties may deliver this Agreement by facsimile or by electronic mail and each party shall be permitted to rely upon the signatures so transmitted to the same extent and effect as if they were original signatures.
(l) Entire Agreement. This Agreement, together with that certain Stockholders Agreement, by and between the Company, Ares and OTPP, dated as of the date of this Agreement, contains the entire agreement among the parties with respect to the subject matter of this Agreement and supersedes and replaces all other prior agreements, written or oral, among the parties with respect to the subject matter of this Agreement.
(m) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.
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(n) Amendments. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions of this Agreement may not be given, without the prior written consent of the Company and of the Holders of a majority of the Registrable Securities, except that any amendment, modification, supplement, waiver or consent to departure from the provisions of this Agreement that disproportionately and adversely affects a Holder as compared to other Holders shall require the prior written consent of such adversely affected Holder.
(o) Further Assurances. Each party to this Agreement shall cooperate and take such action as may be reasonably requested by another party to this Agreement in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby.
(p) Termination. This Agreement shall terminate with respect to any Holder upon such time as such Holder ceases to hold or beneficially own any Registrable Securities. Notwithstanding the previous sentence, the provisions of Sections 9, 11 and this Section 13 shall survive termination.
[Signature Page Follows]
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IN WITNESS WHEREOF, the patties to this Agreement have caused this Agreement to be duly executed as of the date and year first above written.
THE AZEK COMPANY INC. | ||
By: |
/s/ Paul J. Kardish |
|
Name: Paul J. Kardish | ||
Title: Chief Legal Officer |
[Signature Page to Registration Rights Agreement]
ARES CORPORATE OPPORTUNITIES FUND IV, L.P. | ||||
By: ACOF Operating Manager IV, LLC, | ||||
its managers | ||||
By: |
/s/ Brian Klos |
|||
Name: | Brian Klos | |||
Title: | Authorized Signatory |
[Signature Page to Registration Rights Agreement]
ONTARIO TEACHERS PENSION PLAN BOARD | ||||
By: |
/s/ Russell Hammond |
|||
Name: | Russell Hammond | |||
Title: | Authorized Signatory |
[Signature Page to Registration Rights Agreement]
Jesse Singh | ||||
By: |
/s/ Jesse Singh |
|||
Name: | Jesse Singh | |||
Title: | Chief Executive Officer and President | |||
Address for Notices: | ||||
1820 Knox Avenue South | ||||
Minneapolis, MN 55403 | ||||
Phone: 847-626-1502 | ||||
Email: jesse.singh@azekco.com |
[Signature Page to Registration Rights Agreement]
Ralph Nicoletti | ||||
By: |
/s/ Ralph Nicoletti |
|||
Name: | Ralph Nicoletti | |||
Title: | Senior Vice President and Chief Financial Officer | |||
Address for Notices: | ||||
597 Regency Drive | ||||
Zurich, IL 60047 | ||||
Phone: 847-909-9011 | ||||
Email: ralphnicoletti@gmail.com |
[Signature Page to Registration Rights Agreement]
Paul J. Kardish | ||||
By: |
/s/ Paul J. Kardish |
|||
Name: | Paul Kardish | |||
Title: | Senior Vice President and Chief Legal Officer | |||
Address for Notices: | ||||
2592 Remington Ct. | ||||
Green Bay, WI 54302 | ||||
Phone: 920-661-7552 | ||||
E-Mail: paul.kardish@azekco.com |
[Signature Page to Registration Rights Agreement]
Gregory Jorgensen | ||||
By: |
/s/ Gregory Jorgensen |
|||
Name: | Gregory Jorgensen | |||
Title: | Vice President and Chief Accounting Officer | |||
Address for Notices: | ||||
1330 W Fulton Street, #350 | ||||
Chicago, IL 60607 | ||||
(224) 221-8761 | ||||
greg.jorgensen@azekco.com |
[Signature Page to Registration Rights Agreement]
Gary Hendrickson | ||
/s/ Gary Hendrickson |
||
Name: | Gary Hendrickson | |
Title: | Director | |
Address for Notices: | ||
2102 Cedar Lake Parkway | ||
Minneapolis. MN 55416 | ||
Phone: 612-805-5241 | ||
E-Mail: | ||
Ghendrickson@vgrcapital.com |
[Signature Page to Registration Rights Agreement]
Ronald A. Pace | ||
By: |
/s/ Ronald A. Pace |
|
Name: Ronald A. Pace | ||
Title: Director | ||
Address for Notices: | ||
W7168 Berkshire St Cedarburg, | ||
WI 53012 | ||
Phone: 847-808-806 | ||
E-Mail: | ||
ronald.pace@kohler.com |
[Signature Page to Registration Rights Agreement]
Sallie B. Bailey | ||
By: |
/s/ Sallie B. Bailey |
|
Name: Sallie B. Bailey | ||
Title: Director | ||
Address for Notices: | ||
PO Box 58949 | ||
Nashville, TN 37205 | ||
Phone: 615-866-7597 | ||
E-Mail: | ||
salliebailey@.comcast.net |
[Signature Page to Registration Rights Agreement]
Michelle Kasson | ||||
By: |
/s/ Michelle Kasson |
|||
Name: | Michelle Kasson | |||
Title: | Chief Information Officer | |||
Address for Notices: | ||||
2636 Chamberlain Rd. #2 | ||||
Fairlawn, OH 44333 | ||||
Phone: 330-523-8954 | ||||
E-Mail: michelle.kasson@azekco.com |
[Signature Page to Registration Rights Agreement]
Jeanine Gaffke | ||
By: |
/s/ Jeanine Gaffke |
|
Name: Jeanine Gaffke | ||
Title: Chief Marketing Officer | ||
Address for Notices: | ||
900 N Lake Shore Drive #2907 | ||
Chicago, IL 60611 | ||
Phone: 312-919-3393 | ||
E-Mail: jeaninegaflke@hotmail.com |
[Signature Page to Registration Rights Agreement]
Scott Van Winter | ||||
By: |
/s/ Scott Van Winter |
|||
Name: | Scott Van Winter | |||
Title: | President, Commercial Segment | |||
Address for Notices: | ||||
21 Sagewood Ct | ||||
Newnan, GA 30265 | ||||
Phone: 401-580-3575 | ||||
E-Mail: scott.vanwinter@azekco.com |
[Signature Page to Registration Rights Agreement]
Jose Ochoa | ||||
By: |
/s/ Jose Ochoa |
|||
Name: | Jose Ochoa | |||
Title: | President, Residential Segment | |||
Address for Notices: | ||||
888 Elm St | ||||
Winnetka, IL 60093 | ||||
Phone: 419-309-8263 | ||||
E-Mail: jochoa@utexas.edu |
[Signature Page to Registration Rights Agreement]
Dennis Kitchen | ||
By: |
/s/ Dennis Kitchen |
|
Name: | Dennis Kitchen | |
Title: | Senior Vice President and Chief Human Resources Officer | |
Address for Notices: | ||
1403 Star Grass Cir | ||
Aurora, IL 60506 | ||
Phone: 630-215-8336 | ||
E-Mail: dennis.k:itcben@azekco.com |
[Signature Page to Registration Rights Agreement]
Bobby Gentile | ||||
By: |
/s/ Bobby Gentile |
|||
Name: | Bobby Gentile | |||
T itle: | Senior Vice President of Operations | |||
Address for Notices: | ||||
1331 Terrace Dr | ||||
Lantana, TX 76226 | ||||
Phone: 937-422-1839 | ||||
E-Mail: bobby.gentile@azeko.com |
[Signature Page to Registration Rights Agreement]
Jonathan Skelly | ||||
By: |
/s/ Jonathan Skelly |
|||
Name: | Jonathan Skelly | |||
Title: | Senior Vice President of Strategy and Execution | |||
Address for Notices: | ||||
541 Lincoln Ave. | ||||
Glencoe, IL 60022 | ||||
Phone: 847-242-4259 | ||||
Email: jonathan.skelly@azekco.com |
[Signature Page to Registration Rights Agreement]
Exhibit B
Schedule of Other Stockholders
Gary Hendrickson
Sallie B. Bailey
Ronald A. Pace
Jesse Singh
Ralph Nicoletti
Jose Ochoa
Scott Van Winter
Dennis Kitchen
Jeanine Gaffke
Bobby Gentile
Jonathan Skelly
Paul Kardish
Michelle Kasson
Greg Jorgensen
EXHIBIT 31.1
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jesse Singh, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of The AZEK Company Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 14, 2020
/s/ Jesse Singh |
Jesse Singh |
Chief Executive Officer |
(Principal Executive Officer) |
EXHIBIT 31.2
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ralph Nicoletti, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of The AZEK Company Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 14, 2020
/s/ Ralph Nicoletti |
Ralph Nicoletti |
Chief Financial Officer |
(Principal Financial Officer) |
EXHIBIT 32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of The AZEK Company Inc., (the Company) for the period ended June 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, the undersigned, Jesse Singh, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 14, 2020
/s/ Jesse Singh |
Jesse Singh |
Chief Executive Officer |
(Principal Executive Officer) |
EXHIBIT 32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of The AZEK Company Inc., (the Company) for the period ended June 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, the undersigned, Ralph Nicoletti, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 14, 2020
/s/ Ralph Nicoletti |
Ralph Nicoletti |
Chief Financial Officer |
(Principal Financial Officer) |