<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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: 001-14649
Trex Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1910453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 South Cameron Street
Winchester, Virginia 22601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 678-4070
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
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 [x] No [_]
The number of shares of the registrant's common stock, par value $.01 per
share, outstanding at August 12, 1999 was 14,118,435 shares.
<PAGE>
TREX COMPANY, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999 (unaudited) 3
Consolidated Statements of Operations for the three and six months
ended June 30, 1998 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 17
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREX COMPANY, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1998 (*) 1999
--------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,200,000 $ 443,000
Trade accounts receivable 34,000 4,381,000
Inventories 6,007,000 2,230,000
Prepaid expenses and other assets 673,000 340,000
--------------- ----------------
Total current assets 7,914,000 7,394,000
--------------- ----------------
Property, plant and equipment, net 33,886,000 48,149,000
Intangible assets, net 9,298,000 8,880,000
Deferred financing charges, net 233,000 --
--------------- ----------------
Total assets $51,331,000 $64,423,000
=============== ================
LIABILITIES AND MEMBERS' / STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,577,000 $ 3,461,000
Accrued expenses 1,086,000 1,209,000
Income taxes payable - 276,000
Other current liabilities 1,314,000 536,000
Current portion of long-term debt 6,109,000 6,836,000
--------------- ----------------
Total current liabilities 11,086,000 12,318,000
Deferred income taxes -- 2,633,000
Long term debt 26,954,000 4,454,000
--------------- ----------------
Total liabilities 38,040,000 19,405,000
--------------- ----------------
Members' / stockholders' equity:
Preferred units, 1,000 units authorized, used and outstanding 3,000,000 --
Junior units, 4,000 units authorized, issued and outstanding 2,350,000 --
Undistributed earnings 7,941,000 --
Preferred stock, $.01 par value, 3,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $.01 par value, 40,000,000 shares authorized,
14,115,450 shares issued and outstanding -- 141,000
Additional capital -- 40,914,000
Retained earnings -- 3,963,000
--------------- ----------------
Total members' / stockholders' equity 13,291,000 45,018,000
--------------- ----------------
Total liabilities and members' / stockholders' equity $51,331,000 $64,423,000
=============== ================
</TABLE>
* The consolidated balance sheet at December 31, 1998 has been derived from the
audited financial statements of TREX Company, LLC (the Company's predecessor) at
that date, but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
3
<PAGE>
TREX COMPANY, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
1998 1999 1998 1999
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $13,802,000 $19,775,000 $29,327,000 $ 42,140,000
Cost of sales 5,907,000 8,254,000 13,285,000 18,196,000
------------- ------------ ------------ -------------
Gross profit 7,895,000 11,521,000 16,042,000 23,944,000
Selling, general and administrative expenses 4,258,000 6,905,000 6,672,000 10,969,000
------------- ------------ ------------ -------------
Income from operations 3,637,000 4,616,000 9,370,000 12,975,000
Interest income 107,000 14,000 141,000 33,000
Interest (expense) (705,000) (301,000) (1,398,000) (1,120,000)
------------- ------------ ------------ -------------
Income before taxes and extraordinary item 3,039,000 4,329,000 8,113,000 11,888,000
Income taxes -- 4,279,000 -- 4,279,000
------------- ------------ ------------ -------------
Income before extraordinary item 3,039,000 50,000 8,113,000 7,609,000
Extraordinary loss on the early extinguishment of debt,
net of $704,000 of taxes -- (1,056,000) -- ( 1,056,000)
------------- ------------ ------------ -------------
Net income (loss) $ 3,039,000 $(1,006,000) $ 8,113,000 $ 6,553,000
============= ============ ============ =============
Basic earnings per common share
Income before extraordinary item $ 0.31 $ -- $ 0.83 $ 0.65
Extraordinary item -- (0.07) -- (0.09)
------------- ------------ ------------ -------------
Net income (loss) $ 0.31 $ (0.07) $ 0.83 $ 0.56
============= ============ ============ =============
Weighted average shares outstanding 9,500,000 13,591,336 9,500,000 11,556,970
============= ============ ============ =============
Pro forma data (unaudited, see Note 7):
Historical income before taxes and extraordinary item 3,039,000 4,329,000 8,113,000 11,888,000
Pro forma income taxes (1,216,000) (1,732,000) (3,245,000) (4,755,000)
------------- ------------ ------------ -------------
Pro forma net income $ 1,823,000 $ 2,597,000 $ 4,868,000 $ 7,133,000
============= ============ ============ =============
Pro forma basic earnings per common share $ 0.19 $ 0.19 $ 0.51 $ 0.62
============= ============ ============ =============
Pro forma weighted average common shares outstanding 9,500,000 13,591,336 9,500,000 11,556,970
============= ============ ============ =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
4
<PAGE>
TREX COMPANY, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1999
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,113,000 $ 6,553,000
Adjustments to reconcile net income to net cash provided by operating activities
Extraordinary loss on early prepayment of debt -- 1,056,000
Income taxes -- 3,613,000
Depreciation and amortization 1,447,000 1,902,000
Amortization of deferred financing charges 25,000 13,000
Loss on disposal of property, plant and equipment -- 156,000
Changes in operating assets and liabilities
Trade accounts receivable (697,000) (4,347,000)
Inventories 3,406,000 3,777,000
Prepaid expenses and other assets (3,000) 333,000
Trade accounts payable (79,000) 884,000
Accrued expenses 247,000 123,000
Other current liabilities 23,000 (778,000)
----------- ------------
Net cash provided by operating activities 12,482,000 13,285,000
----------- ------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (4,607,000) (15,903,000)
----------- ------------
Net cash used in investing activities (4,607,000) (15,903,000)
----------- ------------
FINANCING ACTIVITIES
Borrowings under mortgages and notes 3,780,000 4,570,000
Principal payments under mortgages and notes -- (27,883,000)
Proceeds from initial public offering -- 41,055,000
Preferred distributions paid (203,000) (3,115,000)
Common distributions paid (1,643,000) (12,766,000)
----------- ------------
Net cash provided by financing activities 1,934,000 1,861,000
----------- ------------
Net increase (decrease) in cash and cash equivalents 9,809,000 (757,000)
Cash and cash equivalents at beginning of period 2,000,000 1,200,000
----------- ------------
Cash and cash equivalents at end of period $11,809,000 $ 443,000
=========== ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
5
<PAGE>
TREX COMPANY, INC.
Notes to Consolidated Financial Statements
For The Three and Six Months Ended June 30, 1998 and 1999 (Unaudited)
1. BUSINESS AND ORGANIZATION
Trex Company, Inc. (the "Company"), a Delaware corporation, was incorporated on
September 4, 1998 for the purpose of acquiring 100% of the membership interests
and operating the business of TREX Company, LLC, a Delaware limited liability
company, in connection with an initial public offering ("IPO") of the Company's
common stock. The Company had no operations or activity from inception on
September 4, 1998 through April 7, 1999, immediately prior to the Reorganization
described below. The IPO was consummated on April 13, 1999. On March 22, 1999,
the Company amended its certificate of incorporation to increase its authorized
capital to 40,000,000 shares of common stock (the "Common Stock") and 3,000,000
shares of preferred stock. All references in the accompanying balance sheets
have been restated to reflect the increase in the Company's authorized capital.
TREX Company, LLC manufactures and distributes wood/plastic composite products
primarily for residential and commercial decking applications. Trex Wood-
Polymer(TM) lumber is manufactured in a proprietary process that combines waste
wood fibers and reclaimed polyethylene. TREX Company, LLC is a limited
liability company formed under the laws of the State of Delaware on July 1, 1996
(inception). It initiated commercial activity on August 29, 1996. On August 29,
1996, TREX Company, LLC acquired substantially all of the assets and assumed
certain liabilities of the Composite Products Division of Mobil Oil Corporation
for a cash purchase price of approximately $29.5 million. The acquisition was
accounted for using the purchase accounting method.
Reorganization
Trex Company, Inc., TREX Company, LLC and the holders of membership interests in
TREX Company, LLC completed certain transactions (the "Reorganization") on April
7, 1999, prior to the consummation of the IPO. In the Reorganization, the
junior members of TREX Company, LLC contributed their membership interests to
Trex Company, Inc. in exchange for 9,500,000 shares of Common Stock of Trex
Company, Inc. Concurrently with such exchange, the preferred member of TREX
Company, LLC exchanged its preferred membership interest for a $3.1 million note
of Trex Company, Inc. As a result of such exchanges, TREX Company, LLC became a
wholly owned subsidiary of Trex Company, Inc. The Company has accounted for the
Reorganization as an exchange of shares between entities under common control at
historical cost in a manner similar to a pooling of interests. After the
Reorganization, the ownership percentage of each Trex Company, Inc. common
stockholder was the same as its ownership percentage in the junior membership
interests of TREX Company, LLC.
As part of the Reorganization, the Company made a special cash distribution (the
"LLC Distribution") to its junior members in the amount of $12.6 million, of
which $6.7 million was paid prior to the consummation of the IPO. The Company
finalized its determination of amounts due to the junior members for the LLC
Distribution in July, 1999 and will distribute an additional $822,000 in the
third quarter of 1999. A deferred income tax liability of $2.6 million was
recognized as a result of the conversion of TREX Company, LLC in the
Reorganization from a partnership for federal income tax purposes to a
corporation taxed in accordance with Subchapter C of the Internal Revenue Code.
Immediately prior to the Reorganization, TREX Company, LLC exercised an option
to repurchase 667 units of junior membership interest from certain members at a
price of $.01 per unit.
Initial Public Offering
In the IPO, the Company sold 4,615,450 shares of Common Stock at a public
offering price of $10.00 per share. Of such shares, the Company sold 4,000,000
shares on April 13, 1999 and 615,450 shares on May 6, 1999 pursuant to the
underwriters' exercise in full of their over-allotment option. The net proceeds
from the IPO, after deducting underwriting discounts and commissions and
offering expenses payable by the Company, totaled approximately $41.2 million.
The net proceeds of approximately $35.5 million from the sale of shares on April
13, 1999 were used as follows: approximately $28.1 million was used to repay
approximately $26.3 million of senior and subordinated notes, accrued interest
thereon and a related prepayment premium of approximately $1.5 million;
approximately $3.1 million was used to repay the note issued to the preferred
member of TREX Company, LLC in the Reorganization; and approximately $4.3
million was used to fund a portion of the LLC Distribution. The net proceeds of
approximately $5.7 million from the over-allotment exercise were used as
follows: approximately $4.4 million was used to repay borrowings under the
Company's revolving credit facility and approximately $1.3 million was used for
working capital and general corporate purposes.
6
<PAGE>
TREX COMPANY, INC.
Notes to Consolidated Financial Statements (continued)
For The Three and Six Months Ended June 30, 1998 and 1999 (Unaudited)
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the accompanying consolidated financial statements
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normally recurring accruals,
except as described below) considered necessary for a fair presentation have
been included in the accompanying consolidated financial statements. The
consolidated results of operations for the three-month and six-month periods
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year. These consolidated financial statements
should be read in conjunction with the consolidated audited financial statements
as of December 31, 1998 and 1997 and for the period from July 1, 1996
(inception) to December 31, 1996 and for each of the two years in the period
ended December 31, 1998 included in the registration statement of Trex Company,
Inc. on Form S-1 (File No. 333-63287), as filed with the Securities and Exchange
Commission.
3. Inventory
Inventories consist of the following:
December 31, 1998 June 30, 1999
----------------- -------------
Finished goods $4,847,000 $1,215,000
Raw materials 1,160,000 1,015,000
---------- ----------
$6,007,000 $2,230,000
========== ==========
4. Debt
On August 3, 1999, the Company revised the terms of its bank revolving credit
facility. The new terms of the revolving credit facility provide for borrowings
of up to $10.0 million on an unsecured basis for working capital and general
corporate purposes. In addition, under this facility, the Company may obtain a
total of $7.5 million of term loans to finance equipment purchases and for
general corporate purposes. Amounts drawn under the revolving credit facility
and any term loans bear interest at an annual rate equal to LIBOR plus 1.00%.
The revolving credit facility will mature on July 31, 2000. The unpaid principal
balance of term loans outstanding on December 31, 1999 will be payable in
consecutive monthly payments beginning on February 1, 2000 and the entire unpaid
principal balance of the term loans will be payable in full on July 31, 2000.
In the three-month period ended June 30, 1999, the Company borrowed $3.1 million
under a $4.6 million construction loan for application to the construction of
its second manufacturing facility. The loan accrues interest at 7.5% per annum
and is payable in November 1999. The Company intends to refinance this
construction loan with long-term borrowings upon completion of the manufacturing
facility.
7
<PAGE>
TREX COMPANY, INC.
Notes to Consolidated Financial Statements (continued)
For The Three and Six Months Ended June 30, 1998 and 1999 (Unaudited)
5. Stockholders' Equity
The following table sets forth the computation of basic earnings (loss) per
share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- --------------------------------
1998 1999 1998 1999
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item $ 3,039,000 $ 50,000 $ 8,113,000 $ 7,609,000
Preferred dividends (101,000) (13,000) (203,000) (115,000)
--------------- -------------- -------------- -------------
2,938,000 37,000 7,910,000 7,494,000
Extraordinary item - (1,056,000) - (1,056,000)
--------------- -------------- -------------- -------------
Net income (loss) available to common shareholders $ 2,938,000 $ (1,019,000) $ 7,910,000 $ 6,438,000
=============== ============== ============== =============
Denominator:
Denominator for basic earnings per share-weighted
average shares outstanding 9,500,000 13,591,336 9,500,000 11,556,970
=============== ============== ============== =============
Basic earnings per common share
Income before extraordinary item $ 0.31 $ 0.00 $ 0.83 $ 0.65
Extraordinary loss - (0.07) - (0.09)
--------------- -------------- -------------- -------------
Net income (loss) per share $ 0.31 $ (0.07) $ 0.83 $ 0.56
=============== ============== ============== =============
</TABLE>
The earnings (loss) per share amounts shown above have been adjusted to reflect
the Reorganization and the issuance of 9,500,000 shares of Trex Company, Inc.
Common Stock in exchange for the junior units in the Company. Earnings (loss)
per share on a fully diluted basis is the same as basic earnings per share, and
therefore, is not separately presented.
During 1999, the Company granted certain employees stock options to acquire a
total of 105,050 shares of the Company's Common Stock at exercise prices of
$10.00 per share and its two non-employee directors stock options to acquire a
total of 5,180 shares of Common Stock at exercise prices ranging from $13.75 to
$24.75 per share. Each option vests with respect to 25% of the shares subject
to the option on each of the first, second, third and fourth anniversaries of
the date of grant. The options are forfeitable upon termination of an option
holder's service as an employee or director under certain circumstances.
6. Seasonality
The Company's net sales and income from operations have historically varied from
quarter to quarter. Such variations are principally attributable to seasonal
trends in the demand for Trex. The Company typically experiences lower net sales
during the fourth quarter due to holidays and adverse weather conditions in
certain regions, which reduce the level of home improvement and new construction
activity. Net sales during the second quarter of 1998 accounted for
approximately 29% of annual sales in the year ended December 31, 1998.
7. Pro Forma Data (Unaudited)
The pro forma consolidated statements of operations data set forth in the
accompanying consolidated statements of operations give effect to the
Reorganization as if the Reorganization had occurred on January 1 of each period
presented. The pro forma income taxes and pro forma net income reflect federal
and state income taxes (assuming a 40% combined effective tax rate) as if the
Company had been taxed as a C corporation for the three and six months ended
June 30, 1998 and 1999. The pro forma consolidated statements of operations data
exclude one-time charges
8
<PAGE>
TREX COMPANY, INC.
Notes to Consolidated Financial Statements (continued)
For The Three and Six Months Ended June 30, 1998 and 1999 (Unaudited)
7. Pro Forma Data (Unaudited) (continued)
relating to the Reorganization and IPO, including (i) a net deferred tax
liability of approximately $2.6 million and (ii) a $1.1 million extraordinary
charge for the extinguishment of debt repaid from the net proceeds of the IPO.
Pro forma weighted average shares outstanding reflect 9,500,000 shares of Trex
Company, Inc. Common Stock outstanding through April 7, 1999, 13,500,000 from
April 8, 1999 through May 2, 1999 and 14,115,450 shares outstanding thereafter
(See Note 1).
The following table sets forth the computation of basic earnings per common
share on a supplemental pro forma basis:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- --------------------------------
1998 1999 1998 1999
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Historical income from operations $ 3,637,000 $ 4,616,000 $ 9,370,000 $ 12,975,000
Supplemental pro forma interest
income (expense), net 96,000 (196,000) 131,000 (302,000)
Supplemental pro forma income taxes (1,493,000) (1,770,000) (3,800,000) (5,070,000)
-------------- --------------- -------------- --------------
Supplemental pro forma net income available to
common shareholders $ 2,240,000 $ 2,650,000 $ 5,701,000 $ 7,603,000
============== =============== ============== ==============
Denominator:
Denominator for pro forma basic earnings per common
share-weighted average shares outstanding 14,115,450 14,115,450 14,115,450 14,115,450
============== =============== ============== ==============
Supplemental pro forma basic earnings per common share $ 0.16 $ 0.19 $ 0.40 $ 0.54
============== =============== ============== ==============
</TABLE>
The foregoing supplemental pro forma basic earnings per common share amounts
have been adjusted to reflect the Reorganization (see Note 1) as if the
Reorganization had occurred on January 1, 1998 and 1999, respectively. The
supplemental pro forma interest income (expense) gives effect to the repayment
of the senior and subordinated notes of the Company (see Note 1) as if such
repayments had been made as of January 1, 1998 and 1999, respectively. The
supplemental pro forma income taxes reflect federal and state income taxes
(assuming a 40% combined effective tax rate) as if the Company had been taxed as
a C corporation as of January 1, 1998 and 1999, respectively. Supplemental pro
forma net income available to common shareholders assumes the preferred units
were exchanged for a note of Trex Company, Inc. as of January 1, 1998 and 1999,
and excludes one-time charges relating to the Reorganization and IPO, including
(i) a net deferred tax liability of approximately $2.6 million and (ii) a $1.1
million extraordinary charge for the extinguishment of debt repaid from the net
proceeds of the IPO. Supplemental pro forma weighted average shares outstanding
assumes that the shares issued in the Reorganization and the IPO were
outstanding for all periods presented. Supplemental pro forma earnings per
share on a fully diluted basis is the same as supplemental pro forma basic
earnings per share, and therefore, is not separately presented.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements regarding the Company's expected financial position and
operating results, its business strategy and its financing plans are forward-
looking statements. These statements are subject to risks and uncertainties that
could cause the Company's actual results to differ materially. Such risks and
uncertainties include the Company's ability to increase market acceptance of its
Trex product; the Company's lack of product diversification; the Company's
current dependence on a single manufacturing facility and its ability to
increase its manufacturing capacity in its existing facility and its proposed
new facility; the Company's reliance on the supply of raw materials used in its
production process; the Company's sensitivity to economic conditions, which
influence the level of activity in home improvements and new home construction;
the Company's ability to manage its growth; the Company's significant capital
requirements; and the Company's dependence on its largest distributors to market
and sell its products. A discussion of such risks and uncertainties is
contained in the Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 25, 1999.
References to the "Company" in the following discussion mean TREX Company, LLC
until the consummation of the reorganization on April 7, 1999 (the
"Reorganization") and Trex Company, Inc. and its wholly owned subsidiary, TREX
Company, LLC, at all times thereafter. See Note 1 to the Consolidated Financial
Statements of Trex Company, Inc. included elsewhere in this report.
Overview
The Company is the nation's largest manufacturer of non-wood decking alternative
products, which are marketed under the brand name Trex.(R) Trex Wood-Polymer(TM)
lumber ("Trex") is a wood/plastic composite which is manufactured in a
proprietary process that combines waste wood fibers and reclaimed polyethylene.
Trex is used primarily for residential and commercial decking. Trex also has
non-decking product applications, including industrial block flooring,
applications for parks and recreational areas, floating and fixed docks and
other marine applications, and landscape edging.
Net sales consists of sales net of returns and discounts. Cost of sales consists
of raw material costs, direct labor costs and manufacturing costs, including
depreciation. The principal component of selling, general and administrative
expenses is sales and marketing costs, which have increased significantly as the
Company has sought to build brand awareness of Trex in the decking market. Sales
and marketing costs consist primarily of salaries, commissions and benefits paid
to sales and marketing personnel, advertising expenses and other promotional
costs. General and administrative expenses include salaries and benefits of
personnel engaged in research and development, procurement, accounting and other
business functions and office occupancy costs attributable to such functions, as
well as amortization expense.
The Company did not record an income tax provision for any period through April
7, 1999. Until the Reorganization, the Company elected to be treated as a
partnership for federal and state income tax purposes. Accordingly, the
Company's income through April 7, 1999 has been taxed directly to the Company's
members, rather than to the Company.
Three Months Ended June 30, 1999 Compared with Three Months Ended June 30, 1998
Net Sales
Net sales in the three months ended June 30, 1999 (the "1999 quarter") increased
43.3% to $19.8 million from $13.8 million in the three months ended June 30,
1998 (the "1998 quarter"). The increase in net sales was primarily attributable
to the growth in sales volume, which increased to 60.2 million pounds of
finished product in the 1999 quarter from 44.2 million pounds in the 1998
quarter, and, to a lesser extent, to a price increase of approximately 6%.
Production line rate increases and the addition of two production lines since
June 30, 1998 significantly increased the Company's production capacity in the
1999 quarter. The increase in the number of dealer outlets, from approximately
1,900 at June 30, 1998 to approximately 2,000 at June 30, 1999, contributed to
the growth in sales volume.
Cost of Sales
Cost of sales increased 40.0% to $8.3 million in the 1999 quarter from $5.9
million in the 1998 quarter. All components of cost of sales increased to
support the higher level of sales activity. Cost of sales as a percentage of
10
<PAGE>
net sales decreased to 41.7% in the 1999 quarter from 42.7% in the 1998 quarter.
The decline principally reflected operating efficiencies from improved
production line rates and the economies of scale resulting from the two
additional production lines.
Gross Profit
Gross profit increased 45.7% to $11.5 million in the 1999 quarter from $7.9
million in the 1998 quarter. The increase in gross profit was attributable to
the higher sales volume and improved operating efficiencies. Gross profit as a
percentage of net sales increased to 58.3% in the 1999 quarter from 57.3% in the
1998 quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 61.7% to $6.9 million in
the 1999 quarter from $4.3 million in the 1998 quarter. The increase was
primarily attributable to higher sales and marketing expenses, which increased
63.0% to $4.4 million in the 1999 quarter from $2.7 million in the 1998 quarter.
The largest component of the increase was branding costs, including advertising,
which increased 85% as the Company expanded its advertising and promotional
activities. General and administrative expenses increased 60.3% to $2.5 million
in the 1999 quarter from $1.6 million in the 1998 quarter. The increase was
primarily attributable to costs associated with an increase in staffing
necessary to support the Company's growth, the Company's second manufacturing
facility, which started production in the third quarter of 1999, and an increase
in research and development activities. Selling, general and administrative
expenses as a percentage of net sales increased to 34.9% in the 1999 quarter
from 30.9% in the 1998 quarter.
Interest Expense
Net interest expense decreased 51.9% to $.3 million in the 1999 quarter from $.6
million in the 1998 quarter. The decrease was primarily attributable to lower
average balances outstanding as a result of the repayment of $21.25 million of
senior debt and $5.0 million of subordinated debt with the net proceeds of the
Company's initial public offering (the "IPO").
Income Taxes
The Company was taxed as a partnership for federal and state tax purposes for
all periods through April 7, 1999 and thus recorded no provision for income
taxes. The income tax provision of $4.3 million in the 1999 quarter represents
an assumed 40% combined effective tax and a one-time charge for deferred income
taxes of $2.6 million arising from the Company's conversion for income tax
purposes to a C corporation on April 7, 1999.
Extraordinary Charge
The extraordinary charge of $1.1 million in the 1999 quarter reflects a
prepayment penalty of $1.5 million from the early retirement of $26.25 million
of senior and subordinated debt with the net proceeds of the IPO and the related
write-off of unamortized debt discount of $.2 million, both net of taxes.
Net Income (Loss)
The Company realized a net loss of $1.0 million in the 1999 quarter compared to
net income of $3.0 million in the 1998 quarter.
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30, 1998
Net Sales
Net sales in the six months ended June 30, 1999 (the "1999 six-month period")
increased 43.7% to $42.1 million from $29.3 million in the six months ended June
30, 1998 (the "1998 six-month period"). The increase in net sales was primarily
attributable to the growth in sales volume, which increased to 129.1 million
pounds of finished product in the 1999 six-month period from 95.3 million pounds
in the 1998 six-month period, and, to a lesser extent, to a price increase of
approximately 6%. Production line rate increases and the addition of two
production lines since June 30, 1998 significantly increased the Company's
production capacity in the 1999 six-month period. The increase in the number of
dealer outlets, from approximately 1,900 at June 30, 1998 to approximately 2,000
at June 30, 1999, contributed to the growth in sales volume.
11
<PAGE>
Cost of Sales
Cost of sales increased 37.1% to $18.2 million in the 1999 six-month period from
$13.3 million in the 1998 six-month period. All components of cost of sales
increased to support the higher level of sales activity. Cost of sales as a
percentage of net sales decreased to 43.2% in the 1999 six-month period from
45.3% in the 1998 six-month period. The decline principally reflected operating
efficiencies from improved production line rates and the economies of scale
resulting from the two additional production lines.
Gross Profit
Gross profit increased 49.2% to $23.9 million in the 1999 six-month period from
$16.0 million in the 1998 six-month period. The increase in gross profit was
attributable to the higher sales volume and improved operating efficiencies.
Gross profit as a percentage of net sales increased to 56.8% in the 1999 six-
month period from 54.7% in the 1998 six-month period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 64.1% to $11.0 million in
the 1999 six-month period from $6.7 million in the 1998 six-month period. The
increase was primarily attributable to higher sales and marketing expenses,
which increased 57.4% to $6.5 million in the 1999 six-month period from $4.2
million in the 1998 six-month period. The largest component of the increase was
branding costs, including advertising, which increased 79% as the Company
expanded its advertising and promotional activities. General and administrative
expenses increased 75.2% to $4.4 million in the 1999 six-month period from $2.5
million in the 1998 six-month period. The increase was primarily attributable to
costs associated with an increase in staffing necessary to support the Company's
growth, the Company's second manufacturing facility, which started production in
the third quarter of 1999, and an increase in research and development
activities. Selling, general and administrative expenses as a percentage of net
sales increased to 26.0% in the 1999 six-month period from 22.8% in the 1998
six-month period.
Interest Expense
Net interest expense decreased 13.5% to $1.1 million in the 1999 six-month
period from $1.3 million in the 1998 six-month period. The decrease was
primarily attributable to lower average balances outstanding as a result of the
repayment of $21.25 million of senior debt and $5.0 million of subordinated debt
with the net proceeds of the IPO.
Income taxes
The Company was taxed as a partnership for federal and state income tax purposes
for all periods through April 7, 1999 and thus recorded no provision for income
taxes. The income tax provision of $4.3 million in the 1999 six-month period
represents an assumed 40% combined effective tax rate and a one-time charge for
deferred income taxes of $2.6 million arising from the Company's conversion from
an LLC to a C corporation on April 7, 1999.
Extraordinary charge
The extraordinary charge of $1.1 million in the 1999 six-month period reflects a
prepayment penalty of $1.5 million from the early retirement of $26.25 million
of senior and subordinated debt with the net proceeds of the IPO and the related
write-off of unamortized debt discount of $.2 million, both net of taxes.
Net Income
Net income decreased 19.2% to $6.6 million in the 1999 six-month period from
$8.1 million in the 1998 six-month period.
Liquidity and Capital Resources
The Company's total assets increased from $51.3 million at December 31, 1998 to
$64.4 million at June 30, 1999. Higher receivables balances resulting from an
increase in net sales in the 1999 six-month period accounted for $4.4 million of
the increase. Inventories decreased $3.8 million in relation to the increased
net sales. Property, plant and equipment, net, increased $14.3 million as the
Company incurred the balance of the costs of installing two additional
production lines in its Winchester, Virginia facility and began construction of
its second manufacturing facility in Nevada.
12
<PAGE>
The Company historically has financed its operations and growth primarily with
cash flow from operations, operating leases, normal trade credit terms and
borrowings under its credit facility.
The Company's cash flow from operating activities for the 1999 six-month period
was $13.4 million compared to $12.5 million for the 1998 six-month period.
Higher sales volume accounted for the increase in cash flows in the 1999 six-
month period.
The Company's working capital generally averages between 12% and 18% of net
sales. The Company's working capital needs correlate closely with the level of
the Company's net sales. Consequently, the Company's short-term borrowing
requirements are affected by the seasonality of its business. On August 3, 1999,
the Company amended the terms of its revolving credit facility. The facility
provides for borrowings of up to $10.0 million on an unsecured basis for working
capital and other general corporate purposes. In addition, under this facility,
the Company may obtain a total of $7.5 million of term loans to finance
equipment purchases and for other general corporate purposes. Amounts drawn
under the revolving credit facility and any term loans bear interest at an
annual rate equal to LIBOR plus 1.00%. The revolving credit facility will mature
on July 31, 2000. The unpaid principal balance of any term loans outstanding on
December 31, 1999 will be payable in consecutive monthly payments beginning
February 1, 2000, and the entire unpaid principal balance of the term loans will
be payable in full on July 31, 2000.
The Company substantially reduced its overall long-term indebtedness on April
13, 1999 following its repayment of $26.3 million principal amount of senior and
subordinated notes with the net proceeds of the Company's initial public
offering. As of June 30, 1999, the Company's indebtedness had an overall
weighted average interest rate of approximately 7.3% per annum.
The Company financed its purchase of its Winchester, Virginia facility in June
1998 with a ten-year term loan of $3.8 million. Pursuant to an interest rate
swap agreement, the Company pays interest on this loan at an annual rate of
7.12%.
The Company financed its purchase of the Trex Technical Center in November 1998
in part with the proceeds of a ten-year term loan of $1.0 million. Pursuant to
an interest rate swap agreement, the Company pays interest on this loan at an
annual rate of 6.8%.
The Company financed its acquisition of the site for its second manufacturing
facility located in Nevada in December 1998 in part with a $2.1 million loan
which is payable in September 1999. The Company financed construction of the
facility in part with proceeds of $4.6 million under a construction loan which
is payable in November 1999. The site acquisition and construction loans accrue
interest at an annual rate of 7.5%. The Company intends to refinance both loans
with long-term borrowings. As of June 30, 1999, the Company estimates $10.5
million will be required to complete construction and equipping of the Nevada
facility. The Company will fund the remaining expenditures from cash on hand,
cash flow from operations and borrowings under its credit facility.
As part of the Reorganization, TREX Company, LLC in April 1999 made the LLC
Distribution of approximately $12.6 million to certain of its members. See Note
1 to the Consolidated Financial Statements included elsewhere in this report.
The LLC Distribution was funded from $3.9 million of cash on hand, $4.4 million
of borrowings under the credit facility and $4.3 million of net proceeds from
the initial public offering. The Company will make a final payout of $822,000 in
the third quarter of 1999 relating to the LLC Distribution.
Expansion of the Company's production capacity will require significant capital
expenditures. The Company currently estimates that its aggregate capital
requirements in 1999 and 2000 will total approximately $31.3 million, of which
approximately $25.8 million is expected to be incurred in 1999 and approximately
$5.5 million in 2000. Capital expenditures in the first half of 1999 totaled
approximately $15.9 million. Capital expenditures will be used primarily for the
construction and equipping of the Company's new manufacturing facility in
Nevada. The Company believes that cash on hand, cash flow from operations and
borrowings expected to be available under the Company's credit agreements will
provide sufficient funds to enable the Company to expand its business as
currently planned for at least the next 12 months. The actual amount and timing
of the Company's future capital requirements may differ materially from the
Company's estimate depending on the demand for Trex and new market developments
and opportunities. The Company may determine that it is necessary or desirable
to obtain financing for such requirements through bank borrowings or the
issuance of debt or equity securities. Debt financing would increase the
leverage of the Company, while equity financing may dilute the ownership of the
Company's stockholders. There can be no assurance as to whether, or as to the
terms on which, the Company will be able to obtain such financing.
13
<PAGE>
Year 2000 Issue
The Company's Program. The Company has undertaken a program to address the Year
2000 issue with respect to the following: (i) the Company's information
technology and operating systems, including its billing, accounting and
financial reporting systems; (ii) the Company's non-information technology
systems, such as buildings, plant, equipment and other infrastructure systems
that may contain embedded microcontroller technology; (iii) certain systems of
the Company's major suppliers and material service providers, insofar as such
systems relate to the Company's business activities with such parties; and (iv)
the Company's major distributors, insofar as the Year 2000 issue relates to the
ability of such distributors to distribute Trex to the Company's dealer outlets.
As described below, the Company's Year 2000 program involves (i) an assessment
of the Year 2000 problems that may affect the Company, (ii) the development of
remedies to address the problems discovered in the assessment phase and the
testing of such remedies and (iii) the preparation of contingency plans to deal
with worst case scenarios.
Assessment Phase. As part of the assessment phase of its program, the Company
has identified substantially all of the major components of the systems
described above. To determine the extent to which such systems are vulnerable to
the Year 2000 issue, the Company has completed an evaluation of its software
applications and began remediation and testing activities for such applications
in the first and second quarters of 1999. In addition, in the fourth quarter of
1998, the Company completed its distribution of letters to certain of its major
suppliers and other material service providers and to the Company's major
distributors, requesting them to provide the Company with detailed, written
information concerning existing or anticipated Year 2000 compliance by their
systems insofar as the systems relate to such parties' business activities with
the Company. The Company is currently processing the responses to those
inquiries and re-soliciting responses from those entities that have not yet
responded.
Remediation and Testing Phase. Based upon the results of its assessment
efforts, the Company has undertaken remediation and testing activities. The
Company intends to complete this phase by September 30, 1999. The activities
conducted during the remediation and testing phase are intended to address
potential Year 2000 problems in computer software used by the Company in its
information technology and non-information technology systems in an attempt to
demonstrate that this software will be made substantially Year 2000 compliant on
a timely basis. In this phase, the Company will first evaluate a program
application and, if a potential Year 2000 problem is identified, will take steps
to attempt to remediate the problem and individually test the application to
confirm that the remediating changes are effective and have not adversely
affected the functionality of that application. After the individual
applications and system components have undergone remediation and testing
phases, the Company will conduct integrated testing for the purpose of
demonstrating functional integrated systems operation.
Contingency Plans. The Company intends to develop contingency plans to handle
its most reasonably likely worst case Year 2000 scenarios, which it has not yet
identified fully. The Company intends to complete its determination of such
worst case scenarios after it has received and analyzed responses to
substantially all of the inquiries it has made of third parties and completed
its remediation and testing activities. The Company expects to complete
development of its contingency plans by September 30, 1999.
Costs Related to the Year 2000 Issue. To date, the Company has incurred
approximately $25,000 in costs for its Year 2000 program. Such costs do not
include internal staff costs, consisting principally of payroll costs, incurred
on Year 2000 matters, because the Company does not separately track such costs.
The Company currently estimates that it will incur additional costs (excluding
internal staff costs), which are not expected to exceed approximately $30,000,
to complete its Year 2000 compliance work. Such costs will constitute
approximately 40% of the Company's budgeted expenditures for information
technology. Actual costs may vary from the foregoing estimates based on the
Company's evaluation of responses to its third-party inquiries and on the
results of its remediation and testing activities. The Company expects to fund
its Year 2000 remediation costs out of the cash flows generated by its
operations. The Company has not deferred any of its information technology
projects to date as a result of the Year 2000 issue.
Risks Related to the Year 2000 Issue. Although the Company's Year 2000 efforts
are intended to minimize the adverse effects of the Year 2000 issue on the
Company's business and operations, the actual effects of the issue and the
success or failure of the Company's efforts described above cannot be known
until the year 2000. Failure by the Company and its major suppliers, other
material service providers and major distributors to address adequately their
respective Year 2000 issues in a timely manner insofar as such issues relate to
the Company's business could have a material adverse effect on the Company's
business, results of operations and financial condition.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's major market risk exposure is to changing interest rates. The
Company's policy is to manage interest rates through a combination of fixed-rate
and variable-rate debt. As of June 30, 1999, the Company's debt consisted of
fixed-rate debt of $6.6 million and variable-rate debt of $4.6 million.
Substantially all of the Company's variable-rate debt is based on LIBOR. The
Company uses interest rate swap contracts to manage its exposure to fluctuations
in interest rates on its variable-rate debt. As of June 30, 1999, the Company
had effectively fixed its interest rate exposure at approximately 7% on
approximately $4.6 million of its variable-rate debt through 2008.
The Company does not use foreign currency forward contracts or commodity
contracts and does not have any material foreign currency exposure.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
TREX Company, LLC filed a lawsuit on March 2, 1999 in the Circuit Court of
Frederick County, Virginia, against a former distributor to collect unpaid
invoices. The defendant filed its response on July 30, 1999 and, in a
counterclaim, alleges that TREX Company, LLC made various misrepresentations
which resulted in, among other items, loss of business and loss of reputation.
The defendant-counterclaimant seeks compensatory damages of $7.2 million and
punitive damages of $7.5 million against TREX Company, LLC based on claims of
fraud, breach of warranty, negligence, defamation, intentional interference with
business relationships and breach of contract. TREX Company LLC intends to
pursue its claims and to deny all allegations made in the counterclaim.
Item 2. Changes in Securities and Use of Proceeds
(c) On April 7, 1999, in connection with the reorganization consummated on that
date (the "Reorganization"), Trex Company, Inc. issued the following
numbers of shares of Common Stock to the following persons solely in
exchange for their junior membership interests in TREX Company, LLC:
2,137,500 shares of Common Stock to each of Anthony J. Cavanna, Andrew U.
Ferrari, Robert G. Matheny and Roger A. Wittenberg, each of whom is a
director and an executive officer of Trex Company, Inc.; 633,650 shares to
CIG & Co., acting as nominee of Connecticut General Life Insurance Company
(526,300 shares) and Life Insurance Company of North America (107,350
shares) and 316,350 shares of Common Stock to The Lincoln National Life
Insurance Company. Such issuance was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
(d) As of May 17, 1999, the Company had applied all of the net proceeds from
the initial public offering except for $1.3 million, which was temporarily
invested in short-term, investment grade repurchase obligations pending
application for working capital and general corporate purposes. During the
quarter ended June 30, 1999, the Company applied these funds for working
capital and general corporate purposes.
Item 4. Submission of Matters to a Vote of Security Holders
Until April 7, 1999, all of the outstanding capital stock of the Company was
owned by TREX Company, LLC. On April 7, 1999, prior to the Reorganization, the
Company's sole stockholder approved, ratified and confirmed the Trex Company,
Inc. 1999 Stock Option and Incentive Plan, the Trex Company, Inc. 1999 Incentive
Plan for Outside Directors and the Trex Company, Inc. 1999 Employee Stock
Purchase Plan.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The Company files herewith the following exhibits:
27. Financial Data Schedule. Filed herewith.
(b) The following Current Report on Form 8-K was filed by the Company
during the period covered by this report:
Date of Report Item Reported
-------------- -------------
1. May 25, 1999 Item 5 (Cautionary statements for purposes of the "safe
harbor" provisions of the Private Securities
Litigation Reform Act of 1995)
16
<PAGE>
SIGNATURES
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.
TREX COMPANY, INC.
(Registrant)
Date: August 12, 1999 /s/ Anthony J. Cavanna
-------------------------------
Anthony J. Cavanna, Executive Vice
President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
17
<PAGE>
EXHIBIT INDEX
-------------
(Pursuant to Item 601 of Regulation S-K)
27 Financial Data Schedule. Filed herewith.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM FINANCIAL
STATEMENTS INCLUDED IN TREX COMPANY INC.'S QUARTERLY REPORT ON FORM 10-Q FOR
THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 443
<SECURITIES> 0
<RECEIVABLES> 4,381
<ALLOWANCES> 0
<INVENTORY> 2,230
<CURRENT-ASSETS> 7,394
<PP&E> 48,149
<DEPRECIATION> 0
<TOTAL-ASSETS> 64,423
<CURRENT-LIABILITIES> 12,318
<BONDS> 4,454
0
0
<COMMON> 141
<OTHER-SE> 44,877
<TOTAL-LIABILITY-AND-EQUITY> 64,423
<SALES> 42,140
<TOTAL-REVENUES> 42,140
<CGS> 18,196
<TOTAL-COSTS> 18,196
<OTHER-EXPENSES> 10,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,120
<INCOME-PRETAX> 11,888
<INCOME-TAX> 4,279
<INCOME-CONTINUING> 7,609
<DISCONTINUED> 0
<EXTRAORDINARY> (1,056)
<CHANGES> 0
<NET-INCOME> 6,553
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.56
</TABLE>
