<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 March 31, 2000
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 May 8, 2000 was 14,127,822 shares.
<PAGE>
TREX COMPANY, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and March 31, 2000 (unaudited) 3
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 2000 (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 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREX COMPANY, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ -- $ 1,895,000
Trade accounts receivable.............................. 1,266,000 4,716,000
Inventories............................................ 8,668,000 5,219,000
Prepaid expenses and other assets...................... 1,057,000 1,024,000
Deferred income taxes.................................. 360,000 --
----------- -----------
Total current assets................................ 11,351,000 12,854,000
----------- -----------
Property, plant and equipment, net....................... 59,489,000 63,232,000
Intangible assets, net................................... 8,252,000 8,022,000
Other.................................................... 211,000 179,000
----------- -----------
Total Assets........................................ $79,303,000 $84,287,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable................................. $ 6,416,000 $ 5,823,000
Accrued expenses....................................... 1,737,000 942,000
Income taxes payable................................... 117,000 3,958,000
Other current liabilities.............................. 1,163,000 1,083,000
Line of credit......................................... 5,714,000 1,293,000
Current portion of long-term debt...................... 385,000 392,000
----------- -----------
Total current liabilities........................... 15,532,000 13,491,000
Deferred income taxes.................................... 3,532,000 3,571,000
Long-term debt........................................... 10,838,000 10,722,000
----------- -----------
Total Liabilities................................... 29,902,000 27,784,000
----------- -----------
Stockholders' Equity:
Preferred stock, $0.01 par value, 3,000,000
shares authorized; none issued and outstanding........ -- --
Common stock, $0.01 par value, 40,000,000 shares
authorized; 14,120,572 and 14,122,566 shares
issued and outstanding................................ 141,000 141,000
Additional capital..................................... 40,992,000 41,037,000
Retained earnings...................................... 8,268,000 15,325,000
----------- -----------
Total Stockholders' Equity.......................... 49,401,000 56,503,000
----------- -----------
Total Liabilities and Stockholders' Equity.......... $79,303,000 $84,287,000
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
3
<PAGE>
TREX COMPANY, INC.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 2000
----------- -----------
<S> <C> <C>
Net sales................................................. $22,365,000 $38,064,000
Cost of sales............................................. 9,942,000 19,902,000
----------- -----------
Gross profit.............................................. 12,423,000 18,162,000
Selling, general, and administrative expenses............. 4,065,000 6,510,000
----------- -----------
Income from operations.................................... 8,358,000 11,652,000
Interest income........................................... 19,000 --
Interest expense.......................................... (819,000) (277,000)
----------- -----------
Income before taxes....................................... 7,558,000 11,375,000
Income taxes.............................................. -- 4,318,000
----------- -----------
Net income................................................ $ 7,558,000 $ 7,057,000
=========== ===========
Basic earnings per common share........................... $0.78 $0.50
----------- -----------
Weighted average basic shares outstanding................. 9,500,000 14,122,172
=========== ===========
Pro forma data (unaudited, see Note 11):
Historical income before taxes.......................... $ 7,558,000
Pro forma income taxes.................................. (2,872,000)
-----------
Pro forma net income.................................... $ 4,686,000
===========
Pro forma basic earnings per share...................... $0.49
===========
Pro forma weighted average basic common shares
outstanding........................................... 9,500,000
===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
4
<PAGE>
TREX COMPANY, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 2000
----------- -----------
<S> <C> <C>
Operating Activities
Net income..................................................... $ 7,558,000 $ 7,057,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes........................................ -- 399,000
Depreciation and amortization................................ 933,000 1,491,000
Loss on disposal of property, plant and equipment............ 151,000 --
Changes in operating assets and liabilities:
Trade accounts receivable................................. (4,712,000) (3,450,000)
Inventories............................................... 2,896,000 3,449,000
Prepaid expenses and other assets......................... (380,000) 65,000
Trade accounts payable.................................... 3,430,000 (593,000)
Accrued expenses.......................................... (115,000) (795,000)
Income taxes payable...................................... -- 3,841,000
Other..................................................... (580,000) (80,000)
----------- -----------
Net cash provided by operating activities...................... 9,181,000 11,384,000
----------- -----------
Investing Activities
Expenditures for property, plant and equipment................. (8,107,000) (5,004,000)
----------- -----------
Net cash used in investing activities.......................... (8,107,000) (5,004,000)
----------- -----------
Financing Activities
Borrowings under mortgages and notes........................... 1,487,000 --
Principal payments under mortgages and notes................... (46,000) (109,000)
Borrowings under line of credit................................ -- 2,315,000
Principal payments under line of credit........................ -- (6,736,000)
Proceeds from employee stock purchase plan..................... -- 45,000
Preferred distributions paid................................... (101,000) --
Common distributions paid...................................... (175,000) --
----------- -----------
Net cash provided by (used in) financing activities............ 1,165,000 (4,485,000)
----------- -----------
Net increase in cash and cash equivalents...................... 2,239,000 1,895,000
Cash and cash equivalents at beginning of period............... 1,200,000 --
----------- -----------
Cash and cash equivalents at end of period..................... $ 3,439,000 $ 1,895,000
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
5
<PAGE>
TREX COMPANY, INC.
Notes to Consolidated Financial Statements
For The Three Months Ended March 31, 1999 and 2000 (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 ("Trex") 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 distributed 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 (a "C corporation").
6
<PAGE>
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 $41.1 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 $5.6 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 $1.2 million was used for
working capital and general corporate purposes.
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 period ended March 31,
2000 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 1999 and for each of the three years in the period ended December
31, 1999 included in annual report of Trex Company, Inc. on Form 10-K (File No.
001-14649), as filed with the Securities and Exchange Commission.
3. Inventory
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
----------------- --------------
<S> <C> <C>
Finished goods $7,599,000 $3,298,000
Raw materials 1,069,000 1,921,000
---------- ----------
$8,668,000 $5,219,000
========== ==========
</TABLE>
7
<PAGE>
4. Debt
On April 27, 2000, the Company and the lender revised the terms of the Company's
bank revolving credit facility primarily to extend the maturity and principal
amortization terms of the 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,
collateralized by certain equipment, 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 June 30, 2003. The unpaid
principal balance, if any, of term loans outstanding on June 30, 2001 will be
payable in consecutive monthly payments beginning on August 1, 2001, and the
entire unpaid principal balance of the term loans will be payable in full on
July 1, 2008.
On September 30, 1999, the Company refinanced two loans with which it financed
the site acquisition and construction of the Company's second manufacturing
facility located in Nevada with a 15-year term loan in the original principal
amount of $6.7 million. Pursuant to an interest rate swap, interest on this loan
is payable at an annual rate of 7.90%.
5. Stockholders' Equity
The following table sets forth the computation of basic earnings per share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1999 2000
---------- -----------
<S> <C> <C>
Numerator:
Net income................................ $7,558,000 $ 7,057,000
Preferred dividends....................... (101,000) --
---------- -----------
Net income available to common
shareholders............................. $7,457,000 $ 7,057,000
========== ===========
Denominator:
Denominator for basic earnings
per share-weighted average shares
outstanding.............................. 9,500,000 14,122,172
========== ===========
Basic earnings per share..................... $ 0.78 $ 0.50
========== ===========
</TABLE>
The earnings 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 TREX Company, LLC. Earnings per share
on a fully diluted basis is the same as basic earnings per share and, therefore,
is not separately presented.
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 the Trex product. 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 first quarter of 1999 accounted
for approximately 30% of sales in the year ended December 31, 1999.
8
<PAGE>
7. Pro Forma and Supplemental Pro Forma Data (Unaudited)
The pro forma consolidated statement 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, 1999. The pro
forma income taxes and pro forma net income reflect federal and state income
taxes (assuming a 38% combined effective tax rate) as if the Company had been
taxed as a C corporation for the three months ended March 31, 1999. The pro
forma consolidated statement of operations data 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.
Pro forma weighted average shares outstanding reflect 9,500,000 shares of Trex
Company, Inc. Common Stock outstanding through March 31, 1999 (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
March 31, 1999
-------------------
<S> <C>
Numerator:
Historical income from operations........................... $ 8,358,000
Supplemental pro forma interest
expense, net.............................................. (106,000)
Supplemental pro forma income tax provision................. (3,136,000)
-----------
Supplemental pro forma net income available to
common shareholders....................................... $ 5,116,000
===========
Denominator:
Denominator for supplemental pro forma basic
earnings per common share-weighted average
shares outstanding........................................ 14,115,450
===========
Supplemental pro forma basic earnings per
common share.............................................. $ 0.36
===========
</TABLE>
The foregoing supplemental pro forma basic earnings per common share amounts as
of and for the quarter ended March 31, 1999 have been adjusted to reflect the
Reorganization (see Note 1) as if the Reorganization had occurred on January 1,
1999. The supplemental pro forma interest 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, 1999. The supplemental pro forma
income taxes reflect federal and state income taxes (assuming a 38% combined
effective tax rate) as if the Company had been taxed as a C corporation as of
January 1, 1999. Supplemental pro forma net income available to common
shareholders assumes the preferred units in TREX Company, LLC were exchanged for
a note of Trex Company, Inc. as of January 1, 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 of the
quarter ended March 31, 1999. 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 its two manufacturing facilities and its ability to
increase its manufacturing capacity in its existing facilities; 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 these risks and uncertainties is contained in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 22, 2000.
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 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 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 branding and other 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 was taxed directly to the Company's
members, rather than to the Company.
10
<PAGE>
Three Months Ended March 31, 2000 Compared with Three Months
Ended March 31, 1999
Net Sales
Net sales in the three months ended March 31, 2000 (the "2000 quarter")
increased 70.2% to $38.1 million from $22.4 million in the three months ended
March 31, 1999 (the "1999 quarter"). The increase in net sales was primarily
attributable to a growth in sales volume and, to a lesser extent, to a price
increase of approximately 7.2%. Production line rate increases and the opening
of the Company's Fernley, Nevada manufacturing facility with two production
lines during the third quarter of 1999 and one production line in each of
December 1999 and January 2000 significantly increased the Company's production
capacity in the 2000 quarter. The increase in the number of dealer outlets, from
approximately 2,000 at March 31, 1999 to approximately 2,300 at March 31, 2000,
also contributed to the growth in sales volume.
Cost of Sales
Cost of sales increased 100.2% to $19.9 million in the 2000 quarter from $9.9
million in the 1999 quarter. Cost of sales as a percentage of net sales
increased to 52.3% in the 2000 quarter from 44.5% in the 1999 quarter. The
increase principally reflected higher raw material costs and scrap rates. These
increased costs were partially offset by operating efficiencies from improved
production line rates and the economies of scale resulting from the second
manufacturing facility and additional production lines.
Gross Profit
Gross profit increased 46.2% to $18.2 million in the 2000 quarter from $12.4
million in the 1999 quarter. The increase in gross profit, which was partially
offset by increased manufacturing costs, was attributable to the higher sales
volume and the price increase. Gross profit as a percentage of net sales
decreased to 47.7% in the 2000 quarter from 55.5% in the 1999 quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 60.1% to $6.5 million in
the 2000 quarter from $ 4.1 million in the 1999 quarter. The increase was
primarily attributable to performance bonuses of $1.1 million recognized in the
2000 quarter, and higher branding costs, including expenses of promotion,
advertising, public relations, sales literature, trade shows and cooperative
advertising, which increased 35.9% to $2.0 million in the 2000 quarter from $1.5
million in the 1999 quarter. The Company did not record any performance bonuses
in the 1999 quarter. An increase in corporate personnel necessary to support the
Company's growth accounted for $0.4 million of the increase. Site selection
costs related to locating a third manufacturing facility and expenses associated
with being a publicly traded company contributed $0.3 million of the increase.
Selling, general and administrative expenses as a percentage of net sales
decreased to 17.1% in the 2000 quarter from 18.2% in the 1999 quarter.
Interest Expense
Net interest expense decreased 65.4% to $0.3 million in the 2000 quarter from
$0.8 million in the 1999 quarter. The decrease was primarily attributable to
11
<PAGE>
lower average balances outstanding as a result of the repayment, in the second
quarter of 1999, of $21.3 million of senior debt and $5.0 million of
subordinated debt with the net proceeds of the Company's initial public
offering.
Provision for Income Taxes
The Company was taxed as a partnership for federal and state tax purposes for
all periods through April 7, 1999 and thus through that date recorded no
provision for income taxes. The income tax provision of $4.3 million in the 2000
quarter represents an assumed 38% combined effective tax.
Net Income
The Company realized net income of $7.1 million in the 2000 quarter compared to
net income of $7.6 million in the 1999 quarter. The decrease in net income in
the current quarter resulted from the $4.3 million income tax provision, which
offset an increase in income from operations of $3.3 million and a decrease in
interest expense of $0.5 million.
Liquidity and Capital Resources
The Company's total assets increased from $79.3 million at December 31, 1999 to
$84.3 million at March 31, 2000. Higher receivables balances resulting from
an increase in net sales in the 2000 quarter accounted for $3.5 million of the
increase. Inventories decreased $3.5 million in relation to the increased net
sales. Property, plant and equipment, net, increased $3.7 million as the Company
installed one additional production line in its Fernley, Nevada manufacturing
facility and began procurement and installation of equipment in the facility for
two additional production lines.
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 2000 quarter was $11.4
million compared to $9.2 million for the 1999 quarter. Higher sales volume
accounted for the increase in cash flow in the 2000 quarter.
On April 27, 2000, the Company and the lender revised the terms of the Company's
bank revolving credit facility primarily to extend the maturity and principal
amortization terms of the 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,
collateralized by certain equipment, 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 June 30, 2003. The unpaid
principal balance, if any, of term loans outstanding on June 30, 2001 will be
payable in consecutive monthly payments beginning on August 1, 2001, and the
entire unpaid principal balance of the term loans will be payable in full on
July 1, 2008.
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
12
<PAGE>
subordinated notes with the net proceeds of the Company's initial public
offering. As of March 31, 2000, the Company's indebtedness had an overall
weighted average interest rate of approximately 7.6% 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, interest on this loan is payable 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, interest on this loan is payable at an annual
rate of 6.8%.
The Company financed its acquisition of the site for its manufacturing facility
located in Nevada in December 1998 in part with a $2.1 million loan which was
payable in September 1999. The Company financed construction of the facility in
part with proceeds of $4.6 million under a construction loan which was payable
in November 1999. The site acquisition and construction loans accrued interest
at an annual rate of 7.5%. The Company refinanced both loans on September 30,
1999 with a fifteen-year term loan in the original principal amount of $6.7
million. Pursuant to an interest rate swap agreement, interest on this loan is
payable at an annual rate of 7.90%.
Expansion of the Company's production capacity will continue to require
significant capital expenditures. Capital expenditures during the 2000 quarter
totaled approximately $5.0 million and for the balance of 2000 are expected to
total approximately $28.0 million. Of this amount, approximately $5.0 million is
expected to be used for the balance of three new production lines in the Fernley
facility and $13.0 million for the further expansion of the Company's
manufacturing facilities. The Company believes that cash on hand, cash flow from
operations and borrowings expected to be available under the Company's credit
facility 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is to changing interest rates. The
Company's policy is to manage interest rates through a combination of variable-
rate debt under its revolving credit facility and interest rate swap agreements
with respect to its other debt. Amounts drawn under the revolving credit
facility and any term loans bear interest at an annual rate equal to LIBOR plus
1.00%. As of March 31, 2000, pursuant to interest-rate swap agreements, the
Company had effectively fixed its interest rate exposure under its other debt at
approximately 7.6% through 2014.
The Company does not use foreign currency forward contracts or commodity
contracts and does not have any material foreign currency exposure.
13
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The Company files herewith the following exhibits:
10.1 Second Amendment to Amended and Restated Credit Agreement,
dated as of April 27, 2000, among Trex Company, Inc., TREX
Company, LLC and First Union National Bank. Filed herewith.
27. Financial Data Schedule. Filed herewith.
(b) The Company did not file any Current Reports on Form 8-K during
the period covered by this report.
14
<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: May 11, 2000 /s/ Anthony J. Cavanna
---------------------------------
Anthony J. Cavanna, Executive Vice
President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
15
<PAGE>
Exhibit 10.1
SECOND AMENDMENT TO AMENDED
AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") is dated as of April 27, 2000 by and among TREX COMPANY, LLC, a
- ----------
Delaware limited liability company ("Borrower"), TREX COMPANY, INC., a Delaware
--------
corporation ("Guarantor") and FIRST UNION NATIONAL BANK, a national banking
---------
association ("Bank").
----
R E C I T A L S
A. Borrower, Guarantor and Bank are parties to that certain Amended and
Restated Credit Agreement dated as of August 3, 1999, as amended by that certain
First Amendment to Amended and Restated Credit Agreement dated as of
December 15, 1999 (the "Credit Agreement").
----------------
B. Borrower, Guarantor and Bank have agreed to extend the Revolving Credit
Period and the Term Loan Period.
A G R E E M E N T
NOW THEREFORE, in consideration of the mutual covenants herein and for Ten
Dollars and other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Incorporation of Recitals. The Recitals set forth above are
-------------------------
incorporated herein by this reference as if fully set forth in the text of this
Amendment.
2. Definitions. Capitalized terms used in this Amendment and not
-----------
otherwise defined herein shall have the meanings set forth in the Credit
Agreement.
3. Amendment.
---------
a. The definition of "Term Loan Period" in the Definitions Appendix
to the Credit Agreement is hereby deleted in its entirety and the following
new definition is substituted therefor:
"Term Loan Period" means the period from and including the
Closing Date to but not including June 30, 2001.
b. The definition of "Termination Date" in the Definitions Appendix
to the Credit Agreement is hereby deleted in its entirety and the following
new definition is substituted therefor:
<PAGE>
"Termination Date" means June 30, 2003, as said date may be
extended pursuant to Section 2.07(b).
c. Section 2.07(b)(i) of the Credit Agreement is hereby deleted in
its entirety and the following new Section 2.07(b)(i) is substituted
therefor:
(i) The Bank my elect, by notice to the Borrower not less than 15
days and not more than 45 days prior to June 30, 2003 or the
first anniversary of an Extension Date (as applicable, an
"Anniversary Date"), to extend the Revolving Credit Period until
the second anniversary of such Anniversary Date (each of the
first and subsequent Anniversary Dates on which the Revolving
Credit Period is extended hereunder being referred to herein as
an "Extension Date"). Failure by the Bank to notify the Borrower
of such election within the above time period shall be deemed to
constitute an election by the Bank not to extend the Revolving
Credit Period.
d. Section 2.08(c) of the Credit Agreement is hereby deleted in its
entirety and the following new Section 2.08(c) is substituted therefor:
(c) Term Loans. The unpaid principal balance of the Term Loans
----------
on June 30, 2001 shall be payable in consecutive monthly payments
on the first day of each month, beginning August 1, 2001, equal
to the quotient of the amount of such unpaid principal balance on
June 30, 2001 divided by 84; provided, however, that the entire
unpaid principal balance of the Term Loans and all accrued
interest thereon shall be due and payable in full on July 1,
2008.
4. Representations and Warranties. Each of Borrower and Guarantor hereby
------------------------------
confirms to Bank that all representations and warranties of Borrower and
Guarantor contained in the Credit Agreement are true and correct as if made on
the date hereof.
5. Full Force and Effect. Except as specifically set forth herein, all
---------------------
terms and conditions of the Credit Agreement and the other Loan Documents shall
remain unchanged and in full force and effect.
6. Binding Effect. Each of Borrower and Guarantor hereby reaffirms its
--------------
covenant and agreement to perform, comply with and be bound by each and every
one of the terms and provisions of the Credit Agreement, as modified by this
Amendment.
7. Acknowledgment; No Novation. Borrower, Guarantor and Bank agree that
---------------------------
this Amendment shall not constitute a novation of the indebtedness evidenced by
the Term Note or any of the other Obligations.
2
<PAGE>
8. Successors and Assigns. This Amendment shall be binding upon and shall
----------------------
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and assigns.
9. Severability. In case any one or more of the provisions contained in
------------
this Amendment shall be invalid, illegal or unenforceable, the validity and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
10. Counterparts. This Amendment may be executed by the parties hereto in
------------
two counterparts, each of which shall be deemed an original and both of which
shall constitute together but one and the same agreement.
The undersigned have caused this Amendment to be executed in the names and
under the seals of the undersigned, with the intent that this be a sealed
instrument.
BORROWER:
TREX COMPANY, LLC, a Delaware limited liability
company
/s/ Anthony J. Cavanna
By:_______________________________(SEAL)
Anthony J. Cavanna
Chief Executive Officer
GUARANTOR:
TREX COMPANY, INC., a Delaware corporation
/s/ Anthony J. Cavanna
By:________________________________(SEAL)
Anthony J. Cavanna
Chief Financial Officer
BANK:
FIRST UNION NATIONAL BANK, a national banking
association
/s/ B. Scott Arthur
By:________________________________(SEAL)
B. Scott Arthur
Vice President
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,895
<SECURITIES> 0
<RECEIVABLES> 4,716
<ALLOWANCES> 0
<INVENTORY> 5,219
<CURRENT-ASSETS> 12,854
<PP&E> 72,702
<DEPRECIATION> (9,470)
<TOTAL-ASSETS> 84,287
<CURRENT-LIABILITIES> 13,491
<BONDS> 10,722
0
0
<COMMON> 141
<OTHER-SE> 56,362
<TOTAL-LIABILITY-AND-EQUITY> 84,287
<SALES> 38,064
<TOTAL-REVENUES> 38,064
<CGS> 19,902
<TOTAL-COSTS> 19,902
<OTHER-EXPENSES> 6,510
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (277)
<INCOME-PRETAX> 11,375
<INCOME-TAX> 4,318
<INCOME-CONTINUING> 7,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,057
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.50
</TABLE>
