<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 September 30, 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 November 8, 2000 was 14,135,060 shares.
1
<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, 1999
and September 30, 2000 (unaudited).......................................... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 2000 (unaudited)........................ 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 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............................... 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................................. 16
Signatures
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREX COMPANY, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- -------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... -- --
Trade accounts receivable................................................... 1,266,000 5,696,000
Inventories................................................................. 8,668,000 12,519,000
Prepaid expenses and other assets........................................... 1,057,000 1,355,000
Deferred income taxes....................................................... 360,000 360,000
----------- ------------
Total current assets...................................................... 11,351,000 19,930,000
----------- ------------
Property, plant, and equipment, net........................................... 59,489,000 95,688,000
Intangible assets, net........................................................ 8,252,000 7,720,000
Other......................................................................... 211,000 574,000
----------- ------------
Total assets.............................................................. $79,303,000 $123,912,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable...................................................... $ 6,416,000 $ 10,859,000
Accrued expenses............................................................ 1,737,000 2,678,000
Income taxes payable........................................................ 117,000 2,421,000
Other current liabilities................................................... 1,163,000 727,000
Line of credit.............................................................. 5,714,000 --
Current portion of long-term debt........................................... 385,000 602,000
----------- ------------
Total current liabilities................................................ 15,532,000 17,287,000
Deferred income taxes........................................................ 3,532,000 4,997,000
Line of credit............................................................... -- 17,460,000
Long-term debt............................................................... 10,838,000 16,232,000
----------- ------------
Total liabilities........................................................ 29,902,000 55,976,000
----------- ------------
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
14,133,126 shares issued and outstanding.................................. 141,000 141,000
Additional capital.......................................................... 40,992,000 41,193,000
Retained earnings........................................................... 8,268,000 26,602,000
----------- ------------
Total stockholders' equity................................................ 49,401,000 67,936,000
----------- ------------
Total liabilities and stockholders' equity................................ $79,303,000 $123,912,000
=========== ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED).
3
<PAGE>
TREX COMPANY, INC.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales...................................................... $19,955,000 $25,078,000 $62,095,000 $98,698,000
Cost of sales.................................................. 9,358,000 11,975,000 27,554,000 49,420,000
----------- ----------- ----------- -----------
Gross profit................................................... 10,597,000 13,103,000 34,541,000 49,278,000
Selling, general and administrative expenses................... 3,885,000 4,647,000 14,855,000 19,097,000
----------- ----------- ----------- -----------
Income from operations......................................... 6,712,000 8,456,000 19,686,000 30,181,000
Interest income................................................ 30,000 3,000 63,000 5,000
Interest (expense)............................................. (211,000) (79,000) (1,331,000) (621,000)
----------- ----------- ----------- -----------
Income before taxes and extraordinary item..................... 6,531,000 8,380,000 18,418,000 29,565,000
Income taxes................................................... 2,394,000 3,184,000 6,674,000 11,231,000
----------- ----------- ----------- -----------
Income before extraordinary item............................... 4,137,000 5,196,000 11,744,000 18,334,000
Extraordinary loss on early extinguishment of debt............. -- -- (1,056,000) --
----------- ----------- ----------- -----------
Net income..................................................... $ 4,137,000 $ 5,196,000 $10,688,000 $18,334,000
=========== =========== =========== ===========
Basic earnings per common share
Income before extraordinary item............................. $ 0.29 $ 0.37 $ 0.94 $ 1.30
Extraordinary item........................................... -- -- (0.09) --
----------- ----------- ----------- -----------
Net income................................................... $ 0.29 $ 0.37 $ 0.85 $ 1.30
=========== =========== =========== ===========
Weighted average basic shares outstanding...................... 14,117,981 14,132,959 12,420,021 14,127,938
=========== =========== =========== ===========
Diluted earning per common share
Income before extraordinary item............................. $ 0.29 $ 0.37 $ 0.94 $ 1.29
Extraordinary item........................................... -- -- (0.09) --
----------- ----------- ----------- -----------
Net income................................................... $ 0.29 $ 0.37 $ 0.85 $ 1.29
=========== =========== =========== ===========
Weighted average diluted shares outstanding.................... 14,181,725 14,193,579 12,457,290 14,182,491
=========== =========== =========== ===========
Pro forma data (unaudited, see Note 7):
Historical income before taxes and extraordinary item........ $18,418,000
Pro forma income taxes....................................... (6,999,000)
-----------
Pro forma net income......................................... $11,419,000
===========
Pro forma basic earnings per share........................... $ 0.92
===========
Pro forma diluted earnings per share......................... $ 0.92
===========
Pro forma weighted average basic common shares outstanding... 12,420,021
===========
Pro forma weighted average diluted common shares outstanding. 12,457,290
===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED).
4
<PAGE>
TREX COMPANY, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................................ $ 10,688,000 $ 18,334,000
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary loss on early prepayment of debt...................................... 1,760,000 --
Deferred income taxes............................................................... 2,849,000 1,465,000
Depreciation and amortization....................................................... 3,096,000 4,899,000
Amortization of deferred financing charges.......................................... 13,000 --
Loss on disposal of property, plant and equipment................................... 156,000 14,000
Changes in operating assets and liabilities:
Trade accounts receivable......................................................... (4,222,000) (4,430,000)
Inventories....................................................................... 2,852,000 (3,851,000)
Prepaid expenses and other assets................................................. 268,000 (819,000)
Trade accounts payable............................................................ 1,146,000 4,443,000
Accrued expenses.................................................................. 469,000 941,000
Income taxes payable.............................................................. 1,787,000 2,304,000
Other current liabilities......................................................... (612,000) (436,000)
------------ ------------
Net cash provided by operating activities............................................. 20,250,000 22,864,000
------------ ------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment........................................ (22,251,000) (40,422,000)
------------ ------------
Net cash used in investing activities................................................. (22,251,000) (40,422,000)
------------ ------------
FINANCING ACTIVITIES
Borrowings under mortgages and notes.................................................. 11,298,000 5,940,000
Principal payments under mortgages and notes.......................................... (34,570,000) (329,000)
Borrowings under line of credit....................................................... -- 29,321,000
Principal payments under line of credit............................................... -- (17,575,000)
Proceeds from exercise of employee stock purchase and option plan grants.............. 33,000 201,000
Proceeds from initial public offering................................................. 41,055,000 --
Preferred distributions paid.......................................................... (3,115,000) --
Common distributions paid............................................................. (13,588,000) --
------------ ------------
Net cash provided by financing activities............................................. 1,113,000 17,558,000
------------ ------------
Net increase (decrease) in cash and cash equivalents.................................. (888,000) --
Cash and cash equivalents at beginning of period...................................... 1,200,000 --
------------ ------------
Cash and cash equivalents at end of period............................................ $ 312,000 $
============ =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED).
5
<PAGE>
TREX COMPANY, INC.
Notes to Condensed Consolidated Financial Statements
For The Three and Nine Months Ended September 30, 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").
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.
6
<PAGE>
2. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 condensed 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) considered necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements. The consolidated
results of operations for the three-month and nine-month periods ended September
30, 2000 are not necessarily indicative of the results that may be expected for
the full fiscal year. These condensed 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 the 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 September 30, 2000
----------------- -------------------
(unaudited)
<S> <C> <C>
Finished goods......... $7,599,000 $ 9,471,000
Raw materials.......... 1,069,000 3,048,000
---------- -----------
$8,668,000 $12,519,000
========== ===========
</TABLE>
7
<PAGE>
4. DEBT
On October 27, 2000, the Company and the lender revised the terms of the
Company's bank revolving credit agreement primarily to increase the maximum
amount of borrowings available to the Company. The terms of the new revolving
credit facility provide for borrowings of up to $75.0 million on an unsecured
basis for working capital and general corporate purposes through September 30,
2001 and $50.0 million thereafter. Amounts drawn under the revolving credit
facility bear interest at an annual rate equal to LIBOR plus 1.00%. The
facility will mature on June 30, 2003. The facility agreement contains
restrictive and financial covenants and is subject to a commitment fee on the
unused balance.
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%.
In May 2000, the Company financed its purchase of a site adjacent to its
existing Winchester, Virginia manufacturing facility through borrowings under
its revolving credit facility. On August 14, 2000, the Company refinanced the
borrowings with a 15-year term loan in the original principal amount of $5.9
million. Pursuant to an interest rate swap, interest on this loan is payable at
an annual rate of 8.10%.
8
<PAGE>
5. STOCKHOLDERS' EQUITY
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item........................... $ 4,137,000 $ 5,196,000 $11,744,000 $18,334,000
Preferred dividends........................................ -- -- (115,000) --
----------- ----------- ----------- -----------
4,137,000 5,196,000 11,629,000 18,334,000
Extraordinary item......................................... -- -- (1,056,000) --
----------- ----------- ----------- -----------
Net income available to common shareholders, basic and
diluted.................................................... $ 4,137,000 $ 5,196,000 $10,573,000 $18,334,000
=========== =========== =========== ===========
Denominator:
Weighted average shares outstanding, basic................. 14,117,981 14,132,959 12,420,021 14,127,938
Impact of potential common shares:
Stock options............................................ 63,744 60,620 37,269 54,553
----------- ----------- ----------- -----------
Weighted average shares outstanding, diluted............... 14,181,725 14,193,579 12,457,290 14,182,491
=========== =========== =========== ===========
Basic earnings per share
Income before extraordinary item........................... $ 0.29 $ 0.37 $ 0.94 $ 1.30
Extraordinary loss......................................... -- -- (0.09) --
----------- ----------- ----------- -----------
Net income per share....................................... $ 0.29 $ 0.37 $ 0.85 $ 1.30
=========== =========== =========== ===========
Diluted earnings per share
Income before extraordinary item........................... $ 0.29 $ 0.37 $ 0.94 $ 1.29
Extraordinary loss......................................... -- -- (0.09) --
----------- ----------- ----------- -----------
Net income per share....................................... $ 0.29 $ 0.37 $ 0.85 $ 1.29
=========== =========== =========== ===========
</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.
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 has historically
experienced 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 third quarter of
1999 accounted for 26.8% of annual sales in 1999. During the third quarter of
2000, the Company's increased production capacity enabled it to eliminate the
allocation of product supply to its network of wholesale distributors and retail
dealers. Because customer stockpiling of inventories resulting from this
allocation policy affected seasonality during 1998 and 1999, the Company's
historical seasonality may not be a reliable indicator of future seasonality.
9
<PAGE>
7. PRO FORMA AND SUPPLEMENTAL PRO FORMA DATA (UNAUDITED)
Pro Forma Data
--------------
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 and nine months ended September 30, 1999.
The pro forma consolidated statement of operations data exclude 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 April 7, 1999, 13,500,000 from
April 8, 1999 through May 2, 1999, and 14,115,450 from May 3, 1999 through July
14, 1999 and 14,118,435 shares outstanding through September 30, 1999 (See Note
1).
Supplemental Pro Forma Data
---------------------------
The following table sets forth the computation of basic and diluted earnings per
common share on a supplemental pro forma basis:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
------------------
Numerator:
<S> <C>
Historical income from operations.................................................... $19,686,000
Supplemental pro forma interest expense, net......................................... (483,000)
Supplemental pro forma income taxes.................................................. (7,297,000)
-----------
Supplemental pro forma net income available to common shareholder,
basic and diluted................................................................ $11,906,000
===========
Denominator:
Denominator for supplemental pro forma earnings per common
share-weighted average basic shares outstanding.................................. 14,116,303
Impact of potential common shares:
Stock options.................................................................... 37,269
-----------
Denominator for supplemental pro forma earnings per common
share-weighted average diluted shares outstanding................................ 14,153,572
===========
Supplemental pro forma basic earning per common share.................................... $ 0.84
===========
Supplemental pro forma diluted earnings per common share................................. $ 0.84
===========
</TABLE>
The foregoing supplemental pro forma basic and diluted earnings per common share
amounts 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
basic and diluted shares outstanding assume that the shares issued in the
Reorganization and the IPO were outstanding for all of the periods presented.
8. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 133 (SFAS 133) "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes standards for
recognition and measurement of derivatives and hedging activities. The Company
intends to adopt SFAS 133 in the first quarter of fiscal year 2001. The Company
is currently assessing the financial statement impact of SFAS 133.
10
<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. We undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
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 Condensed 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.
Because of the continued expansion of its production capacity, during the third
quarter of 2000 the Company was able to eliminate the allocation of product
supply to its network of wholesale distributors and retail dealers. As a result,
customers generally no longer seek to stockpile inventories. The Company
believes there has been a temporary slowdown in new orders as excess inventories
at the wholesale and retail levels are reduced, and that the impact of this
slowdown may continue until the normal seasonal demand for Trex resumes in the
first quarter of 2001.
11
<PAGE>
Three Months Ended September 30, 2000 Compared with Three Months Ended September
30, 1999
Net Sales
Net sales in the three months ended September 30, 2000 (the "2000 quarter")
increased 25.7% to $25.1 million from $20.0 million in the three months ended
September 30, 1999 (the "1999 quarter"). The increase in net sales was primarily
attributable to a growth in sales volume and, to a lesser extent, a price
increase of approximately 7.2% in January 2000. 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 three additional
production lines in 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 September 30, 1999 to approximately 2,500 at September
30, 2000, also contributed to the growth in sales volume.
Cost of Sales
Cost of sales increased 28.0% to $12.0 million in the 2000 quarter from $9.4
million in the 1999 quarter. Cost of sales as a percentage of net sales
increased to 47.8% in the 2000 quarter from 46.9% in the 1999 quarter. The
increase principally reflected higher raw material costs. The increased cost
was partially offset by operating efficiencies from improved production line
rates and the economies of scale resulting from the operations of the second
manufacturing facility and additional production lines.
Gross Profit
Gross profit increased 23.6% to $13.1 million in the 2000 quarter from $10.6
million in the 1999 quarter. The increase in gross profit was attributable to
the higher sales volume and the price increase in January 2000 and was partially
offset by increased manufacturing costs. Gross profit as a percentage of net
sales decreased to 52.2% in the 2000 quarter from 53.1% in the 1999 quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 19.6% to $4.6 million in
the 2000 quarter from $3.9 million in the 1999 quarter. The increase was
primarily attributable to an increase in expense of $0.4 million related to
additional corporate personnel and related hiring costs necessary to support the
Company's growth. As a percentage of net sales, selling, general and
administrative expenses decreased to 18.5% in the 2000 quarter from 19.5% in the
1999 quarter.
Interest Expense
Net interest expense was $0.1 million in the 2000 quarter compared to $0.2
million in the 1999 quarter. The effects of higher average debt balances
incurred since the 1999 quarter to fund the expansion of the Company's
production capacity were offset by the capitalization of interest with respect
to those projects.
Provision for Income Taxes
The Company recorded a provision of $3.2 million in the 2000 quarter compared to
a provision of $2.4 million in the 1999 quarter. Both provisions reflect a 38%
combined effective tax rate.
Net Income
The Company's net income increased 25.6% to $5.2 million in the 2000 quarter
from $4.1 million in the 1999 quarter. The increase in net income in the 2000
quarter primarily resulted from an increase of $1.7 million in income from
operations, the effect of which was offset in part by an increase in the income
tax provision of $0.8 million.
Nine Months Ended September 30, 2000 Compared with Nine Months Ended September
30, 1999
Net Sales
Net sales in the nine months ended September 30, 2000 (the "2000 nine-month
period") increased 58.9% to $98.7 million from $62.1 million in the nine months
ended September 30, 1999 (the "1999 nine-month period"). The increase in net
sales was primarily attributable to a growth in sales volume and, to a lesser
extent, a price increase of approximately 7.2% in January 2000. 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 three
additional production lines in 2000 significantly increased the Company's
production capacity in the 2000 nine-month period. The increase in the number of
dealer outlets, from approximately 2,000 at September 30, 1999 to
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approximately 2,500 at September 30, 2000, also contributed to the growth in
sales volume.
Cost of Sales
Cost of sales increased 79.4% to $49.4 million in the 2000 nine-month period
from $27.6 million in the 1999 nine-month period. Cost of sales as a percentage
of net sales increased to 50.1% in the 2000 nine-month period from 44.4% in the
1999 nine-month period. 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 42.7% to $49.3 million in the 2000 nine-month period from
$34.5 million in the 1999 nine-month period. The increase in gross profit was
attributable to the higher sales volume. The price increase in January 2000 was
partially offset by increased manufacturing costs. Gross profit as a percentage
of net sales decreased to 49.9% in the 2000 nine-month period from 55.6% in the
1999 nine-month period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 28.6% to $19.1 million in
the 2000 nine-month period from $14.9 million in the 1999 nine-month period. The
increase was primarily attributable to performance bonuses of $2.0 million
recognized in the 2000 nine-month period and higher branding costs, including
expenses of promotion, advertising, public relations, sales literature, trade
shows and cooperative advertising, which increased 18.8% to $7.6 million in the
2000 nine-month period from $6.4 million in the 1999 nine-month period. The
Company did not record any performance bonuses in the 1999 nine-month period. An
increase in corporate personnel necessary to support the Company's growth
accounted for $1.3 million of the increase. Selling, general and administrative
expenses as a percentage of net sales decreased to 19.3% in the 2000 nine-month
period from 23.9% in the 1999 nine-month period.
Interest Expense
Net interest expense was $0.6 million in the 2000 nine-month period compared to
$1.3 million in the 1999 nine-month period. The effects of higher average debt
balances incurred since the 1999 nine-month period to fund the expansion of the
Company's production capacity were offset by the capitalization of interest with
respect to those projects.
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 $6.7 million in the 1999
nine-month period represents a 38% combined effective tax rate and reflects a
one-time charge for deferred income taxes of $2.6 million arising from the
Company's conversion on April 7, 1999 from a partnership for federal income tax
purposes to a corporation taxed in accordance with Subchapter C of the Internal
Revenue Code. The income tax provision of $11.2 million in the 2000 nine-month
period represents an assumed 38% combined effective tax rate.
Net Income
The Company's net income increased 71.5% to $18.3 million in the 2000 nine-month
period from $10.7 million in the 1999 nine-month period. The increase in net
income primarily resulted from an increase in income from operations of $10.5
million and a decrease in interest expense of $0.7 million, which were partially
offset by an increase in the provision for income taxes of $4.6 million. The
1999 nine-month period included a $1.1 million charge for the early
extinguishment of debt in connection with the Reorganization.
Liquidity and Capital Resources
The Company's total assets increased from $79.3 million at December 31, 1999 to
$123.9 million at September 30, 2000. Higher receivables balances resulting from
an increase in net sales in the 2000 nine-month period accounted for $4.4
million of the increase. Inventories increased by $3.9 million as a result of
increased production. This increase was partially offset by the increase in net
sales. Property, plant and equipment, net, increased $36.2 million as the
Company installed three additional production lines in its Fernley, Nevada
manufacturing facility and began construction to increase the size of the
facility to accommodate additional production lines. In May 2000, the Company
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acquired a site adjacent to its existing Winchester, Virginia facility for the
purpose of expanding capacity in that facility, and has begun construction of a
manufacturing facility for this site. The Company has initiated procurement for
five additional production lines between the two facilities and expects a
minimum of one production line to commence production in its Fernley, Nevada
facility by April 1, 2001 and a minimum of two production lines to commence
production by July 1, 2001 in its Winchester, Virginia facility. The Company has
financed the increases in assets in the 2000 nine-month period from cash flows
provided by operations and additional net draws of approximately $11.7 million
under its revolving credit facility.
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 nine-month period
was $22.9 million compared to $20.2 million for the 1999 nine-month period.
Higher net sales volume accounted for the increase in cash flow in the 2000
nine-month period.
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 September 30, 2000, the Company's long-term indebtedness
totaled $16.8 million and had an overall weighted average interest rate of
approximately 7.75% per annum.
On October 27, 2000, the Company and the lender revised the terms of the
Company's bank revolving credit agreement primarily to increase the maximum
amount of borrowings available to the Company. The terms of the new revolving
credit facility provide for borrowings of up to $75.0 million on an unsecured
basis for working capital and general corporate purposes through September 30,
2001 and $50.0 million thereafter. Amounts drawn under the revolving credit
facility bear interest at an annual rate equal to LIBOR plus 1.00%. The
facility will mature on June 30, 2003.
In May 2000, the Company financed its purchase of a site adjacent to its
existing Winchester, Virginia manufacturing facility through borrowings under
its revolving credit facility. On August 14, 2000, the Company refinanced the
borrowings with a 15-year term loan in the original principal amount of $5.9
million. Pursuant to an interest rate swap, interest on this loan is payable at
an annual rate of 8.10%.
In October 2000, the Company purchased an additional 11.83 acres of land near
its existing Winchester, Virginia manufacturing facility. The Company financed
the purchase through borrowings under its revolving credit facility.
Expansion of the Company's production capacity will continue to require
significant capital expenditures. In the second quarter of 2000, the Company
accelerated its capital expenditure program to invest in additional production
capacity to meet current and expected demand for its product. In the third
quarter of 2000, the Company completed installation of a sixth production line
in its Fernley, Nevada facility, which increased to 14 the total number of the
Company's production lines in its two facilities. The Company also is conducting
engineering, site work and construction to expand capacity at its Winchester,
Virginia and Fernley, Nevada facilities; acquiring a site and commencing
engineering for a third manufacturing facility in another location; commencing
procurement for five additional production lines, of which three are expected to
be operational by July 1, 2001 in the two existing facilities; and procuring
equipment for processing polyethylene that the Company believes will enable it
to expand its raw material sourcing at competitive pricing. Capital expenditures
during the 2000 nine-month period totaled $40.4 million and for the balance of
2000 are expected to total approximately $9.6 million. The Company believes that
cash flow from operations and borrowings expected to be available under the
Company's revolving 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.
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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 bear interest at an annual rate equal to LIBOR plus 1.00%. As of
September 30, 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.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In October 2000, the remaining counterclaims filed by a former distributor
against the Company's operating subsidiary, TREX Company, LLC, in a lawsuit in
the Circuit Court of Frederick County, Virginia, were voluntarily dismissed by
the former distributor. TREX Company, LLC had filed a lawsuit on March 2, 1999
against the former distributor to collect unpaid invoices. The defendant filed
its response on July 30, 1999 and, in a counterclaim, alleged that TREX Company,
LLC had made various misrepresentations which resulted in, among other items,
loss of business and loss of reputation. TREX Company, LLC intends to continue
to pursue its claims against the former distributor. The case is currently
scheduled for trial in December 2000. For additional information about this
lawsuit, see the Company's Annual Report on Form 10-K filed on March 22, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) The Company files herewith the following exhibits:
10.1 Fourth Amendment to Amended and Restated Credit Agreement, dated
as of October 27, 2000, among Trex Company, Inc., TREX Company,
LLC and First Union National Bank.
27.1 Financial Data Schedule.
(b) The Company did not file any Current Reports on Form 8-K during
the period covered by this report.
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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: November 14, 2000 /s/ Anthony J. Cavanna
-----------------------------------------
Anthony J. Cavanna, Executive Vice
President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
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