<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 10, 2000 was 14,133,052 shares.
<PAGE>
TREX COMPANY, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and June 30, 2000 (unaudited) 3
Consolidated Statements of Operations for the three and six
months ended June 30, 1999 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 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 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREX COMPANY, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,1999 June 30, 2000
---------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................................... $ -- $ --
Trade accounts receivable.......................................................... 1,266,000 5,153,000
Inventories........................................................................ 8,668,000 5,945,000
Prepaid expenses and other assets.................................................. 1,057,000 1,548,000
Deferred income taxes.............................................................. 360,000 --
----------- ------------
Total current assets............................................................ 11,351,000 12,646,000
Property, plant, and equipment, net.................................................. 59,489,000 81,039,000
Intangible assets, net............................................................... 8,252,000 7,792,000
Other................................................................................ 211,000 667,000
----------- ------------
Total Assets................................................................... $79,303,000 $102,144,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable............................................................... $ 6,416,000 $ 9,635,000
Accrued expenses..................................................................... 1,737,000 1,043,000
Income taxes payable................................................................. 117,000 1,782,000
Other current liabilities............................................................ 1,163,000 1,358,000
Line of credit....................................................................... 5,714,000 10,570,000
Current portion of long-term debt.................................................... 385,000 399,000
----------- ------------
Total current liabilities....................................................... 15,532,000 24,787,000
Deferred income taxes................................................................ 3,532,000 4,052,000
Long-term debt....................................................................... 10,838,000 10,612,000
----------- ------------
Total Liabilities............................................................... 29,902,000 39,451,000
----------- ------------
Stockholders' Equity:
Preferred stock, $0.01par 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
14,131,324 shares issued and outstanding......................................... 141,000 141,000
Additional capital................................................................. 40,992,000 41,146,000
Retained earnings.................................................................. 8,268,000 21,406,000
----------- ------------
Total Stockholders' Equity...................................................... 49,401,000 62,693,000
----------- ------------
Total Liabilities and Stockholders' Equity...................................... $79,303,000 $102,144,000
=========== ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
3
<PAGE>
TREX COMPANY, INC.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................................................ $19,775,000 $35,556,000 $42,140,000 $73,620,000
Cost of sales........................................................ 8,254,000 17,543,000 18,196,000 37,445,000
----------- ----------- ----------- -----------
Gross profit......................................................... 11,521,000 18,013,000 23,944,000 36,175,000
Selling, general and administrative expenses......................... 6,905,000 7,940,000 10,969,000 14,450,000
----------- ----------- ----------- -----------
Income from operations............................................... 4,616,000 10,073,000 12,975,000 21,725,000
Interest income...................................................... 14,000 2,000 33,000 2,000
Interest expense..................................................... (301,000) (265,000) (1,120,000) (542,000)
----------- ----------- ----------- -----------
Income before taxes.................................................. 4,329,000 9,810,000 11,888,000 21,185,000
Income taxes......................................................... 4,279,000 3,729,000 4,279,000 8,047,000
----------- ----------- ----------- -----------
Income before extraordinary item..................................... 50,000 6,081,000 7,609,000 13,138,000
Extraordinary loss on early extinguishment of debt................... (1,056,000) -- (1,056,000) --
----------- ----------- ----------- -----------
Net (loss) income.................................................... $(1,006,000) $ 6,081,000 $ 6,553,000 $13,138,000
=========== =========== =========== ===========
Basic earnings per common share
Income before extraordinary item................................... $ -- $ 0.43 $ 0.65 $ 0.93
Extraordinary item................................................. (0.07) -- (0.09) --
----------- ----------- ----------- -----------
Net (loss) income.................................................. $ (0.07) $ 0.43 $ 0.56 $ 0.93
=========== =========== =========== ===========
Weighted average basic shares outstanding............................ 13,591,336 14,128,437 11,556,970 14,125,502
=========== =========== =========== ===========
Diluted earnings per common share
Income before extraordinary item................................... $ -- $ 0.43 $ 0.65 $ 0.92
Extraordinary item................................................. (0.07) -- (0.09) --
----------- ----------- ----------- -----------
Net (loss) income.................................................. $ (0.07) $ 0.43 $ 0.56 $ 0.92
=========== =========== =========== ===========
Weighted average diluted shares outstanding.......................... 13,639,398 14,227,860 11,581,001 14,206,265
=========== =========== =========== ===========
Pro forma data (unaudited, see Note 7):
Historical income before taxes and extraordinary item.............. $ 4,329,000 $11,888,000
Pro forma income taxes............................................. (1,732,000) (4,755,000)
----------- -----------
Pro forma net income............................................... $ 2,597,000 $ 7,133,000
=========== ===========
Pro forma basic earnings per share................................. $ 0.19 $ 0.62
=========== ===========
Pro forma diluted earnings per share............................... $ 0.19 $ 0.62
=========== ===========
Pro forma weighted average basic common shares outstanding......... 13,591,336 11,556,970
=========== ===========
Pro forma weighted average diluted common shares outstanding....... 13,639,398 11,581,001
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
4
<PAGE>
TREX COMPANY, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
<S> <C> <C>
1999 2000
------------ -------------
Operating Activities
Net income........................................................................................ $ 6,553,000 $ 13,138,000
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary loss on early prepayment of debt.................................................. 1,056,000 --
Deferred income taxes........................................................................... 3,613,000 880,000
Depreciation and amortization................................................................... 1,902,000 3,195,000
Amortization of deferred financing charges...................................................... 13,000 --
Loss on disposal of property, plant and equipment............................................... 156,000 --
Changes in operating assets and liabilities:
Trade accounts receivable..................................................................... (4,347,000) (3,887,000)
Inventories................................................................................... 3,777,000 2,723,000
Prepaid expenses and other assets............................................................. 333,000 (1,011,000)
Trade accounts payable........................................................................ 884,000 3,219,000
Accrued expenses.............................................................................. 123,000 (694,000)
Income taxes payable.......................................................................... -- 1,665,000
Other current liabilities..................................................................... (778,000) 195,000
------------ ------------
Net cash provided by operating activities......................................................... 13,285,000 19,423,000
------------ ------------
Investing Activities
Expenditures for property, plant and equipment.................................................... (15,903,000) (24,221,000)
------------ ------------
Net cash used in investing activities............................................................. (15,903,000) (24,221,000)
------------ ------------
Financing Activities
Borrowings under mortgages and notes.............................................................. 4,570,000 --
Principal payments under mortgages and notes...................................................... (27,883,000) (212,000)
Borrowings under line of credit................................................................... -- 12,748,000
Principal payments under line of credit........................................................... -- (7,892,000)
Proceeds from exercise of employee stock purchase and option plan grants.......................... -- 154,000
Proceeds from initial public offering............................................................. 41,055,000 --
Preferred distributions paid...................................................................... (3,115,000) --
Common distributions paid......................................................................... (12,766,000) --
------------ ------------
Net cash provided by financing activities......................................................... 1,861,000 4,798,000
------------ ------------
Net increase (decrease) in cash and cash equivalents.............................................. (757,000) --
Cash and cash equivalents at beginning of period.................................................. 1,200,000 --
------------ ------------
Cash and cash equivalents at end of period........................................................ $ 443,000 $ --
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
5
<PAGE>
TREX COMPANY, INC.
Notes to Consolidated Financial Statements
For The Three and Six Months Ended June 30, 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
6
<PAGE>
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)
considered necessary for a fair presentation have been included in the
accompanying consolidated financial statements. The consolidated results of
operations for the three-month and six-month periods ended June 30, 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 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 June 30, 2000
----------------- -------------
(unaudited)
<S> <C> <C>
Finished goods.......................... $7,599,000 $3,233,000
Raw materials........................... 1,069,000 2,712,000
---------- ----------
$8,668,000 $5,945,000
========== ==========
</TABLE>
4. DEBT
On June 30, 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 $50.0 million on an unsecured basis for
working capital and general corporate purposes. 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 new facility replaced a
$10.0 million unsecured line of credit and a $7.5 million term loan facility
secured by certain equipment. 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.
7
<PAGE>
5. STOCKHOLDERS' EQUITY
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
<S> <C> <C> <C> <C>
1999 2000 1999 2000
----------- ----------- ----------- -----------
Numerator:
Income before extraordinary item................................... $ 50,000 $ 6,081,000 $ 7,609,000 $13,138,000
Preferred dividends................................................ (13,000) -- (115,000) --
----------- ----------- ----------- -----------
37,000 6,081,000 7,494,000 13,138,000
Extraordinary item................................................. (1,056,000) -- (1,056,000) --
----------- ----------- ----------- -----------
Net (loss) income available to common shareholders, basic and
diluted.......................................................... $(1,019,000) $ 6,081,000 $ 6,438,000 $13,138,000
=========== =========== =========== ===========
Denominator:
Weighted average shares outstanding, basic......................... 13,591,336 14,128,437 11,556,970 14,125,502
Impact of potential common shares:
Stock options.................................................... 48,062 99,423 24,031 80,763
----------- ----------- ----------- -----------
Weighted average shares outstanding, diluted....................... 13,639,398 14,227,860 11,581,001 14,206,265
=========== =========== =========== ===========
Basic earnings per share
Income before extraordinary item................................... $ -- $ 0.43 $ 0.65 $ 0.93
Extraordinary loss................................................. (0.07) -- (0.09) --
----------- ----------- ----------- -----------
Net (loss) income per share........................................ $ (0.07) $ 0.43 $ 0.56 $ 0.93
=========== =========== =========== ===========
Diluted earnings per share
Income before extraordinary item................................... $ -- $ 0.43 $ 0.65 $ 0.92
Extraordinary loss................................................. (0.07) -- (0.09) --
----------- ----------- ----------- -----------
Net (loss) income per share........................................ $ (0.07) $ 0.43 $ 0.56 $ 0.92
=========== =========== =========== ===========
</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 typically experiences
lower net sales during the fourth quarter due to holidays and adverse weather
conditions in certain regions, which reduce the level of home improvement and
new construction activity. Net sales during the second quarter of 1999 accounted
for 26.6% of sales in 1999.
8
<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 six months ended June 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 through June 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>
Three Months Ended Six Months Ended
------------------- -------------------
June 30, 1999 June 30, 1999
------------------- -------------------
<S> <C> <C>
Numerator:
Historical income from operations...................................... $ 4,616,000 $12,975,000
Supplemental pro forma interest expense, net........................... (196,000) (302,000)
Supplemental pro forma income taxes.................................... (1,680,000) (4,816,000)
----------- -----------
Supplemental pro forma net income available to common shareholders,
basic and diluted..................................................... $ 2,740,000 $ 7,857,000
=========== ===========
Denominator:
Denominator for supplemental pro forma earnings per common
share-weighted average basic shares outstanding...................... 14,115,450 14,115,450
Impact of potential common shares:
Stock options........................................................ 48,063 24,031
----------- -----------
Denominator for supplemental pro forma earnings per common
share-weighted average diluted shares outstanding.................... 14,163,513 14,139,481
=========== ===========
Supplemental pro forma basic earnings per common share................... $ 0.19 $ 0.56
=========== ===========
Supplemental pro forma diluted earnings per common share................. $ 0.19 $ 0.56
=========== ===========
</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.
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 June 30, 2000 Compared with Three Months Ended June 30, 1999
Net Sales
Net sales in the three months ended June 30, 2000 (the "2000 quarter") increased
79.8% to $35.6 million from $19.8 million in the three months ended June 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 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 June 30, 1999 to approximately 2,400 at
June 30, 2000, also contributed to the growth in sales volume.
Cost of Sales
Cost of sales increased 112.5% to $17.5 million in the 2000 quarter from $8.3
million in the 1999 quarter. Cost of sales as a percentage of net sales
increased to 49.3% in the 2000 quarter from 41.7% in the 1999 quarter. The
increase principally reflected higher raw material landed costs. The increased
cost was 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 56.3% to $18.0 million in the 2000 quarter from $11.5
million in the 1999 quarter. The increase in gross profit was attributable to
the higher sales volume and the price increase and was partially offset by
increased manufacturing costs. Gross profit as a percentage of net sales
decreased to 50.7% in the 2000 quarter from 58.3% in the 1999 quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 15.0% to $7.9 million in
the 2000 quarter from $ 6.9 million in the 1999 quarter. The increase was
primarily attributable to higher branding costs, including expenses of
promotion, advertising, public relations, sales literature, trade shows and
cooperative advertising, which increased 22.9% to $5.4 million in the 2000
quarter from $4.4 million in the 1999 quarter. An increase in expense of $0.3
million related to additional corporate personnel necessary to support the
Company's growth was offset primarily by costs recognized in the 1999 quarter
relating to commencement of operations at the Company's Fernley, Nevada
manufacturing facility. Selling, general and administrative expenses as a
percentage of net sales decreased to 22.3% in the 2000 quarter from 34.9% in the
1999 quarter.
Interest Expense
Net interest expense remained unchanged at $0.3 million in the 2000 and 1999
quarters.
Provision for Income Taxes
The Company was taxed as a partnership for federal and state income tax purposes
for all periods through April 7, 1999 and thus through that date recorded no
provision for income taxes. During the second quarter of 1999, the Company
recorded a provision of $4.3 million using a 40% combined effective tax rate for
year-to-date federal and state income taxes and recognized certain deferred tax
liabilities related to the Reorganization. The income tax provision of $3.7
million in the 2000 quarter represents a 38% combined effective tax rate.
Net Income
The Company's net income of $6.1 million in the 2000 quarter compared to a net
loss of $1.0 million in the 1999 quarter. The net income in the 2000 quarter
resulted from an increase of $5.5 million in income from operations and
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a reduced income tax provision of $.5 million. The 1999 quarter included a $1.1
million extraordinary loss for the early extinguishment of debt in connection
with the Reorganization.
Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999
Net Sales
Net sales in the six months ended June 30, 2000 (the "2000 six-month period")
increased 74.7% to $73.6 million from $42.1 million in the six months ended June
30, 1999 (the "1999 six-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 one production line in
each of December 1999 and January 2000 significantly increased the Company's
production capacity in the 2000 six-month period. The increase in the number of
dealer outlets, from approximately 2,000 at June 30, 1999 to approximately 2,400
at June 30, 2000, also contributed to the growth in sales volume.
Cost of Sales
Cost of sales increased 105.8% to $37.5 million in the 2000 six-month period
from $18.2 million in the 1999 six-month period. Cost of sales as a percentage
of net sales increased to 50.9% in the 2000 six-month period from 43.2% in the
1999 six-month period. The increase principally reflected higher raw material
landed costs and scrap rates. This increased cost was 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 51.1% to $36.2 million in the 2000 six-month period from
$23.9 million in the 1999 six-month period. The increase in gross profit was
attributable to the higher sales volume and the price increase and was partially
offset by increased manufacturing costs. Gross profit as a percentage of net
sales decreased to 49.1% in the 2000 six-month period from 56.8% in the 1999
six-month period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 31.7% to $14.5 million in
the 2000 six-month period from $11.0 million in the 1999 six-month period. The
increase was primarily attributable to performance bonuses of $1.1 million
recognized in the first quarter of 2000, and higher branding costs, including
expenses of promotion, advertising, public relations, sales literature, trade
shows and cooperative advertising, which increased 35.9% to $6.6 million in the
2000 six-month period from $5.2 million in the 1999 six-month period. The
Company did not record any performance bonuses in the 1999 six-month period. An
increase in corporate personnel necessary to support the Company's growth
accounted for $0.8 million of the increase. Site selection costs related to
locating a third manufacturing facility and expenses associated with being a
publicly traded company contributed $0.2 million of the increase. Selling,
general and administrative expenses as a percentage of net sales decreased to
19.6% in the 2000 six-month period from 26.0% in the 1999 six-month period.
Interest Expense
Net interest expense decreased 50.1% to $0.5 million in the 2000 six-month
period from $1.1 million in the 1999 six-month period. The decrease was
primarily attributable to lower average balances outstanding as a result of the
repayment in April 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
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provision for income taxes. During the second quarter of 1999, the Company
recorded a provision of $4.3 million using a 40% combined effective tax rate for
year-to-date federal and state income taxes and recognized certain deferred tax
liabilities due to the Reorganization. The income tax provision of $8.1 million
in the 2000 six-month period represents an assumed 38% combined effective tax
rate.
Net Income
The Company's net income of $13.1 million in the 2000 six-month period compared
to net income of $6.6 million in the 1999 six-month period. The increase in net
income primarily resulted from the increase in income from operations of $8.7
million plus a decrease in interest expense of $0.6 million, less income taxes.
The 1999 six-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
$102.1 million at June 30, 2000. Higher receivables balances resulting from an
increase in net sales in the 2000 six-month period accounted for $3.9 million of
the increase. Inventories decreased $2.7 million due to increased net sales.
Property, plant and equipment, net, increased $21.6 million as the Company
installed one additional production line in its Fernley, Nevada manufacturing
facility, initiated procurement and installation for four additional lines in
this facility, and began construction to increase the size of the facility to
accommodate additional lines. In May 2000, the Company acquired a site adjacent
to its existing Winchester, Virginia facility for the purpose of expanding
capacity there. The Company is designing a manufacturing facility for this site
and has begun procurement of three production lines for the new facility. The
Company has financed the increases in assets in the 2000 six-month period from
cash flows provided by operations and increases in current liabilities,
including additional net draws of approximately $4.9 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 six-month period
was $19.4 million compared to $13.3 million for the 1999 six-month period.
Higher sales volume accounted for the increase in cash flow in the 2000 six-
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 June 30, 2000, the Company's indebtedness totaled $21.6 million
and had an overall weighted average interest rate of approximately 7.56% per
annum.
On June 30, 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 $50.0 million on an unsecured basis for
working capital and general corporate purposes. 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 new facility replaced a
$10.0 million unsecured line of credit and a $7.5 million term loan facility
secured by certain equipment.
<PAGE>
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. In August 2000, the Company received a commitment
from a financial institution for permanent financing of the purchase through a
15-year term loan in the original principal amount of approximately $5.9
million. An interest rate swap agreement will effectively fix the interest rate
on this loan at an annual rate of 8.1%.
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. Included in the
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program are expanding the building and installing two additional production
lines in the Company's Fernley, Nevada facility by year-end, which will bring
the Company's total production lines at year-end to fourteen at full capacity
between its two facilities; engineering and site work for expanding capacity at
its Winchester, Virginia facility; acquiring a site and commencing engineering
for a third manufacturing facility in a yet-to-be-determined location;
commencing procurement for six additional production lines to be operational by
year-end 2001 between these three facilities; and the procurement of equipment
for two plastic processing facilities that the Company believes will enable it
to expand its raw material sourcing at competitive pricing, both of which are
expected to be operational by year-end 2001. Capital expenditures during the
2000 six-month period totaled approximately $24.2 million and for the balance of
2000 are expected to total approximately $25.8 million. The Company believes
that cash flow from operations and borrowings expected to be available under the
Company's revolving credit facility and anticipated permanent financing 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 June
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 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 2000 annual meeting of stockholders on
May 3, 2000.
(c) The following sets forth information regarding the proposal
voted upon at the 2000 annual meeting. There were 14,122,566
shares of common stock outstanding as of the record date for,
and entitled to vote at, the 2000 annual meeting.
At the annual meeting, the stockholders approved a proposal to elect
each of the nominees to the board of directors for a three-year term
which will expire at the annual meeting of stockholders in 2003. The
tabulation of votes on this proposal is as follows:
<TABLE>
<CAPTION>
Nominees Votes For Votes Withheld
-------- ---------- --------------
<S> <C> <C>
Anthony J. Cavanna 12,754,241 358,375
Roger A. Wittenberg 12,754,296 358,320
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) The Company files herewith the following exhibits:
10.1 Third Amendment to Amended and Restated Credit Agreement,
dated as of June 30, 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: August 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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