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, 2001
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.)
160 Exeter Drive
Winchester, Virginia 22603-8605
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 542-6300
20 South Cameron Street, Winchester, Virginia 22601
(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 11, 2001 was 14,154,558 shares.
TREX COMPANY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2000
and September 30, 2001 (unaudited).............................. 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2000 and 2001 (unaudited)... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 2001 (unaudited)............ 5
Notes to Condensed Consolidated Financial Statements
(unaudited)..................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 14
Item 2. Changes in Securities and Use of Proceeds....................... 14
Item 3. Defaults Upon Senior Securities................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............. 14
Item 5. Other Information............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 14
Signatures 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREX COMPANY, INC.
Condensed Consolidated Balance Sheets
December 31, September 30,
2000 2001
------------ -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.......................... $ -- $ --
Trade accounts receivable.......................... 10,582,000 5,308,000
Inventories........................................ 23,017,000 32,002,000
Prepaid expenses and other assets.................. 689,000 741,000
Deferred income taxes.............................. 478,000 360,000
------------ ------------
Total current assets............................... 34,766,000 38,411,000
------------ ------------
Property, plant, and equipment, net................. 113,635,000 137,330,000
Intangible assets, net.............................. 7,544,000 7,013,000
Other............................................... 650,000 500,000
------------ ------------
Total assets........................................ $156,595,000 $183,254,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............................. $ 17,082,000 $ 10,449,000
Accrued expenses................................... 2,053,000 1,156,000
Income taxes payable............................... 574,000 181,000
Other current liabilities.......................... 664,000 894,000
Current portion of long-term debt.................. 697,000 25,662,000
------------ ------------
Total current liabilities.......................... 21,070,000 38,342,000
------------ ------------
Deferred income taxes............................... 5,782,000 6,354,000
Line of credit...................................... 44,748,000 41,764,000
Debt-related derivatives............................ -- 1,906,000
Long-term debt...................................... 15,954,000 15,471,000
------------ ------------
Total liabilities.................................. 87,554,000 103,837,000
------------ ------------
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; 14,135,060 and 14,151,125 shares
issued and outstanding............................ 141,000 142,000
Additional capital................................. 41,330,000 41,542,000
Retained earnings.................................. 27,570,000 38,915,000
Accumulated other comprehensive net loss........... -- (1,182,000)
------------ ------------
Total stockholders' equity......................... 69,041,000 79,417,000
------------ ------------
Total liabilities and stockholders' equity......... $156,595,000 $183,254,000
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED).
3
TREX COMPANY, INC.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
2000 2001 2000 2001
----------- ----------- ------------ -----------
Net sales..................................... $25,806,000 $29,868,000 $101,308,000 $99,791,000
Cost of sales................................. 12,703,000 16,716,000 52,030,000 55,754,000
----------- ----------- ------------ -----------
Gross profit.................................. 13,103,000 13,152,000 49,278,000 44,037,000
Selling, general and administrative expenses.. 4,647,000 7,478,000 19,097,000 24,602,000
----------- ----------- ------------ -----------
Income from operations........................ 8,456,000 5,674,000 30,181,000 19,435,000
Interest income............................... 3,000 -- 5,000 2,000
Interest (expense)............................ (79,000) (760,000) (621,000) (1,710,000)
----------- ----------- ------------ -----------
Income before taxes........................... 8,380,000 4,914,000 29,565,000 17,727,000
Income taxes.................................. 3,184,000 1,511,000 11,231,000 6,382,000
----------- ----------- ------------ -----------
Net income.................................... $ 5,196,000 $ 3,403,000 $ 18,334,000 $11,345,000
=========== =========== ============ ===========
Basic earnings per common share............... $ 0.37 $ 0.24 $ 1.30 $ 0.80
=========== =========== ============ ===========
Weighted average basic shares outstanding..... 14,132,959 14,149,049 14,127,938 14,142,686
=========== =========== ============ ===========
Diluted earnings per common share............. $ 0.37 $ 0.24 $ 1.29 $ 0.80
=========== =========== ============ ===========
Weighted average diluted shares outstanding... 14,193,579 14,171,593 14,182,491 14,172,971
=========== =========== ============ ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED).
4
TREX COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended September 30,
-------------------------------
2000 2001
------------ ------------
OPERATING ACTIVITIES
Net income......................................................................... $ 18,334,000 $ 11,345,000
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes............................................................. 1,465,000 1,414,000
Depreciation and amortization..................................................... 4,899,000 6,254,000
Loss on disposal of property, plant and equipment................................. 14,000 472,000
Changes in operating assets and liabilities:
Trade accounts receivable......................................................... (4,430,000) 5,274,000
Inventories....................................................................... (3,851,000) (8,985,000)
Prepaid expenses and other assets................................................. (819,000) 98,000
Trade accounts payable............................................................ 4,443,000 (6,633,000)
Accrued expenses.................................................................. 941,000 (897,000)
Income taxes payable.............................................................. 2,304,000 (393,000)
Other current liabilities......................................................... (436,000) 230,000
------------ ------------
Net cash provided by operating activities.......................................... 22,864,000 8,179,000
------------ ------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment..................................... (40,422,000) (29,890,000)
------------ ------------
Net cash used in investing activities.............................................. (40,422,000) (29,890,000)
------------ ------------
FINANCING ACTIVITIES
Borrowing under mortgages and term loans........................................... 5,940,000 --
Principal payments under mortgages and term loans.................................. (329,000) (518,000)
Borrowings under line of credit.................................................... 29,321,000 72,655,000
Principal payments under line of credit............................................ (17,575,000) (50,639,000)
Proceeds from exercise under employee stock purchase and option plans.............. 201,000 213,000
------------ ------------
Net cash provided by financing activities.......................................... 17,558,000 21,711,000
------------ ------------
Net increase in cash and cash equivalents.......................................... -- --
Cash and cash equivalents at beginning of period................................... -- --
------------ ------------
Cash and cash equivalents at end of period......................................... $ -- $ --
============ ============
Supplemental Disclosure:
Cash paid for interest............................................................ $ 1,039,000 $ 3,475,000
Cash paid for income taxes........................................................ $ 7,517,000 $ 5,367,000
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED).
5
TREX COMPANY, INC.
Notes to Condensed Consolidated Financial Statements
For the Three and Nine months Ended September 30, 2000 and 2001 (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 of the Company's common
stock. Through its wholly owned subsidiary, TREX Company, LLC, the Company
manufactures and distributes wood/plastic composite products primarily for
residential and commercial decking applications. Trex Wood-Polymer(R) 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.
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, 2001 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, 1999 and 2000 and for each of the three years in the period ended
December 31, 2000 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:
December 31, 2000 September 30,2001
----------------- ------------------
(unaudited)
Finished goods................... $19,523,000 $26,103,000
Raw materials.................... 3,494,000 5,899,000
----------- -----------
$23,017,000 $32,002,000
=========== ===========
4. DEBT
On November 13, 2001, the Company and the lender revised the terms of the
Company's bank credit facility, primarily to increase the maximum amount of
borrowings available to the Company, restructure the form of borrowings, and
modify the term of the facility. The terms of the revised credit agreement
provide for borrowings under a revolving credit facility of up to $17.0 million
for working capital and general corporate purposes through January 31, 2003.
Amounts drawn under the revolving credit agreement bear interest at an annual
rate equal to LIBOR plus 3.00% through June 30, 2002 and LIBOR plus 4.00%
thereafter, and are subject to a borrowing base consisting of accounts
receivable and finished goods inventories. The revised agreement also provides
for a $58.0 million term loan, with scheduled
6
principal reductions of $5.0 million on each of March 1, April 1, May 1, June 1
and July 1, 2002. The remaining principal balance and accrued interest on the
term loan will be payable in full on January 31, 2003. Amounts drawn under the
term loan up to $33.0 million bear interest at an annual rate equal to LIBOR
plus 3.00% through June 30, 2002 and LIBOR plus 4.00% thereafter. Amounts drawn
under the term loan in excess of $33.0 million bear interest at an annual rate
equal to LIBOR plus 5.00%. As of the date of this report, the Company has drawn
down $58.0 million under ther term loan. In connection with the revised
agreement, the maturity dates of the Company's real estate mortgage loans with
this lender were modified and the interest rates on these loans were increased
by 200 basis points through June 30, 2002 and by 300 basis points thereafter.
The mortgage loans will be payable in full on January 31, 2003 or, if earlier,
on the date on which the term loan and revolving credit facility are repaid,
subject to an extension of such maturity dates until January 31, 2005 if the
Company meets certain conditions. The revised agreement, which was effective as
of September 30, 2001, contains restrictive and financial covenants, and
borrowings under the agreement are secured by a lien on substantially all of the
Company's assets. In connection with the revised agreement, the Company issued
the lender a warrant exercisable until January 31, 2005 to purchase up to
707,557 shares of the Company's common stock at a price per share equal to the
average of the last sale price of the common stock on the New York Stock
Exchange for the 20 consecutive trading days beginning on October 30, 2001. The
lender's right to purchase one-half of those shares will automatically terminate
if the Company repays the revolving credit facility and term loan and an
outstanding letter of credit on or before June 30, 2002. Before the foregoing
revisions to the credit agreement, the Company was not in compliance with
certain requirements of the agreement, including covenants that require the
Company to maintain minimum leverage and capitalization ratios and to reduce its
outstanding borrowings under the credit facility to $50 million as of a
specified date. As a result of such non-compliance, the Company was also in
violation of certain of its mortgage loans with a total balance of approximately
$9.9 million as of September 30, 2001. The revision of the credit agreement
eliminated such non-compliance as of September 30, 2001 under both the credit
facility and such mortgage loans.
5. STOCKHOLDERS' EQUITY
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
Numerator:
Net income available to common
shareholders, basic and diluted............... $ 5,196,000 $ 3,403,000 $18,334,000 $11,345,000
=========== =========== =========== ===========
Denominator:
Weighted average shares outstanding, basic.... 14,132,959 14,149,049 14,127,938 14,142,686
Impact of potential common shares:
Stock options................................ 60,620 22,544 54,553 30,285
----------- ----------- ----------- -----------
Weighted average shares outstanding, diluted.. 14,193,579 14,171,593 14,182,491 14,172,971
=========== =========== =========== ===========
Basic earnings per share....................... $0.37 $0.24 $1.30 $0.80
===== ===== ===== =====
Diluted earnings per share..................... $0.37 $0.24 $1.29 $0.80
===== ===== ===== =====
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 because of 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
2000 accounted for approximately 21.9% of annual sales in 2000. 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, the Company's
historical seasonality may not be a reliable indicator of future seasonality.
7. NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by Statement of Financial
7
Accounting Standard No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." SFAS No. 133, as amended, establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.
In order to manage market risk exposure related to changing interest rates, the
Company has entered into interest rate swap agreements effectively converting
its floating rate mortgage debt to a fixed-rate obligation. These interest rate
swap agreements have the same payment and maturity terms as the underlying debt
and are accounted for under the short-cut method as permitted by SFAS No. 133.
The transition adjustment to implement this new standard, which is presented as
a cumulative effect of change in accounting principle, increased liabilities by
approximately $820,000, with a corresponding reduction in stockholders' equity
through other comprehensive income (approximately $508,000, net of tax). The
Company recognized an increase in the liability of $1,056,000, with a
corresponding decrease to stockholders' equity through other comprehensive
income (approximately $732,000 net of tax and reclassification of earnings), for
the three-month period ended September 30, 2001 and an increase in the liability
of $1,086,000 with a corresponding decrease to stockholders' equity through
other comprehensive income (approximately $825,000, net of tax and
reclassification to earnings), for the nine-month period ended September 30,
2001. The Company estimates that of the amounts included in other comprehensive
income, approximately $410,000, net of taxes of approximately $251,000, will be
reclassified to earnings over the next 12 months.
Comprehensive income for the Company includes net income and derivative gains or
losses that are excluded from net income but included as a separate component of
total stockholders' equity. Comprehensive income for the three-month and nine-
month periods ended September 30, 2000 and 2001 is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 2001 2000 2001
---------- ---------- ----------- -----------
Net income................................... $5,196,000 $3,403,000 $18,334,000 $11,345,000
Cumulative effect of a change in accounting
principle................................... -- -- -- (508,000)
Net derivative change in fair value.......... -- (732,000) -- (825,000)
Derivative loss reclassified to earnings..... -- 77,000 -- 151,000
---------- ---------- ----------- -----------
Total comprehensive income................... $5,196,000 $2,748,000 $18,334,000 $10,163,000
========== ========== =========== ===========
The Company implemented the consensus of the Emerging Issues Task Force Issue
00-10, "Accounting for Shipping and Handling Fees and Costs," or EITF 00-10, in
the fourth quarter of 2000. This rule requires that all shipping and handling
fees be recorded in net sales and that the related costs be included in cost of
sales. Previously, the Company had classified shipping and handling fees, net of
shipping and handling costs, as cost of sales. The effect of this
reclassification was to increase net sales and cost of sales by approximately
$0.7 million for three-month period ended September 30, 2000, and approximately
$2.6 million for the nine-month period ended September 30, 2000. This
reclassification had no effect on net income in any period.
In September 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002. The Company has not
yet determined what the effect of these tests will be on its earnings and
financial position.
8
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; 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 ability to raise
capital; 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 28, 2001. The Company undertakes no obligation to update or
revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
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(R)
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 consist of sales and freight, net of returns and discounts. Cost of
sales consists of raw material costs, direct labor costs and manufacturing
costs, including depreciation and freight. The most significant 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.
For most fiscal periods since the Company's inception, the Company has had to
allocate its product supply to its customers. In 2000, the Company made capital
expenditures of approximately $60.1 million, primarily to increase production
capacity. Because of the 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
of this development and current adverse economic conditions, 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. The Company also believes that the slowdown in new
orders and the effect of the slowdown on net sales may continue until the more
normal seasonal demand for Trex products is fully resumed in 2002. During the
quarters ended June 30 and September 30, 2001, the Company suspended operations
on a portion of its production capacity and halted a substantial portion of its
capital projects to reduce investments in inventory and working capital and
preserve capital. As of September 30, 2001, the Company's capital projects in
process totaled approximately $44.2 million. The Company has ceased the
capitalization of interest on these projects until they are resumed. The Company
is currently utilizing six of its 15 available production lines, representing
approximately 40% of its production capacity. In connection with the curtailment
of production capacity, the Company in August 2001 terminated approximately 15
employees at its Fernley, Nevada manufacturing facility and in October 2001
terminated a total of approximately 75 employees at its Fernley, Nevada and
Winchester, Virginia manufacturing facilities and its corporate headquarters.
9
Three Months Ended September 30, 2001 Compared with Three Months Ended
September 30, 2000
Net Sales
Net sales in the three months ended September 30, 2001 (the "2001 quarter")
increased 15.7 % to $29.9 million from $25.8 million in the three months ended
September 30, 2000 (the "2000 quarter"). The increase in net sales was
significantly influenced by the increase in the number of dealer outlets, from
approximately 2,500 at September 30, 2000 to approximately 2,900 at September
30, 2001, and to a lesser extent, a price increase of approximately 6.8%.
Cost of Sales
Cost of sales increased 31.6% to $16.7 million in the 2001 quarter from $12.7
million in the 2000 quarter as a result of the higher sales volume. Cost of
sales as a percentage of net sales increased to 56.0% in the 2001 quarter from
49.2% in the 2000 quarter. The increase principally reflected operating
inefficiencies from the reduced production level in the 2001 quarter.
Gross Profit
Gross profit increased 0.4% to $13.2 million in the 2001 quarter from $13.1
million in the 2000 quarter. The increase in gross profit was primarily
attributable to the higher sales volume, which was substantially offset by
production inefficiencies from the reduced production level in the 2001 quarter.
Gross profit as a percentage of net sales decreased to 44.0% in the 2001 quarter
from 50.8% in the 2000 quarter, primarily because of the increase in cost of
sales as a percentage of net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 60.9% to $7.5 million in
the 2001 quarter from $4.6 million in the 2000 quarter, primarily because of an
increase of $1.0 million in corporate personnel expenses and related hiring
costs necessary to support the Company's growth and an increase of $1.1 million
in expense incurred in the Company's marketing and branding activities.
Expenses relating to information technology increased $0.3 million as the
Company continued installation of a new enterprise reporting system. During the
2001 quarter, the Company wrote off $0.3 million of previously capitalized costs
relating to work performed on a prospective third plant site in Knoxville,
Tennessee, which the Company decided not to pursue, and unamortized leasehold
improvements of $0.2 million relating to the relocation of the Company's
corporate headquarters. Rental expense increased $0.2 million at the new
headquarters facility. The foregoing increases were partially offset by a
reduction of $1.8 million in the accrual for profit sharing and management
bonuses. The Company reversed these profit sharing and bonus accruals in the
2001 quarter based on management's revised assessment that none of the amounts
would be earned and payable for 2001. As a percentage of net sales, selling,
general and administrative expenses increased to 25.0% in the 2001 quarter from
18.0% in the 2000 quarter.
Interest Expense
Net interest expense increased to $0.8 million in the 2001 quarter from $0.1
million in the 2000 quarter. The increased expense primarily reflected higher
average debt balances incurred since the 2000 quarter to fund the expansion of
the Company's production capacity and, to a lesser extent, higher interest rates
charged on outstanding borrowings. The increase was partially offset by the
capitalization of interest with respect to projects financed with those
borrowings.
Provision for Income Taxes
The Company recorded a provision for income taxes of $1.5 million in the 2001
quarter compared to a provision of $3.2 million in the 2000 quarter. Both
provisions reflect a 38% combined effective tax rate. The provision in the 2001
quarter reflects a $0.3 million adjustment to decrease the accrual for state
taxes payable.
10
Net Income
The Company's net income decreased 34.5% to $3.4 million in the 2001 quarter
from $5.2 million in the 2000 quarter. The decrease in net income in the 2001
quarter was primarily attributable to higher costs of sales attributable to
production inefficiencies from the reduced production level and the increase in
selling, general and administrative expenses.
Nine Months Ended September 30, 2001 Compared with Nine Months Ended
September 30, 2000
Net Sales
Net sales in the nine months ended September 30, 2001 (the "2001 nine-month
period") decreased 1.5% to $99.8 million from $101.3 million in the nine months
ended September 30, 2000 (the "2000 nine-month period"). The decrease in net
sales was primarily attributable to a reduction in sales volume, as the Company
eliminated the allocation of product supply in October 2000, which led to
customers reducing stockpiles of inventory in 2001. The increase in net sales
was significantly influenced by the increase in the number of dealer outlets,
from approximately 2,500 at September 30, 2000 to approximately 2,900 at
September 30, 2001, and to a lesser extent, a price increase of approximately
6.8%.
Cost of Sales
Cost of sales increased 7.2% to $55.8 million in the 2001 nine-month period from
$52.0 million in the 2000 nine-month period. Cost of sales as a percentage of
net sales increased to 55.9% in the 2001 nine-month period from 51.4% in the
2000 nine-month period. The increase principally reflected operating
inefficiencies from the reduced production level in the 2001 nine-month period.
Gross Profit
Gross profit decreased 10.6% to $44.0 million in the 2001 nine-month period from
$49.3 million in the 2000 nine-month period. The decrease in gross profit was
primarily attributable to the lower sales volume and production inefficiencies
from the reduced production level in the 2001 nine-month period. Gross profit as
a percentage of net sales decreased to 44.1% in the 2001 nine-month period from
48.6% in the 2000 nine-month period, primarily because of the increase in cost
of sales as a percentage of net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 28.8% to $24.6 million in
the 2001 nine-month period from $19.1 million in the 2000 nine-month period. The
increase was primarily attributable to an increase of approximately $2.8 million
in corporate personnel expense and related hiring costs necessary to support the
Company's planned growth, and an increase in marketing and branding expenses of
$1.2 million. Healthcare costs increased $0.6 million due to a larger workforce
and higher medical costs. Expenses relating to information technology increased
$0.3 million as the Company continued installation of a new enterprise reporting
system. During the 2001 quarter, the Company wrote off $0.3 million of
previously capitalized costs relating to work performed on a prospective third
plant site in Knoxville, Tennessee, which the Company decided not to pursue, and
unamortized leasehold improvements of $0.2 million relating to the relocation of
the Company's corporate headquarters. Rental expense increased $0.2 million at
the new headquarters facility. The foregoing increases were partially offset by
a reduction of $1.8 million in the accrual for profit sharing and management
bonuses. The Company reversed these profit sharing and bonus accruals in the
2001 quarter based on management's revised assessment that none of the amounts
would be earned and payable for 2001. As a percentage of net sales, selling,
general and administrative expenses increased to 24.7% in the 2001 nine-month
period from 18.9% in the 2000 nine-month period.
Interest Expense
Net interest expense increased to $1.7 million in the 2001 nine-month period
from $0.6 million in the 2000
11
nine-month period. The increased expense primarily reflected higher average debt
balances incurred since the 2000 nine-month period to fund the expansion of the
Company's production capacity and, to a lesser extent, higher interest rates
charged on outstanding borrowings. The increase was partially offset by the
capitalization of interest with respect to projects financed with those
borrowings.
Provision for Income Taxes
The Company recorded a provision for income taxes of $6.4 million in the 2001
nine-month period compared to a provision of $11.2 million in the 2000 nine-
month period. Both provisions reflect a 38% combined effective tax rate. The
provision in the 2001 nine-month period reflects a $0.3 million adjustment to
decrease the accrual for state taxes payable.
Net Income
The Company's net income decreased 38.1% to $11.3 million in the 2001 nine-month
period from $18.3 million in the 2000 nine-month period. The decrease in net
income in the 2001 nine-month period was primarily attributable to lower net
sales resulting from the stockpiling of inventories by customers, higher costs
of sales attributable to production inefficiencies from the reduced production
level, and the increase in selling, general and administrative expenses.
Liquidity and Capital Resources
The Company's total assets increased from $156.6 million at December 31, 2000 to
$183.3 million at September 30, 2001. Receivables decreased by $5.3 million as
the Company offered some distributors extended payment terms in the fourth
quarter of 2000 to facilitate the addition of new distributors and the
introduction on a national basis of the newest Trex color, Madeira. Inventories
increased by $9.0 million from December 31, 2000 to September 30, 2001 as a
result of lower net sales in the 2001 nine-month period. Property, plant and
equipment, net, increased $23.7 million as the Company continued construction of
a second manufacturing facility in Winchester, Virginia, installation of
manufacturing lines in both its Winchester, Virginia and Fernley, Nevada
facilities, and construction of a plastic processing facility in Winchester,
Virginia. Trade accounts payable decreased $6.6 million as a result of the
timing of payments relating to the foregoing construction projects. The Company
financed these activities in the 2001 nine-month period from operating cash
flows and additional net draws of approximately $22.0 million under its
revolving credit facilities.
The Company historically has financed its operations and growth primarily with
cash flow from operations and borrowings under its credit facilities.
The Company's cash flow from operating activities for the 2001 nine-month period
was $8.2 million compared to cash flow from operating activities of $22.9
million for the 2000 nine-month period. Trade accounts receivable, net,
decreased from $5.7 million at September 30, 2000 to $5.3 million at September
30, 2001. Inventories increased from $12.5 million at September 30, 2000 to
$32.0 million at September 30, 2001 as the Company's production of Trex products
grew at a faster rate than net sales. Trade accounts payable decreased from
$10.9 million at September 30, 2000 to $10.4 million at September 30, 2001 as a
result of the timing of payments relating to the Company's construction
projects.
As of September 30, 2001, the Company's indebtedness, excluding amounts
outstanding under its revolving credit facility, totaled $16.1 million and had
an overall weighted average interest rate of approximately 9.0% per annum.
On November 13, 2001, the Company and the lender revised the terms of the
Company's bank credit facility, primarily to increase the maximum amount of
borrowings available to the Company, restructure the form of borrowings, and
modify the term of the facility. The terms of the revised credit agreement
provide for borrowings under a revolving credit facility of up to $17.0 million
for working capital and general corporate purposes through January 31, 2003.
Amounts drawn under the revolving credit
12
agreement bear interest at an annual rate equal to LIBOR plus 3.00% through
June 30, 2002 and LIBOR plus 4.00% thereafter, and are subject to a borrowing
base consisting of accounts receivable and finished goods inventories. The
revised agreement also provides for a $58.0 million term loan, with scheduled
principal reductions of $5.0 million on each of March 1, April 1, May 1, June 1
and July 1, 2002. The remaining principal balance and accrued interest on the
term loan will be payable in full on January 31, 2003. Amounts drawn under the
term loan up to $33.0 million bear interest at an annual rate equal to LIBOR
plus 3.00% through June 30, 2002 and LIBOR plus 4.00% thereafter. Amounts drawn
under the term loan in excess of $33.0 million bear interest at an annual rate
equal to LIBOR plus 5.00%. As of the date of this report, the Company has drawn
down $58.0 million under the term loan. In connection with the revised
agreement, the maturity dates of the Company's real estate mortgage loans with
this lender were modified and the interest rates on these loans were increased
by 200 basis points through June 30, 2002 and by 300 basis points thereafter.
The mortgage loans will be payable in full on January 31, 2003 or, if earlier,
on the date on which the term loan and revolving credit facility are repaid,
subject to an extension of such maturity dates until January 31, 2005 if the
Company meets certain conditions. The revised agreement, which was effective as
of September 30, 2001, contains restrictive and financial covenants, and
borrowings under the agreement are secured by a lien on substantially all of the
Company's assets. In connection with the revised agreement, the Company issued
the lender a warrant exercisable until January 31, 2005 to purchase up to
707,557 shares of the Company's common stock at a price per share equal to the
average of the last sale price of the common stock on the New York Stock
Exchange for the 20 consecutive trading days beginning on October 30, 2001. The
lender's right to purchase one-half of those shares will automatically terminate
if the Company repays the revolving credit facility and term loan and an
outstanding letter of credit on or before June 30, 2002. Before the foregoing
revisions to the credit agreement, the Company was not in compliance with
certain requirements of the agreement, including covenants that require the
Company to maintain minimum leverage and capitalization ratios and to reduce its
outstanding borrowings under the credit facility to $50 million as of a
specified date. As a result of such non-compliance, the Company was also in
violation of certain of its mortgage loans with a total balance of approximately
$9.9 million as of September 30, 2001. The revision of the credit agreement
eliminated such non-compliance as of September 30, 2001 under both the credit
facility and such mortgage loans.
Capital expenditures during the 2001 nine-month period totaled $29.9 million and
for the balance of 2001 are expected to total approximately $2.1 million. The
Company is currently utilizing six of its 15 available production lines,
representing approximately 40% of its production capacity. The nine other
production lines can resume operation at nominal expense. The Company has
temporarily halted a substantial portion of its capital projects to preserve
capital. The Company believes that cash flow from operations and borrowings
expected to be available under the Company's bank credit facility will provide
sufficient funds to enable the Company to continue its business as currently
planned and meet scheduled debt service obligations for 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 products
and evolving market and economic conditions. The Company may determine that it
is necessary or desirable to obtain financing for such requirements through the
issuance of debt or equity securities. Debt financing would increase the
leverage of the Company, while equity financing may dilute the ownership of the
Company's stockholders. There can be no assurance as to whether, or as to the
terms on which, the Company will be able to obtain such financing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary existing 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 and term loan facilities and
interest rate swap agreements with respect to its other debt. Amounts drawn
under the Company's revolving credit and term loan facilities bear interest at
annual rates between LIBOR plus 3.0% and LIBOR plus 5.0%. As of September 30,
2001, pursuant to interest rate swap agreements on its variable-rate mortgage
debt, the Company had effectively fixed its interest rate exposure at a rate of
9.0% on $16.1 million of such variable-rate debt.
The Company does not have any material foreign currency forward contracts or
commodity contracts and does not have any material foreign currency exposure.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in the Company's report on Form 10-Q for the quarter ended June 30,
2001, commencing on or about July 11, 2001, four purported class action lawsuits
(the "Class Actions") were filed in the United States District Court for the
Western District of Virginia naming as defendants Trex Company, Inc. and certain
directors and officers of the Company, including Robert G. Matheny, the
President and a director of the Company, Roger A. Wittenberg, the Executive Vice
President of Technical Operations and Materials Sourcing and a director of the
Company, and Anthony J. Cavanna, the Executive Vice President, Chief Financial
Officer and a director of the Company. The plaintiffs in the lawsuits purport to
represent a class of purchasers of the Company's common stock between
November 2, 2000 and June 18, 2001. The complaints, one of which since has been
dismissed voluntarily, principally allege that the Company and certain directors
and officers of the Company violated Sections 10(b) and 20(a) of, and Rule 10b-5
under, the Securities Exchange Act of 1934 by, among other things, making false
and misleading public statements concerning the Company's operating and
financial results and expectations and by filing misleading and inaccurate
financial statements with the Securities and Exchange Commission. They also
allege that Mr. Matheny and Mr. Wittenberg sold shares of the Company's common
stock during a period in which the price of the common stock was inflated
artificially due to the purportedly misleading statements. The plaintiffs in the
lawsuits seek unspecified monetary damages together with any other relief
permitted by law, equity and federal statutory provisions identified in the
complaints. The Company believes that the lawsuits are without merit and intends
to vigorously defend these lawsuits and any other similar lawsuits that may be
served on the Company.
On or about September 21, 2001, Trex Company, Inc. was named in a related
complaint filed in the Circuit Court for the City of Winchester, Virginia (the
"Bennett Complaint"). The Bennett Complaint purports to assert a derivative suit
for the benefit of the Company against each of its directors. It alleges that
during the same period at issue in the Class Actions and in violation of
applicable state and/or federal laws, the individual defendants caused the
Company to issue materially misleading disclosures in order to inflate the
Company's common stock price and permit insider trading by two of the individual
defendants, Mr. Matheny and Mr. Wittenberg. The Bennett Complaint further
alleges that the individual defendants thereby exposed the Company to potential
damages in connection with the Class Actions. The Bennett Complaint seeks a
constructive trust in favor of the Company over the profits received from the
allegedly improper insider sales, as well as an unspecified amount of damages
allegedly sustained by the Company, together with attorneys' fees, costs and
expenses. No damages or other relief are sought from the Company. On October 19,
2001, the Bennett Complaint was removed to the federal court in which the
related Class Actions are pending.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
The information set forth in this report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" is incorporated by reference in this Item.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The Company files herewith the following exhibits:
14
10.1 Second Amended and Restated Credit Agreement, dated as of
September 30, 2001, among TREX Company, LLC, Trex Company, Inc.,
and First Union National Bank.
10.2 Security Agreement, dated as of September 30, 2001, among TREX
Company, LLC, Trex Company, Inc., and First Union National Bank.
10.3 Deed of Trust, Security Agreement and Assignment of Leases and
Rents, dated as of September 30, 2001, granted by TREX Company,
LLC to Western Title Company, Inc. securing First Union National
Bank.
10.4 Modified Deed of Trust, Security Agreement and Assignment of
Leases and Rents, dated as of September 30, 2001, granted by
TREX Company, LLC to TRSTE, Inc. securing First Union National
Bank.
10.5 $5,940,000 Amended and Restated Promissory Note, dated
September 30, 2001, made by TREX Company, LLC and Trex Company,
Inc. payable to First Union National Bank.
10.6 $1,035,000 Amended and Restated Promissory Note, dated
September 30, 2001, made by TREX Company, LLC and Trex Company,
Inc. payable to First Union National Bank.
10.7 $3,780,000 Amended and Restated Promissory Note, dated
September 30, 2001, made by TREX Company, LLC and Trex Company,
Inc. payable to First Union National Bank.
10.8 $58,000,000 Promissory Note, dated September 30, 2001, made by
TREX Company, LLC and Trex Company, Inc. payable to First Union
National Bank.
10.9 Registration Rights Agreement, dated as of November 13, 2001,
among Trex Company, Inc., First Union National Bank and the
other Holders from time to time thereafter.
10.10 Trex Company, Inc. Common Stock Purchase Warrant, dated November
13, 2001, issued to First Union National Bank.
(b) The following Current Report on Form 8-K was filed by the
Company during the period covered by this report:
Date of Report Item Covered
-------------- ------------
September 18, 2001 Item 5 (termination of land purchase contract
for prospective third plant site)
15
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, 2001 By: /s/ Anthony J. Cavanna
----------------------------------
Anthony J. Cavanna, Executive Vice
President and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
16
Exhibit Index
Number Exhibit Description
- ------ -------------------
10.1 Second Amended and Restated Credit Agreement, dated as of September 30,
2001, among TREX Company, LLC, Trex Company, Inc., and First Union
National Bank.
10.2 Security Agreement, dated as of September 30, 2001, among TREX Company,
LLC, Trex Company, Inc., and First Union National Bank.
10.3 Deed of Trust, Security Agreement and Assignment of Leases and Rents,
dated as of September 30, 2001, granted by TREX Company, LLC to Western
Title Company, Inc. securing First Union National Bank.
10.4 Modified Deed of Trust, Security Agreement and Assignment of Leases and
Rents, dated as of September 30, 2001, granted by TREX Company, LLC to
TRSTE, Inc. securing First Union National Bank.
10.5 $5,940,000 Amended and Restated Promissory Note, dated September 30,
2001, made by TREX Company, LLC and Trex Company, Inc. payable to First
Union National Bank.
10.6 $1,035,000 Amended and Restated Promissory Note, dated September 30,
2001, made by TREX Company, LLC and Trex Company, Inc. payable to First
Union National Bank.
10.7 $3,780,000 Amended and Restated Promissory Note, dated September 30,
2001, made by TREX Company, LLC and Trex Company, Inc. payable to First
Union National Bank.
10.8 $58,000,000 Promissory Note, dated September 30, 2001, made by TREX
Company, LLC and Trex Company, Inc. payable to First Union National
Bank.
10.9 Registration Rights Agreement, dated as of November 13, 2001, among
Trex Company, Inc., First Union National Bank and the other Holders
from time to time thereafter.
10.10 Trex Company, Inc. Common Stock Purchase Warrant, dated November 13,
2001, issued to First Union National Bank.
17