SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock, par value $.01 per share,
outstanding at May 1, 2002 was 14,283,700 shares.
TREX COMPANY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31,
2001 and March 31, 2002 (unaudited) .............................. 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2001 and 2002 (unaudited) ........... 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2002 (unaudited) ........... 5
Notes to Condensed Consolidated Financial Statements for
the Three Months Ended March 31, 2001 and 2002 (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 ....... 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................. 13
Signatures
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREX COMPANY, INC.
Condensed Consolidated Balance Sheets
December 31, March 31,
2001 2002
------------ -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ -- $ --
Trade accounts receivable ................................................ 2,507,000 11,278,000
Inventories .............................................................. 33,168,000 14,257,000
Prepaid expenses and other assets ........................................ 1,306,000 3,167,000
Income tax receivable .................................................... 1,137,000 --
Deferred income taxes .................................................... 1,946,000 1,946,000
----------- -----------
Total current assets ..................................................... 40,064,000 30,648,000
----------- -----------
Property, plant, and equipment, net ....................................... 137,223,000 135,786,000
Goodwill assets, net ...................................................... 6,837,000 6,837,000
Other ..................................................................... 513,000 438,000
----------- -----------
Total assets .............................................................. $184,637,000 $173,709,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ................................................... $ 9,495,000 $ 8,730,000
Accrued expenses ......................................................... 630,000 1,534,000
Income taxes payable ..................................................... -- 2,433,000
Other current liabilities ................................................ 964,000 981,000
Line of credit ........................................................... -- 672,000
Debt-related derivatives ................................................. -- 634,000
Mortgages ................................................................ 759,000 9,871,000
Term loan ................................................................ 25,000,000 47,986,000
Debt discount ............................................................ -- (2,380,000)
----------- -----------
Total current liabilities ................................................ 36,848,000 70,461,000
----------- -----------
Deferred income taxes ..................................................... 7,800,000 8,249,000
Line of credit ............................................................ 12,153,000 --
Debt-related derivatives .................................................. 1,381,000 462,000
Mortgages ................................................................. 15,196,000 5,892,000
Long-term debt ............................................................ 32,986,000 --
Debt discount ............................................................. (3,712,000) --
----------- -----------
Total liabilities ........................................................ 102,652,000 85,064,000
----------- -----------
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; 14,155,083 and 14,277,912 shares
issued and outstanding at December 31, 2001 and
March 31, 2002, respectively ............................................ 142,000 143,000
Additional capital ....................................................... 46,079,000 48,970,000
Retained earnings ........................................................ 36,620,000 43,038,000
Deferred compensation .................................................... -- (2,827,000)
Accumulated other comprehensive net loss ................................. (856,000) (679,000)
----------- -----------
Total stockholders' equity ............................................... 81,985,000 88,645,000
----------- -----------
Total liabilities and stockholders' equity ................................ $184,637,000 $173,709,000
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED).
3
TREX COMPANY, INC.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended March 31,
------------------------------
2001 2002
----------- -----------
Net sales .................................................................... $ 42,196,000 $ 51,996,000
Cost of sales ................................................................ 22,978,000 32,034,000
----------- -----------
Gross profit ................................................................. 19,218,000 19,962,000
Selling, general and administrative expenses ................................. 6,403,000 7,136,000
----------- -----------
Income from operations ....................................................... 12,815,000 12,826,000
Interest expense, net ........................................................ (465,000) (2,470,000)
----------- ------------
Income before taxes .......................................................... 12,350,000 10,356,000
Income taxes ................................................................. 4,695,000 3,936,000
----------- -----------
Net income ................................................................... $ 7,655,000 $ 6,420,000
=========== ===========
Basic earnings per common share .............................................. $ 0.54 $ 0.45
=========== ===========
Weighted average basic shares outstanding .................................... 14,136,786 14,157,715
=========== ===========
Diluted earnings per common share ............................................ $ 0.54 $ 0.45
=========== ===========
Weighted average diluted shares outstanding .................................. 14,172,064 14,373,248
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED).
4
TREX COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
-----------------------------
2001 2002
------------ ------------
OPERATING ACTIVITIES
Net income .................................................................... $ 7,655,000 $ 6,420,000
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Deferred income taxes ........................................................ 430,000 449,000
Depreciation and amortization ................................................ 1,894,000 2,206,000
Amortization of debt discount ................................................ -- 1,332,000
Changes in operating assets and liabilities:
Trade accounts receivable ................................................ (16,743,000) (8,771,000)
Inventories .............................................................. 1,461,000 18,911,000
Prepaid expenses and other assets ........................................ 71,000 (1,861,000)
Trade accounts payable ................................................... (7,403,000) (765,000)
Accrued expenses ......................................................... (800,000) 904,000
Income taxes payable ..................................................... 4,156,000 3,570,000
Other current liabilities ................................................ 472,000 5,000
----------- -----------
Net cash (used in) provided by operating activities .......................... (8,807,000) 22,400,000
----------- -----------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment ................................ (9,997,000) (770,000)
----------- -----------
Net cash used in investing activities ......................................... (9,997,000) (770,000)
----------- -----------
FINANCING ACTIVITIES
Principal payments under mortgages and term loans ............................. (174,000) (10,192,000)
Borrowings under line of credit ............................................... 35,978,000 14,028,000
Principal payments under line of credit ....................................... (17,050,000) (25,509,000)
Proceeds from exercise under employee stock purchase and option plans ......... 50,000 43,000
----------- -----------
Net cash provided by (used in) financing activities ........................... 18,804,000 (21,630,000)
----------- ------------
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 ....................................................... $ 1,272,000 $ 1,004,000
Cash paid for income taxes ................................................... $ 112,000 $ 24,000
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED).
5
TREX COMPANY, INC.
Notes to Condensed Consolidated Financial Statements for the Three Months Ended
March 31, 2001 and 2002 (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, par value $.01 per share (the "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 accounting principles generally accepted in the
United States 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 accounting principles generally accepted in the United
States 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 period ended March 31, 2002 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 audited
consolidated financial statements as of December 31, 2000 and 2001 and for each
of the three years in the period ended December 31, 2001 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, 2001 March 31, 2002
----------------- ---------------
(unaudited)
Finished goods ................................ $27,236,000 $ 8,460,000
Raw materials ................................. 5,932,000 5,797,000
----------- -----------
$33,168,000 $14,257,000
=========== ===========
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and costs. Since inventory levels and costs
are subject to factors beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
4. DEBT
On November 13, 2001, the Company and the lender amended the terms of the
Company's senior 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. As of March 31, 2002, the borrowing
base totaled approximately $14.4 million. 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
6
in excess of $33.0 million bear interest at an annual rate equal to LIBOR plus
5.00%. As of March 31, 2002, $48.0 million was outstanding on the term loan
facility. 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 foregoing revisions to the senior credit agreement, the
Company issued the lender a warrant exercisable until January 31, 2005 to
purchase up to 707,557 shares of the Common Stock at $14.89 per share, the
then-current market value. The warrant relating to one-half of those shares is
not exercisable until June 30, 2002 and will only become exercisable if the
Company does not repay the revolving credit facility and term loan and an
outstanding letter of credit on or before such date. The Company has valued the
warrant at approximately $4.4 million, based on calculations using a
Black-Scholes option pricing model and applying a probability factor to
recognize that the portion of the warrant relating to one-half of the 707,557
shares may not become exercisable. The $4.4 million warrant value was
established as a debt discount in the fourth quarter of 2001 and is being
amortized into interest expense through January 31, 2003, which is the maturity
date of loans under the senior credit facility. Debt discount of $1.3 million
was amortized into interest expense in the first quarter of 2002, resulting in a
net debt discount of $2.4 million as of March 31, 2002.
5. STOCKHOLDERS' EQUITY
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended March 31,
-------------------------------
2001 2002
----------- -----------
Numerator:
Net income available to common
shareholders, basic and diluted ............................................... $ 7,655,000 $ 6,420,000
=========== ===========
Denominator:
Weighted average shares outstanding, basic .................................... 14,136,786 14,157,715
Impact of potential common shares:
Stock options ................................................................ 35,278 24,960
Warrants ..................................................................... -- 190,573
----------- -----------
Weighted average shares outstanding, diluted .................................. 14,172,064 14,373,248
=========== ===========
Basic earnings per share ....................................................... $0.54 $0.45
===== =====
Diluted earnings per share ..................................................... $0.54 $0.45
===== =====
On March 19, 2002, the Company issued 120,000 shares of restricted stock to
certain employees under the Company's 1999 Stock Option and Incentive Plan. The
shares vest in equal installments on the third, fourth and fifth anniversaries
of the date of grant. The Company recorded $2.8 million of deferred compensation
as a reduction of stockholders' equity relating to the issuance of the
restricted stock. The deferred compensation will be expensed on a straight-line
basis over the five-year vesting term. In the first quarter of 2002, the Company
recorded compensation expense of $24,000.
6. SEASONALITY
The Company's net sales and income from operations have historically varied from
quarter to quarter. Such variations are principally attributable to seasonal
trends in the demand for Trex. The Company 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 first quarter of 2000 and 2001
accounted for approximately 33.2% and 36.1% of annual sales in 2000 and 2001,
respectively. 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 mitigated the
Company's inherent seasonality, the Company's historical seasonality may not be
a reliable indicator of future seasonality.
7
7. NEW ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("FAS") 141, "Business Combinations," and FAS 142,
"Goodwill and Other Intangible Assets." FAS 141 requires business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting. FAS 141 also specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill. FAS 142
requires that goodwill and certain intangibles no longer be amortized, but
instead be tested for impairment at least annually. The adoption of FAS 141 had
no impact on the Company's results of operations or financial condition. No
impairment of goodwill resulted from the adoption of FAS 142. However, as a
result of the adoption of FAS 142, amortization expense decreased by $0.2
million in the current quarter. The pro forma effect of applying FAS 142 to the
quarter ended March 31, 2001 would have been to decrease amortization expense by
approximately $0.2 million and would result in basic and diluted earnings per
share of $.55.
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 Trex; the Company's lack of product
diversification; the Company's plan to increase production levels; the Company's
current dependence on its three 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 investments and ability to refinance
its indebtedness due January 31, 2003; 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 21, 2002.
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 blocks to cover and protect concrete
floors in heavy industrial plants, 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 primary component of selling,
general and administrative expenses is branding and other sales and marketing
costs. 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 experienced growth in net sales each fiscal year from 1996, when it
began operations, through 2000. The net sales increase resulted primarily from a
growth in sales volume. From time to time since 1996, customer demand for Trex
exceeded the Company's manufacturing capacity. The constraints on the Company's
capacity during these periods limited the rate of the Company's net sales
growth. Because of these constraints, the Company had to allocate its product
supply to its network of wholesale distributors and retail dealers. In response
to this allocation practice, the Company's distributors and dealers generally
stockpiled their inventories of Trex to meet anticipated customer demand.
In 1999, 2000 and 2001, the Company made capital expenditures totaling $121.5
million, principally to add production lines and increase the size of its
facilities to accommodate the new lines. The resulting production capacity
increases enabled the Company, beginning in the third quarter of 2000, to
eliminate its historical allocation of product supply. As a result of the
termination of the Company's allocation practice in 2000, and adverse economic
conditions in 2001, the Company's distributors and dealers generally reduced
their inventories of Trex from levels built up as a result of stockpiling in
prior years. Because distributors and dealers were able to meet much of the
customer demand for Trex from their existing inventories, the Company
experienced a decrease in new product orders compared to the prior year.
In response to these developments in 2001, the Company took a number of actions
to reduce its finished product inventories and conserve working capital. The
Company curtailed its production capacity by temporarily suspending operation of
nine of its production lines. The Company ended the year with six production
lines in operation, resulting in a capacity utilization of approximately 40%. In
addition, the Company suspended construction of an additional seven production
lines at various stages of completion and suspended construction of a new
plastic processing plant. In connection with the curtailment of production
capacity, the Company terminated 89 employees in the second half of 2001,
including 81 employees in its manufacturing operations.
9
Three Months Ended March 31, 2002 Compared with Three Months Ended March 31,
2001
Net Sales
Net sales in the three months ended March 31, 2002 (the "2002 quarter")
increased 23.2 % to $52.0 million from $42.2 million in the three months ended
March 31, 2001 (the "2001 quarter"). The increase in net sales was attributable
to a growth in sales volume as a result of an increase in demand from dealers
and distributors and, to a lesser extent, an increase in the number of dealer
outlets. By the end of 2001, the Company's finished goods inventory had
increased substantially over prior levels as a result of a reduction in new
product orders from distributors and dealers following the Company's termination
of its product allocation practice in the third quarter of 2000. After
termination of production allocation, many distributors and dealers met a
significant portion of customer demand for Trex by reducing their existing
inventories, which they had stockpiled in prior quarters. In the 2002 quarter,
the Company's finished goods inventory decreased nearly 70% as these stockpiles
of inventory at the dealer and distributor levels were significantly reduced and
new orders resumed. The number of dealer outlets increased to approximately
2,900 at March 31, 2002 from approximately 2,800 at March 31, 2001.
Cost of Sales
Cost of sales increased 39.4% to $32.0 million in the 2002 quarter from $23.0
million in the 2001 quarter. The increase in costs of sales was attributable to
increased sales volume and, to a lesser extent, higher manufacturing overhead
costs. Cost of sales as a percentage of net sales increased to 61.8% in the 2002
quarter from 54.5% in the 2001 quarter. The increase was attributable to the
underabsorption of fixed operating costs that resulted from the relatively low
capacity utilization during the 2002 quarter.
Gross Profit
Gross profit increased 3.9% to $20.0 million in the 2002 quarter from $19.2
million in the 2001 quarter reflecting the higher sales volume and higher
manufacturing costs in the 2002 quarter. As a percentage of net sales, gross
profit decreased to 38.4% in the 2002 quarter from 45.5% in the 2001 quarter, as
a result of the underabsorption of fixed operating costs that resulted from the
relatively low capacity utilization during the 2002 quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 11.5% to $7.1 million in
the 2002 quarter from $6.4 million in the 2001 quarter. The higher selling,
general and administrative expenses primarily resulted from an increase of $0.5
million in corporate personnel expenses and related hiring costs necessary to
support the Company's growth and an increase of $0.1 million in expense incurred
in the Company's marketing and branding activities. Expenses relating to
information technology increased $0.1 million as the Company continued
installation of a new enterprise resource planning system. As a percentage of
net sales, selling, general and administrative expenses decreased to 13.7% in
the 2002 quarter from 15.2% in the 2001 quarter.
Interest Expense
Net interest expense increased to $2.5 million in the 2002 quarter from $0.5
million in the 2001 quarter. The increase in net interest expense primarily
reflected the non-cash amortization into interest expense of approximately $1.3
million of debt discount in connection with the modification of the Company's
senior credit facility as of September 30, 2001 and higher interest rates
incurred on borrowings under the credit facility. The Company did not capitalize
any interest on construction in process in the 2002 quarter. In the 2001
quarter, the Company capitalized $0.9 million of interest on construction in
process.
Provision for Income Taxes
The Company recorded a provision for income taxes of $3.9 million in the 2002
quarter compared to a provision of $4.7 million in the 2001 quarter. Both
provisions reflect a 38% combined effective tax rate.
Liquidity and Capital Resources
The Company's total assets decreased from $184.6 million at December 31, 2001 to
$173.7 million at March 31, 2002. Receivables increased by $8.8 million as a
result of the increased sales volume in the 2002 quarter over the fourth quarter
of 2001. Inventories decreased by $18.9 million from December 31, 2001 to March
31, 2002 due to the increased sales volume in the 2002 quarter, as the Company's
net sales of Trex grew at a faster rate than production. Property, plant and
equipment, net, decreased $1.4 million. During the third quarter of 2001, the
Company temporarily halted substantially all of its capital projects to improve
management of its investments in inventory and to conserve working capital. At
March 31, 2002, the Company's construction in process totaled
10
approximately $42.8 million, which represented an increase of $0.4 million from
the level at December 31, 2001. Trade accounts payable decreased $0.8 million as
a result of the timing of payments relating to the general operations of the
Company. The Company financed these activities in the 2002 quarter from
operating cash flows.
The Company has financed its operations and growth primarily with cash flows
from operations, borrowings under its credit facility and mortgage loans,
operating leases and normal trade credit terms.
The Company's cash flow provided by operating activities for the 2002 quarter
was $22.4 million compared to cash flow used in operating activities of $8.8
million for the 2001 quarter . Trade accounts receivable, net, decreased from
$27.3 million at March 31, 2001 to $11.3 million at March 31, 2002. Inventories
decreased from $21.6 million at March 31, 2001 to $14.3 million at March 31,
2002, as the Company's net sales of Trex grew at a faster rate than production.
Trade accounts payable decreased from $9.7 million at March 31, 2001 to $8.7
million at March 31, 2002 as a result of the timing of payments relating to the
general operations of the Company.
As of March 31, 2002, the Company's indebtedness totaled $64.4 million and had
an overall weighted average interest rate of approximately 6.2% per annum. As of
December 31, 2001, the Company's indebtedness totaled $86.1 million and had an
overall weighted average interest rate of approximately 6.8% per annum.
Effective interest rates are substantially higher than these rates due to the
non-cash amortization into interest expense of the debt discount associated with
the issuance of a warrant to the lender under the Company's bank credit facility
in connection with the revisions to the facility referred to below.
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. For information on the terms of the revised
facility, see note 4 to the condensed consolidated financial statements included
elsewhere in this report.
The Company's sources of short-term funding consist of its $17.0 million
revolving credit facility and its term loan facility. The Company's ability to
borrow under the revolving credit facility is tied to a borrowing base that
consists of certain receivables and inventories. As of March 31, 2002, the
Company's borrowing base was $14.4 million, and $0.7 million was outstanding
under the revolving credit facility. The term loan facility, of which $48.0
million was outstanding as of March 31, 2002, has additional scheduled principal
payments in 2002 of $5.0 million on each of May 1, June 1 and July 1, 2002.
To remain in compliance with its senior credit facility covenants, the Company
must maintain minimum financial ratios based on its debt, capital and earnings
before interest, taxes and amortization ("EBITDA"). The following table
summarizes these financial covenant ratios:
Company Ratio as of
Ratio Covenant March 31, 2002
- ----- -------- -----------------
Trailing twelve month EBITDA Minimum of $22.0 million during the period from $26.0 million
October 1, 2001 through December 31,
2001; minimum of $20.0 million during
the period from January 1, 2002 through
March 31, 2002; minimum of $25.0
million thereafter
Debt to capital Maximum of 55.0% 42.1%
Debt to trailing twelve month Maximum of 4.0:1.0 through June 30, 2002; 2.5:1.0
EBITDA maximum of 3.0:1.0 thereafter
The Company's ability to pay down its term loan, borrow under its revolving
credit facility and maintain compliance with the related financial covenants is
dependent primarily on its ability to generate substantial cash flow from
operations. The generation of operating cash flow is subject to the risks of the
Company's business.
Capital expenditures in the 2002 quarter totaled $0.8 million. The Company
currently estimates that its capital requirements in 2002 will total
approximately $5.5 million, since the Company expects that increased utilization
of its existing capacity will be sufficient to meet the demand for Trex in 2002.
The Company plans to use its capital expenditures in 2002 primarily for process
and productivity improvements, to complete a plastic processing plant at its
Winchester, Virginia facility, and to complete the installation of its
enterprise resource planning system. The Company expects that its capital
requirements will be significantly higher in 2003 and subsequent years as the
Company completes its construction in process and then invests in additional
production lines and facilities to meet an anticipated increase in the demand
for Trex.
The Company believes that cash flow from operations and borrowings expected to
be available under the Company's existing revolving credit facility will provide
sufficient funds to enable the Company to fund its planned capital expenditures,
make scheduled
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principal payments under its term loan, meet its other cash requirements and
maintain compliance with terms of its borrowing agreements for at least the next
12 months. Thereafter, significant capital expenditures may be required to
provide increased capacity to meet the Company's expected growth in demand for
its products. Of its aggregate capital expenditures of $121.5 million for the
three-year period ended December 31, 2001, the Company funded $43.8 million from
cash flow from operations and $77.7 million from proceeds of financing
activities, including net proceeds of the Company's initial public offering and
borrowings under various loan and credit facilities. The Company currently
expects that it will fund its future capital expenditures from operations and
financing activities. 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 Company's level of indebtedness,
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 major market risk exposure is to changing interest rates. The
Company's policy is to manage interest rates through the use of a combination of
fixed and floating-rate debt. The Company uses interest rate swap contracts to
manage its exposure to fluctuations in the interest rates on its floating-rate
mortgage debt, all of which is based on LIBOR. At March 31, 2002, the Company
had effectively capped its interest rate exposure at approximately 9.0% on
approximately $15.8 million of its floating-rate debt. A change of one
percentage point in the interest rates applicable to the Company's $48.6 million
of variable-rate debt not subject to an interest-rate swap agreement at March
31, 2002 would result in a fluctuation of approximately $0.6 million in the
Company's annual interest expense.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The Company files herewith the following exhibits:
10.1 Form of Restricted Stock Agreement Under Trex Company, Inc.
1999 Stock Option and Incentive Plan.
(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
- -------------- ------------
February 25, 2002 Item 5 (press release reporting unaudited financial
results for the fourth quarter and year ended
December 31, 2001)
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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.
Date: May 10, 2002 By: /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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