SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 30, 2002 was 14,288,044 shares.
TREX COMPANY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2001 and
June 30, 2002 (unaudited) ................................................ 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2001 and 2002 (unaudited) .......................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and 2002 (unaudited) ................................. 5
Notes to Condensed Consolidated Financial Statements for the Three
and Six Months Ended June 30, 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 ............... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders ...................... 14
Item 6. Exhibits and Reports on Form 8-K ......................................... 14
Signatures
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREX COMPANY, INC.
Condensed Consolidated Balance Sheets
December 31, June 30,
2001 2002
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ -- 5,729,000
Trade accounts receivable ................................................... 2,507,000 15,335,000
Inventories ................................................................. 33,168,000 9,574,000
Prepaid expenses and other assets ........................................... 1,306,000 2,485,000
Income tax receivable ....................................................... 1,137,000 --
Deferred income taxes ....................................................... 1,946,000 1,946,000
------------ -----------
Total current assets ........................................................ 40,064,000 35,069,000
Property, plant, and equipment, net .......................................... 137,223,000 133,448,000
Goodwill assets, net ......................................................... 6,837,000 6,837,000
Other ........................................................................ 513,000 1,544,000
------------ -----------
Total assets ................................................................. $184,637,000 176,898,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ...................................................... $ 9,495,000 7,670,000
Accrued expenses ............................................................ 630,000 3,805,000
Income taxes payable ........................................................ -- 1,743,000
Other current liabilities ................................................... 964,000 930,000
Mortgages ................................................................... 759,000 909,000
Term loan ................................................................... 25,000,000 --
------------ -----------
Total current liabilities ................................................... 36,848,000 15,057,000
------------ -----------
Deferred income taxes ........................................................ 7,800,000 8,328,000
Line of credit ............................................................... 12,153,000 --
Debt-related derivatives ..................................................... 1,381,000 1,749,000
Mortgages .................................................................... 15,196,000 17,700,000
Long-term debt ............................................................... 32,986,000 40,000,000
Debt discount ................................................................ (3,712,000) --
------------ -----------
Total liabilities ........................................................... 102,652,000 82,834,000
------------ -----------
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 14,284,823 shares
issued and outstanding at December 31, 2001 and
June 30, 2002, respectively ................................................ 142,000 143,000
Additional capital .......................................................... 46,079,000 49,020,000
Retained earnings ........................................................... 36,620,000 48,670,000
Deferred compensation ....................................................... -- (2,685,000)
Accumulated other comprehensive net loss .................................... (856,000) (1,084,000)
------------ -----------
Total stockholders' equity .................................................. 81,985,000 94,064,000
------------ -----------
Total liabilities and stockholders' equity ................................... $184,637,000 176,898,000
============ ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED).
3
TREX COMPANY, INC.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Net sales .......................................... $ 27,727,000 $ 45,924,000 $ 69,923,000 $ 97,920,000
Cost of sales ...................................... 16,060,000 21,676,000 39,038,000 53,710,000
------------ ------------ ------------ ------------
Gross profit ....................................... 11,667,000 24,248,000 30,885,000 44,210,000
Selling, general and administrative expenses ....... 10,721,000 11,823,000 17,124,000 18,959,000
------------ ------------ ------------ ------------
Income from operations ............................. 946,000 12,425,000 13,761,000 25,251,000
Interest expense, net .............................. (483,000) (3,341,000) (948,000) (5,811,000)
------------ ------------ ------------ ------------
Income before taxes ................................ 463,000 9,084,000 12,813,000 19,440,000
Income taxes ....................................... 176,000 3,454,000 4,871,000 7,390,000
------------ ------------ ------------ ------------
Net income ......................................... $ 287,000 $ 5,630,000 $ 7,942,000 $ 12,050,000
============ ============ ============ ============
Basic earnings per common share .................... $ 0.02 $ 0.40 $ 0.56 $ 0.85
============ ============ ============ ============
Weighted average basic shares outstanding .......... 14,142,087 14,162,859 14,139,451 14,160,301
============ ============ ============ ============
Diluted earnings per common share .................. $ 0.02 $ 0.39 $ 0.56 $ 0.84
============ ============ ============ ============
Weighted average diluted shares outstanding ........ 14,177,454 14,404,296 14,174,866 14,343,799
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED).
4
TREX COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30,
-------------------------------
2001 2002
-------------------------------
OPERATING ACTIVITIES
Net income ............................................................................ $ 7,942,000 $ 12,050,000
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Deferred income taxes ................................................................. 943,000 528,000
Deferred expenses ..................................................................... -- 179,000
Depreciation and amortization ......................................................... 4,017,000 4,479,000
Amortization of debt discount ......................................................... -- 3,712,000
Loss on disposal of property, plant and equipment ..................................... 16,000 248,000
Changes in operating assets and liabilities:
Trade accounts receivable ........................................................ 2,783,000 (12,828,000)
Inventories ...................................................................... (4,989,000) 23,593,000
Prepaid expenses and other assets ................................................ 284,000 (2,210,000)
Income taxes receivable .......................................................... (504,000) 1,137,000
Trade accounts payable ........................................................... (8,586,000) (1,825,000)
Accrued expenses ................................................................. (144,000) 3,175,000
Income taxes payable ............................................................. (574,000) 1,742,000
Other current liabilities ........................................................ 678,000 108,000
------------- -----------
Net cash provided by operating activities ............................................. 1,866,000 34,088,000
------------- -----------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment ........................................ (20,721,000) (952,000)
------------- -----------
Net cash used in investing activities ................................................. (20,721,000) (952,000)
------------- -----------
FINANCING ACTIVITIES
Borrowings under mortgages and term loans ............................................. -- 52,600,000
Principal payments under mortgages and term loans ..................................... (325,000) (67,932,000)
Borrowings under line of credit ....................................................... 57,809,000 --
Principal payments under line of credit ............................................... (38,772,000) (12,153,000)
Proceeds from exercise under employee stock purchase and option plans ................. 143,000 78,000
------------- -----------
Net cash provided by (used in) financing activities ................................... 18,855,000 (27,407,000)
------------- -----------
Net increase in cash and cash equivalents ............................................. -- 5,729,000
Cash and cash equivalents at beginning of period ...................................... -- --
------------- -----------
Cash and cash equivalents at end of period ............................................ $ -- $ 5,729,000
============ ===========
Supplemental Disclosure:
Cash paid for interest ............................................................... $ 618,000 $ 2,172,000
Cash paid for income taxes ........................................................... $ 5,011,000 $ 3,842,000
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED).
5
TREX COMPANY, INC.
Notes to Condensed Consolidated Financial Statements for the Three and Six
Months Ended June 30, 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 and six-month periods ended June 30, 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 (at LIFO value) consist of the following:
December 31, 2001 June 30, 2002
----------------- -------------
(unaudited)
Finished goods ........... $27,236,000 $ 3,573,000
Raw materials ............ 5,932,000 6,001,000
----------- -----------
$33,168,000 $ 9,574,000
=========== ============
An actual valuation of inventory under the LIFO (last-in, first-out) 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.
6
4. DEBT
On June 19, 2002, the Company refinanced total indebtedness of $47.6 million
outstanding under its existing senior bank credit facility and various real
estate loans. The Company refinanced this indebtedness from the proceeds of its
sale of $40 million principal amount of senior secured notes due 2009 and
borrowings under new real estate loans having a principal amount of $12.6
million. In connection with the refinancing, the Company replaced its existing
$17 million revolving credit facility with a $20 million revolving credit
facility with a new lender.
The senior secured notes, which were privately placed with institutional
investors, accrue interest at an annual rate of 8.32%. Five principal payments
of $8 million annually to retire the notes will be payable beginning on the
third anniversary of the closing date.
The new revolving credit facility and real estate loans accrue interest at
annual rates equal to LIBOR plus specified margins and mature on the third
anniversary of the closing date. The specified margins are determined based on
the Company's ratio of total consolidated debt to consolidated earnings before
interest, taxes, depreciation and amortization, as computed under the credit
facility. The specified margins for the credit facility and real estate loans
range from 1.50% to 3.25% and 1.75% to 3.50%, respectively.
Amounts drawn under the new revolving credit facility are subject to a borrowing
base consisting of accounts receivable and finished goods inventories. As of
June 30, 2002, no amount was outstanding under the revolving credit facility and
the borrowing base totaled approximately $17.5 million. As of June 30, 2002,
$18.6 million was outstanding under the real estate loans.
The new credit revolving facility and the senior secured notes contain
restrictive and financial covenants. Borrowings under these agreements are
secured by liens on substantially all of the Company's assets.
The refinancing eliminated the former lender's conditional right under an
existing warrant to purchase 353,778 shares of common stock at $14.89 per share.
Early retirement of the outstanding indebtedness resulted in a one-time non-cash
charge to interest expense of $2.4 million in the second quarter of 2002 as a
result of accelerated amortization of the remaining debt discount balance. This
debt discount was previously scheduled to be amortized through January 31, 2003.
Consistent with generally accepted accounting principles, the Company
capitalized $1.2 million of financing related expenses as deferred financing
costs in the current quarter relating to the refinancing of the Company's senior
credit facility. The deferred financing costs will be amortized over the terms
of the various debt instruments and will vary between three and seven years. In
the second quarter of 2002, the Company amortized $14,000 of such costs.
7
5. STOCKHOLDERS' EQUITY
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -----------------------------
2001 2002 2001 2002
----------- ----------- ---------- ----------
Numerator:
Net income available to common
shareholders, basic and diluted ................... $ 287,000 $ 5,630,000 $ 7,942,000 $ 12,050,000
============ =========== ============ ============
Denominator:
Weighted average shares outstanding, basic ........ 14,142,087 14,162,859 14,139,451 14,160,301
Impact of potential common shares:
Stock options .................................... 35,367 60,255 35,415 40,057
Warrants ......................................... -- 159,994 -- 132,789
Restricted ....................................... -- 21,188 -- 10,652
------------- ----------- ------------ -----------
Weighted average shares outstanding, diluted ...... 14,177,454 14,404,296 14,174,866 14,343,799
============ =========== ============ ===========
Basic earnings per share ........................... $ 0.02 $ 0.40 $ 0.56 $ 0.85
============ =========== ============ ===========
Diluted earnings per share ......................... $ 0.02 $ 0.39 $ 0.56 $ 0.84
============ =========== ============ ===========
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. For the three months and six months ended
June 30, 2002, the Company recorded compensation expense of $142,000 and
$166,000, respectively.
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 six-month period ended June 30,
2000 and 2001 accounted for approximately 64.2% and 59.8% of annual sales in
2000 and 2001, respectively.
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 for the
three months ended June 30, 2002 and $0.4 million for the six months ended June
30, 2002. The pro forma effect of applying FAS 142 for the three months ended
June 30, 2002 would have been to decrease amortization expense by approximately
$0.2 million for such three-month period and by approximately $0.4 million for
the six months ended June 30, 2002, and to result in basic and diluted earnings
per share of $0.84 and $0.83, respectively.
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 access the
capital markets; and the Company's dependence on its largest distributors to
market and sell its products. A discussion of these and other risks and
uncertainties is contained in the Company's 2001 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
overhead costs, including depreciation and freight. The largest 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 depreciation and 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.
In 2002, the Company has sought to reduce inventory levels before increasing
utilization of its production capacity. The Company's finished goods inventory
decreased to $3.6 million at June 30, 2002 from $27.2 million at December 31,
2001. During the six months ended June 30, 2002, the Company placed into
operation six production lines whose operations had been suspended in 2001. At
June 30, 2002, the Company had a total of 12 production lines in operation,
representing a capacity utilization of approximately 75%.
9
Three Months Ended June 30, 2002 Compared with Three Months Ended June 30, 2001
Net Sales
Net sales in the three months ended June 30, 2002 (the "2002 quarter") increased
65.6% to $45.9 million from $27.7 million in the three months ended June 30,
2001 (the "2001 quarter"). The increase in net sales was primarily 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 sales prices. 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 six months ended June 30, 2002, the
Company's finished goods inventory decreased nearly 87.0% as these stockpiles of
inventory at the dealer and distributor levels were significantly reduced and
new orders resumed. The number of dealer outlets remained at approximately 2,900
at June 30, 2002 and June 30, 2001.
Cost of Sales
Cost of sales increased 35.0% to $21.7 million in the 2002 quarter from $16.1
million in the 2001 quarter. The increase in cost of sales is attributed to
increased net sales volume offset by lower unit manufacturing costs. Cost of
sales as a percentage of net sales decreased to 47.2% in the 2002 quarter from
57.9% in the 2001 quarter.
Gross Profit
Gross profit increased 107.8% to $24.2 million in the 2002 quarter from $11.7
million in the 2001 quarter because of the increased net sales volume enhanced
by higher pricing and lower unit manufacturing costs in the 2002 quarter. As a
percentage of net sales, gross profit increased to 52.8% in the 2002 quarter
from 42.1% in the 2001 quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 10.3% to $11.8 million in
the 2002 quarter from $10.7 million in the 2001 quarter. The higher selling,
general and administrative expenses primarily resulted from an increase of $2.0
million in corporate personnel expenses, including medical, profit sharing,
bonuses and insurance expenses. The effects of these increases were offset in
part by a decrease of $1.7 million in expense incurred in the Company's
marketing activities. Legal expenses increased to $0.8 million in the 2002
quarter from $0.1 million in the 2001 quarter. As a percentage of net sales,
selling, general and administrative expenses decreased to 25.7% in the 2002
quarter from 38.7% in the 2001 quarter.
Interest Expense
Net interest expense increased to $3.3 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 $2.4
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 $0.7 million of interest on construction in
process.
Provision for Income Taxes
The Company recorded a provision for income taxes of $3.5 million in the 2002
quarter compared to a provision of $0.2 million in the 2001 quarter. Both
provisions reflect a 38% combined effective tax rate.
10
Six Months Ended June 30, 2002 Compared with Six Months Ended June 30, 2001
Net Sales
Net sales in the six months ended June 30, 2002 (the "2002 six-month period")
increased 40.0% to $97.9 million from $69.9 million in the six months ended June
30, 2001 (the "2001 six-month period"). 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 sales
prices. 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 six-month period, the Company's
finished goods inventory decreased nearly 87.0% as these stockpiles of inventory
at the dealer and distributor levels were significantly reduced and new orders
resumed. The number of dealer outlets remained at approximately 2,900 at June
30, 2002 and June 30, 2001.
Cost of Sales
Cost of sales increased 37.6% to $53.7 million in the 2002 six-month period from
$39.0 million in the 2001 six-month period. The increase in cost of sales is
attributed to increased net sales volume and, to a lesser extent, higher
manufacturing unit costs. Cost of sales as a percentage of net sales decreased
to 54.8% in the 2002 six-month period from 55.8% in the 2001 six-month period.
Gross Profit
Gross profit increased 43.1% to $44.2 million in the 2002 six-month period from
$30.9 million in the 2001 six-month period because of the increased net sales
volume and offset by higher manufacturing costs in the 2002 six-month period. As
a percentage of net sales, gross profit increased to 45.1% in the 2002 six-month
period from 44.1% in the 2001 six-month period as a result of increased sales
prices offset by higher manufacturing costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 10.7% to $19.0 million in
the 2002 six-month period from $17.1 million in the 2001six-month period. The
higher selling, general and administrative expenses primarily resulted from an
increase of $2.2 million in corporate personnel expenses, including medical,
profit sharing, bonuses and insurance expenses. The effects of these increases
were offset in part by a decrease of $1.7 million in expense incurred in the
Company's marketing activities. Legal expenses increased to $1.3 million in the
2002 six-month period from $0.2 million in the 2001 six-month period. As a
percentage of net sales, selling, general and administrative expenses decreased
to 19.4% in the 2002 six-month period from 24.5% in the 2001 six-month period.
Interest Expense
Net interest expense increased to $5.8 million in the 2002 six-month period from
$0.9 million in the 2001 six-month period. The increase in net interest expense
primarily reflected the non-cash amortization into interest expense of
approximately $3.7 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 six-month
period. In the 2001 six-month period, the Company capitalized $1.5 million of
interest on construction in process.
Provision for Income Taxes
The Company recorded a provision for income taxes of $7.4 million in the 2002
six-month period compared to a provision of $4.9 million in the 2001 six-month
period. Both provisions reflect a 38% combined effective tax rate.
11
Liquidity and Capital Resources
The Company's cash flow provided by operating activities for the 2002 six-month
period was $34.1 million compared to cash flow provided by operating activities
of $1.9 million for the 2001 six-month period. Trade accounts receivable, net,
increased from $7.8 million at June 30, 2001 to $15.3 million at June 30, 2002.
The Company's inventories decreased from $28.0 million at June 30, 2001 to $9.6
million at June 30, 2002, as the Company's net sales of Trex grew at a faster
rate than production. Trade accounts payable decreased from $8.5 million at June
30, 2001 to $7.7 million at June 30, 2002 as a result of the timing of payments
relating to the general operations of the Company.
As of June 30, 2002, the Company's indebtedness totaled $60.4 million. For the
2002 quarter, the annualized overall weighted average interest rate of such
indebtedness was approximately 6.2%. As of December 31, 2001, the Company's
indebtedness totaled $87.5 million and for 2001 the annualized overall weighted
average interest rate of such indebtedness was approximately 6.8%. Interest
expense was substantially higher than these rates due to the non-cash
amortization into interest expense of the debt discount associated with the
issuance of a common stock purchase warrant to the lender under the Company's
former bank credit facility in connection with the modification of that facility
as of September 30, 2001.
On June 19, 2002, the Company refinanced total indebtedness of $47.6 million
outstanding under its existing senior bank credit facility and various real
estate loans. The Company refinanced this indebtedness from the proceeds of its
sale of $40 million principal amount of senior secured notes due 2009 and
borrowings under new real estate loans having a principal amount of $12.6
million. In connection with the refinancing, the Company replaced its existing
$17 million revolving credit facility with a $20 million revolving credit
facility with a new lender. For information about this refinancing and terms of
the Company's principal current indebtedness, see Note 4 to the Condensed
Consolidated Financial Statements included elsewhere in this report.
The Company's principal source of short-term funding consists of its $20.0
million revolving credit 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 June 30, 2002, no amount was outstanding
under the revolving credit facility and the borrowing base totaled approximately
$17.5 million.
The Company's revolving credit facility and senior secured notes require the
Company to meet certain financial and non-financial covenants. As of June 30,
2002, the Company was in compliance with these financial and non-financial
covenants.
The Company's ability to pay down its senior secured notes, 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 six months ended June 30, 2002 totaled $0.9 million.
The Company currently estimates that its capital requirements in 2002 will total
approximately $6.0 million. The Company plans to use the majority of its capital
expenditures in 2002 to increase production capacity. The Company expects that
its capital requirements will be significantly higher in 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 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. 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.
12
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 June 30, 2002, the Company had
effectively capped its interest rate exposure at approximately 9.0% on
approximately $15.6 million of its floating-rate debt. A change of one
percentage point in the interest rates applicable to the Company's $3.0 million
of variable-rate debt not subject to an interest-rate swap agreement at June 30,
2002 would result in a fluctuation of approximately $0.03 million in the
Company's annual interest expense.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Company's Annual Report on Form 10-K for 2001, commencing on
July 11, 2001, four purported class action lawsuits were filed in the United
States District Court for the Western District of Virginia naming as defendants
the Company and Robert G. Matheny, the President and a director of the Company,
Roger A. Wittenberg, the Executive Vice President of Material Sourcing and
International Operations and a director of the Company, and Anthony J. Cavanna,
the Executive Vice President and Chief Financial Officer and a director of the
Company. The plaintiffs in these lawsuits purported to represent a class of
purchasers of the Company's securities between November 2, 2000 and June 18,
2001. The complaints, one of which was dismissed voluntarily, alleged that the
defendants violated Sections 10(b) and 20(a) of and Rule 10b-5 under the
Securities Exchange Act of 1934 by making false and misleading public statements
or omissions concerning the Company's operating and financial results,
expectations, and business and by filing misleading reports on Forms 10-Q and
10-K with the Securities and Exchange Commission. The plaintiffs sought
unspecified monetary damages together with any other relief permitted by law,
equity and federal statutory provisions identified in the complaints. The cases
were consolidated and an amended consolidated complaint, which added as a
defendant Andrew U. Ferrari, the Company's Executive Vice President of Marketing
and Business Development and a director of the Company, was filed on December
17, 2001.
On or about January 31, 2002, the defendants filed a motion to have the amended
consolidated complaint dismissed with prejudice. By a Final Order entered on May
29, 2002, a United States District Court Judge dismissed the consolidated
amended complaint. The Final Order was accompanied by a Memorandum Opinion
granting defendants' motion to dismiss the amended consolidated complaint for
failure to state a claim. In the Memorandum Opinion, the Court found that the
plaintiffs had not pleaded facts raising a strong inference that any disclosure
challenged was made with fraudulent intent or was materially misleading or
omissive.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 2002 annual meeting of stockholders on May 15, 2002.
(c) The following sets forth information regarding the sole matter voted upon
at the 2002 annual meeting. There were 14,277,912 shares of common stock
outstanding as of the record date for, and entitled to vote at, the 2002 annual
meeting.
At the annual meeting, the stockholders approved a proposal to elect each of the
nominees to the board of directors for a three-year term which will expire at
the annual meeting of stockholders in 2005. The tabulation of votes on this
proposal is as follows:
Nominees Votes For Votes Withheld
-------- --------- --------------
William H. Martin, III 13,269,248 100,356
Robert G. Matheny 13,007,039 362,565
Item 6. Exhibits and Reports on Form 8-K
(a) The Company files herewith the following exhibits:
10.1 Credit Agreement, dated as of June 19, 2002, among TREX
Company, LLC, Trex Company, Inc. and Branch Banking and Trust
Company of Virginia. Filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K filed on June 25, 2002, as amended
by the Current Report on Form 8-K/A filed on June 28, 2002,
and incorporated herein by reference.
10.2 Note Purchase Agreement, dated as of June 19, 2002, by and
among Trex Company, Inc., TREX Company, LLC and the Purchasers
listed therein. Filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on June 25, 2002, as amended by the
Current Report on Form 8-K/A filed on June 28, 2002, and
incorporated herein by reference.
10.3 Security Agreement, dated as of June 19, 2002, by and among
TREX Company, LLC, Trex Company, Inc. and Branch Banking and
Trust Company of Virginia, as collateral agent. Filed as
Exhibit 10.3 to the Company's Current Report on Form 8-K filed
on June 25, 2002, as amended by the Current Report on Form
8-K/A filed on June 28, 2002, and incorporated herein by
reference.
10.4 Intercreditor and Collateral Agency Agreement, dated as of
June 19, 2002, by and among the Noteholders named in Schedule
I therein, Branch Banking and Trust Company of Virginia, and
Branch Banking and Trust Company of
14
Virginia,as collateral agent. Filed as Exhibit 10.4 to the
Company's Current Report on Form 8-K filed on June 25, 2002,
as amended by the Current Report on Form 8-K/A filed on June
28, 2002, and incorporated herein by reference.
10.5 Credit Line Deed of Trust, dated June 19, 2002, by and among
TREX Company, LLC, as grantor, BB&T-VA Collateral Service
Corporation, as trustee, and Branch Banking and Trust Company
of Virginia and Branch Banking and Trust Company, as
noteholder. Filed as Exhibit 10.5 to the Company's Current
Report on Form 8-K filed on June 25, 2002, as amended by the
Current Report on Form 8-K/A filed on June 28, 2002, and
incorporated herein by reference.
99.1 Written Statement of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
Filed herewith.
(b) Reports on Form 8-K
(i) On June 4, 2002, the Company filed a Current Report on Form
8-K dated May 29, 2002 reporting the dismissal on May 29,
2002 of a purported securities class action lawsuit against
the Company and certain of its officers and directors
(Item 5).
(ii) On June 25, 2002, the Company filed a Current Report on Form
8-K dated June 19, 2002, which was amended by a Current
Report on Form 8-K/A filed on June 28, 2002, reporting the
completion of a refinancing of the Company's indebtedness,
issuance of senior secured notes and entry into a new senior
credit facility, and filing certain agreements relating to
these transactions (Item 5).
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.
Date: August 14, 2002 By: /s/ Anthony J. Cavanna
----------------------------------
Anthony J. Cavanna, Executive Vice
President and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
16