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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission File Number: 001-14649
Trex Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1910453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 South Cameron Street
Winchester, Virginia 22601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 678-4070
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [_]
The number of shares of the registrant's common stock, par value $.01 per share,
outstanding at November 5, 1999 was 14,120,572 shares.
TREX COMPANY, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1998 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREX COMPANY, INC.
Consolidated Balance Sheets
December 31, September 30,
1998 (*) 1999
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,200,000 $ 312,000
Trade accounts receivable 34,000 4,256,000
Inventories 6,007,000 3,155,000
Prepaid expenses and other assets 673,000 405,000
------------ ------------
Total current assets 7,914,000 8,128,000
------------ ------------
Property, plant and equipment, net 33,886,000 53,512,000
Intangible assets, net 9,298,000 8,671,000
Deferred financing charges, net 233,000 --
------------ ------------
Total assets $ 51,331,000 $ 70,311,000
============ ============
LIABILITIES AND MEMBERS' / STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,577,000 $ 3,723,000
Accrued expenses 1,086,000 1,555,000
Income taxes payable -- 1,787,000
Other current liabilities 1,314,000 702,000
Current portion of long-term debt 6,109,000 444,000
------------ ------------
Total current liabilities 11,086,000 8,211,000
Deferred income taxes -- 2,849,000
Long-term debt 26,954,000 10,887,000
------------ ------------
Total liabilities 38,040,000 21,947,000
------------ ------------
Members' / stockholders' equity:
Preferred units, 1,000 units authorized, issued and outstanding 3,000,000 --
Junior units, 4,000 units authorized, issued and outstanding 2,350,000 --
Undistributed earnings 7,941,000 --
Preferred stock, $.01 par value, 3,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $.01 par value, 40,000,000 shares authorized,
14,118,435 shares issued and outstanding -- 141,000
Additional capital -- 40,947,000
Retained earnings -- 7,276,000
------------ ------------
Total members' / stockholders' equity 13,291,000 48,364,000
------------ ------------
Total liabilities and members' / stockholders' equity $ 51,331,000 $ 70,311,000
============ ============
* The consolidated balance sheet at December 31, 1998 has been derived from the
audited financial statements of TREX Company, LLC (the Company's predecessor) at
that date, but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
3
TREX COMPANY, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
Net sales $ 12,058,000 $ 19,955,000 $ 41,386,000 $ 62,095,000
Cost of sales 6,537,000 9,358,000 19,812,000 27,554,000
------------- ------------- ------------- -------------
Gross profit 5,521,000 10,597,000 21,574,000 34,541,000
Selling, general and administrative expenses 3,199,000 3,885,000 9,883,000 14,855,000
------------- ------------- ------------- -------------
Income from operations 2,322,000 6,712,000 11,691,000 19,686,000
Interest income 160,000 30,000 302,000 63,000
Interest (expense) (758,000) (211,000) (2,156,000) (1,331,000)
------------- ------------- ------------- -------------
Income before taxes and extraordinary item 1,724,000 6,531,000 9,837,000 18,418,000
Income taxes -- 2,394,000 -- 6,674,000
------------- ------------- ------------- -------------
Income before extraordinary item 1,724,000 4,137,000 9,837,000 11,744,000
Extraordinary loss on the early
extinguishment of debt, net of
$704,000 of taxes -- -- -- (1,056,000)
------------- ------------- ------------- -------------
Net income $ 1,724,000 $ 4,137,000 $ 9,837,000 $ 10,688,000
============= ============= ============= =============
Basic earnings per common share
Income before extraordinary item $ 0.17 $ 0.29 $ 1.00 $ 0.94
Extraordinary item -- -- -- (0.09)
------------- ------------- ------------- -------------
Net income $ 0.17 $ 0.29 $ 1.00 $ 0.85
============= ============= ============= =============
Weighted average shares outstanding 9,500,000 14,117,981 9,500,000 12,420,021
============= ============= ============= =============
Pro forma data (unaudited, see Note 7):
Historical income before taxes and
extraordinary item $ 1,724,000 $ 6,531,000 $ 9,837,000 $ 18,418,000
Pro forma income taxes (655,000) (2,482,000) (3,738,000) (6,999,000)
-------------- -------------- ------------- -------------
Pro forma net income $ 1,069,000 $ 4,049,000 $ 6,099,000 $ 11,419,000
============= ============= ============= =============
Pro forma basic earnings per
common share $ 0.11 $ 0.29 $ 0.64 $ 0.92
============= ============= ============= =============
Pro forma weighted average common
shares outstanding 9,500,000 14,117,981 9,500,000 12,420,021
============= ============= ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
4
TREX COMPANY, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
----------------------------------
1998 1999
-------------- -------------
OPERATING ACTIVITIES
Net income $ 9,837,000 $ 10,688,000
Adjustments to reconcile net income to net cash provided by operating activities
Extraordinary loss on early prepayment of debt -- 1,760,000
Deferred income taxes -- 2,849,000
Depreciation and amortization 2,208,000 3,096,000
Amortization of deferred financing charges 38,000 13,000
Loss on disposal of property, plant and equipment -- 156,000
Changes in operating assets and liabilities
Trade accounts receivable (1,676,000) (4,222,000)
Inventories 2,567,000 2,852,000
Prepaid expenses and other assets (327,000) 268,000
Trade accounts payable 414,000 1,146,000
Accrued expenses 628,000 469,000
Income taxes payable -- 1,787,000
Other current liabilities (603,000) (612,000)
------------- --------------
Net cash provided by operating activities 13,086,000 20,250,000
------------- --------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (8,783,000) (22,251,000)
------------- --------------
Net cash used in investing activities (8,783,000) (22,251,000)
------------- --------------
FINANCING ACTIVITIES
Borrowings under mortgages and notes 3,780,000 11,298,000
Borrowings under line of credit 162,000 --
Principal payments under mortgages and notes (34,000) (34,570,000)
Proceeds from initial public offering -- 41,055,000
Proceeds from employee stock purchase plan -- 33,000
Preferred distributions paid (304,000) (3,115,000)
Common distributions paid (2,296,000) (13,588,000)
------------- --------------
Net cash provided by financing activities 1,308,000 1,113,000
------------- --------------
Net increase (decrease) in cash and cash equivalents 5,611,000 (888,000)
Cash and cash equivalents at beginning of period 2,000,000 1,200,000
------------- --------------
Cash and cash equivalents at end of period $ 7,611,000 $ 312,000
============= ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
5
TREX COMPANY, INC.
Notes to Consolidated Financial Statements
For The Three and Nine Months Ended September 30, 1998 and 1999 (Unaudited)
1. BUSINESS AND ORGANIZATION
Trex Company, Inc. (the "Company"), a Delaware corporation, was incorporated on
September 4, 1998 for the purpose of acquiring 100% of the membership interests
and operating the business of TREX Company, LLC, a Delaware limited liability
company, in connection with an initial public offering ("IPO") of the Company's
common stock. The Company had no operations or activity from inception on
September 4, 1998 through April 7, 1999, immediately prior to the Reorganization
described below. The IPO was consummated on April 13, 1999. On March 22, 1999,
the Company amended its certificate of incorporation to increase its authorized
capital to 40,000,000 shares of common stock (the "Common Stock") and 3,000,000
shares of preferred stock. All references in the accompanying balance sheets
have been restated to reflect the increase in the Company's authorized capital.
TREX Company, LLC manufactures and distributes wood/plastic composite products
primarily for residential and commercial decking applications. Trex Wood-
Polymer(TM) lumber ("Trex") is manufactured in a proprietary process that
combines waste wood fibers and reclaimed polyethylene. TREX Company, LLC is a
limited liability company formed under the laws of the State of Delaware on July
1, 1996 (inception). It initiated commercial activity on August 29, 1996. On
August 29, 1996, TREX Company, LLC acquired substantially all of the assets and
assumed certain liabilities of the Composite Products Division of Mobil Oil
Corporation for a cash purchase price of approximately $29.5 million. The
acquisition was accounted for using the purchase accounting method.
Reorganization
Trex Company, Inc., TREX Company, LLC and the holders of membership interests in
TREX Company, LLC completed certain transactions (the "Reorganization") on April
7, 1999, prior to the consummation of the IPO. In the Reorganization, the junior
members of TREX Company, LLC contributed their membership interests to Trex
Company, Inc. in exchange for 9,500,000 shares of Common Stock of Trex Company,
Inc. Concurrently with such exchange, the preferred member of TREX Company, LLC
exchanged its preferred membership interest for a $3.1 million note of Trex
Company, Inc. As a result of such exchanges, TREX Company, LLC became a wholly
owned subsidiary of Trex Company, Inc. The Company has accounted for the
Reorganization as an exchange of shares between entities under common control at
historical cost in a manner similar to a pooling of interests. After the
Reorganization, the ownership percentage of each Trex Company, Inc. common
stockholder was the same as its ownership percentage in the junior membership
interests of TREX Company, LLC.
As part of the Reorganization, the Company made a special cash distribution (the
"LLC Distribution") to its junior members in the amount of $12.6 million, of
which $6.7 million was paid prior to the consummation of the IPO. The Company
finalized its determination of amounts due to the junior members for the LLC
Distribution in July 1999 and distributed an additional $822,000 in the third
quarter of 1999. A deferred income tax liability of $2.6 million was recognized
as a result of the conversion of TREX Company, LLC in the Reorganization from a
partnership for federal income tax purposes to a corporation taxed in accordance
with Subchapter C of the Internal Revenue Code (a "C corporation").
Immediately prior to the Reorganization, TREX Company, LLC exercised an option
to repurchase 667 units of junior membership interest from certain members at a
price of $.01 per unit.
6
TREX COMPANY, INC.
Notes to Consolidated Financial Statements
For The Three and Nine Months Ended September 30, 1998 and 1999 (Unaudited)
Initial Public Offering
In the IPO, the Company sold 4,615,450 shares of Common Stock at a public
offering price of $10.00 per share. Of such shares, the Company sold 4,000,000
shares on April 13, 1999 and 615,450 shares on May 6, 1999 pursuant to the
underwriters' exercise in full of their over-allotment option. The net proceeds
from the IPO, after deducting underwriting discounts and commissions and
offering expenses payable by the Company, totaled approximately $41.1 million.
The net proceeds of approximately $35.5 million from the sale of shares on April
13, 1999 were used as follows: approximately $28.1 million was used to repay
approximately $26.3 million of senior and subordinated notes, accrued interest
thereon and a related prepayment premium of approximately $1.5 million;
approximately $3.1 million was used to repay the note issued to the preferred
member of TREX Company, LLC in the Reorganization; and approximately $4.3
million was used to fund a portion of the LLC Distribution. The net proceeds of
approximately $5.6 million from the over-allotment exercise were used as
follows: approximately $4.4 million was used to repay borrowings under the
Company's revolving credit facility and approximately $1.2 million was used for
working capital and general corporate purposes.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the accompanying consolidated financial statements
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normally recurring accruals,
except as described below) considered necessary for a fair presentation have
been included in the accompanying consolidated financial statements. The
consolidated results of operations for the three-month and nine-month periods
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the full fiscal year. These consolidated financial statements
should be read in conjunction with the consolidated audited financial statements
as of December 31, 1998 and 1997 and for the period from July 1, 1996
(inception) to December 31, 1996 and for each of the two years in the period
ended December 31, 1998 included in the registration statement of Trex Company,
Inc. on Form S-1 (File No. 333-63287), as filed with the Securities and Exchange
Commission.
3. Inventory
Inventories consist of the following:
December 31, 1998 September 30, 1999
----------------- ------------------
Finished goods $4,847,000 $2,327,000
Raw materials 1,160,000 828,000
---------- ----------
$6,007,000 $3,155,000
========== ==========
4. Debt
On August 3, 1999, the Company revised the terms of its bank revolving credit
facility. The new terms of the revolving credit facility provide for borrowings
of up to $10.0 million on an unsecured basis for working capital and general
corporate purposes. In addition, under this facility, the Company may obtain a
total of $7.5 million of term loans, collateralized by certain equipment, to
finance equipment purchases and for other general corporate purposes. Amounts
drawn under the revolving credit facility and any
7
TREX COMPANY, INC.
Notes to Consolidated Financial Statements
For The Three and Nine Months Ended September 30, 1998 and 1999 (Unaudited)
term loans bear interest at an annual rate equal to LIBOR plus 1.00%. The
revolving credit facility will mature on July 31, 2000. The unpaid principal
balance of term loans outstanding on December 31, 1999 will be payable in
consecutive monthly payments beginning on February 1, 2000, and the entire
unpaid principal balance of the term loans will be payable in full on July 31,
2000.
On September 30, 1999, the Company refinanced two loans with which it financed
the site acquisition and construction of the Company's second manufacturing
facility located in Nevada with a 15-year term loan in the original principal
amount of $6.7 million. Pursuant to an interest rate swap, interest on this loan
is payable at an annual rate of 7.90%.
5. Stockholders' Equity
The following table sets forth the computation of basic earnings per share:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- ----------------------------------
1998 1999 1998 1999
---------------- --------------- -------------- ---------------
Numerator:
Income before extraordinary item $ 1,724,000 $ 4,137,000 $ 9,837,000 $ 11,744,000
Preferred dividends (101,000) - (304,000) (115,000)
--------------- -------------- -------------- --------------
1,623,000 4,137,000 9,533,000 11,629,000
Extraordinary item - - - (1,056,000)
-------------- -------------- -------------- --------------
Net income available
to common shareholders $ 1,623,000 $ 4,137,000 $ 9,533,000 $ 10,573,000
============== ============== ============== ==============
Denominator:
Denominator for basic earnings per
share-weighted average shares
outstanding 9,500,000 14,117,981 9,500,000 12,420,021
============== ============== ============== ==============
Basic earnings per common share
Income before extraordinary item $ 0.17 $ 0.29 $ 1.00 $ 0.94
Extraordinary loss - - - (0.09)
-------------- -------------- -------------- --------------
Net income per share $ 0.17 $ 0.29 $ 1.00 $ 0.85
============== ============== ============== ==============
8
TREX COMPANY, INC.
Notes to Consolidated Financial Statements
For The Three and Nine Months Ended September 30, 1998 and 1999 (Unaudited)
The earnings per share amounts shown above have been adjusted to reflect the
Reorganization and the issuance of 9,500,000 shares of Trex Company, Inc. Common
Stock in exchange for the junior units in the Company. Earnings per share on a
fully diluted basis is the same as basic earnings per share and, therefore, is
not separately presented.
During 1999, the Company granted certain employees stock options to acquire a
total of 105,050 shares of the Company's Common Stock at exercise prices of
$10.00 per share and its two non-employee directors stock options to acquire a
total of 6,110 shares of Common Stock at exercise prices ranging from $13.75 to
$26.56 per share. Each option vests with respect to 25% of the shares subject to
the option on each of the first, second, third and fourth anniversaries of the
date of grant. The options are forfeitable upon termination of an option
holder's service as an employee or director under certain circumstances.
6. Seasonality
The Company's net sales and income from operations have historically varied from
quarter to quarter. Such variations are principally attributable to seasonal
trends in the demand for the Trex product. The Company typically experiences
lower net sales during the fourth quarter due to holidays and adverse weather
conditions in certain regions, which reduce the level of home improvement and
new construction activity. Net sales during the third quarter of 1998 accounted
for approximately 26% of annual sales in the year ended December 31, 1998.
7. Pro Forma and Supplemental Pro Forma Data (Unaudited)
The pro forma consolidated statements of operations data set forth in the
accompanying consolidated statements of operations give effect to the
Reorganization as if the Reorganization had occurred on January 1 of each period
presented. The pro forma income taxes and pro forma net income reflect federal
and state income taxes (assuming a 38% combined effective tax rate) as if the
Company had been taxed as a C corporation for the three and nine months ended
September 30, 1998 and 1999. The pro forma consolidated statements of operations
data exclude one-time charges relating to the Reorganization and IPO, including
(i) a net deferred tax liability of approximately $2.6 million and (ii) a $1.1
million extraordinary charge for the extinguishment of debt repaid from the net
proceeds of the IPO. Pro forma weighted average shares outstanding reflect
9,500,000 shares of Trex Company, Inc. Common Stock outstanding through April 7,
1999, 13,500,000 from April 8, 1999 through May 2, 1999, 14,115,450 from May 3
through July 14 and 14,118,435 shares outstanding through September 30, 1999
(See Note 1).
9
TREX COMPANY, INC.
Notes to Consolidated Financial Statements
For The Three and Nine Months Ended September 30, 1998 and 1999 (Unaudited)
The following table sets forth the computation of basic earnings per common
share on a supplemental pro forma basis:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
----------- ----------- ------------ ------------
Numerator:
Historical income from
operations $ 2,322,000 $ 6,712,000 $ 11,691,000 $ 19,686,000
Supplemental pro forma
interest income
(expense), net 96,000 (181,000) 227,000 (483,000)
Supplemental pro forma
income taxes (919,000) (2,482,000) (4,529,000) (7,297,000)
----------- ----------- ------------ ------------
Supplemental pro forma
net income available to
common shareholders $ 1,499,000 $ 4,049,000 $ 7,389,000 $ 11,906,000
=========== =========== ============ ============
Denominator:
Denominator for pro forma
basic earnings per
common share-weighted
average shares
outstanding 14,115,450 14,117,981 14,115,450 14,116,303
=========== =========== ============ ============
Supplemental pro forma basic
earnings per common share $ 0.11 $ 0.29 $ 0.52 $ 0.84
=========== =========== ============ ============
The foregoing supplemental pro forma basic earnings per common share amounts
have been adjusted to reflect the Reorganization (see Note 1) as if the
Reorganization had occurred on January 1, 1998 and 1999, respectively. The
supplemental pro forma interest income (expense) gives effect to the repayment
of the senior and subordinated notes of the Company (see Note 1) as if such
repayments had been made as of January 1, 1998 and 1999, respectively. The
supplemental pro forma income taxes reflect federal and state income taxes
(assuming a 38% combined effective tax rate) as if the Company had been taxed as
a C corporation as of January 1, 1998 and 1999, respectively. Supplemental pro
forma net income available to common shareholders assumes the preferred units
were exchanged for a note of Trex Company, Inc. as of January 1, 1998 and 1999,
and excludes one-time charges relating to the Reorganization and IPO, including
(i) a net deferred tax liability of approximately $2.6 million and (ii) a $1.1
million extraordinary charge for the extinguishment of debt repaid from the net
proceeds of the IPO. Supplemental pro forma weighted average shares outstanding
assumes that the shares issued in the Reorganization and the IPO were
outstanding for all periods presented. Supplemental pro forma earnings per share
on a fully diluted basis is the same as supplemental pro forma basic earnings
per share and, therefore, is not separately presented.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements regarding the Company's expected financial position and
operating results, its business strategy and its financing plans are
forward-looking statements. These statements are subject to risks and
uncertainties that could cause the Company's actual results to differ
materially. Such risks and uncertainties include the Company's ability to
increase market acceptance of its Trex product; the Company's lack of product
diversification; the Company's current dependence on its two manufacturing
facilities and its ability to increase its manufacturing capacity in its
existing facilities; the Company's reliance on the supply of raw materials used
in its production process; the Company's sensitivity to economic conditions,
which influence the level of activity in home improvements and new home
construction; the Company's ability to manage its growth; the Company's
significant capital requirements; and the Company's dependence on its largest
distributors to market and sell its products. A discussion of such risks and
uncertainties is contained in the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 25, 1999.
References to the "Company" in the following discussion mean TREX Company, LLC
until the consummation of the reorganization on April 7, 1999 (the
"Reorganization") and Trex Company, Inc. and its wholly owned subsidiary, TREX
Company, LLC, at all times thereafter. See Note 1 to the Consolidated Financial
Statements included elsewhere in this report.
Overview
The Company is the nation's largest manufacturer of non-wood decking alternative
products, which are marketed under the brand name Trex(R). Trex Wood-Polymer(TM)
lumber ("Trex") is a wood/plastic composite which is manufactured in a
proprietary process that combines waste wood fibers and reclaimed polyethylene.
Trex is used primarily for residential and commercial decking. Trex also has
non-decking product applications, including industrial block flooring,
applications for parks and recreational areas, floating and fixed docks and
other marine applications, and landscape edging.
Net sales consists of sales net of returns and discounts. Cost of sales consists
of raw material costs, direct labor costs and manufacturing costs, including
depreciation. The principal component of selling, general and administrative
expenses is sales and marketing costs, which have increased significantly as the
Company has sought to build brand awareness of Trex in the decking market. Sales
and marketing costs consist primarily of salaries, commissions and benefits paid
to sales and marketing personnel, advertising expenses and other promotional
costs. General and administrative expenses include salaries and benefits of
personnel engaged in research and development, procurement, accounting and other
business functions and office occupancy costs attributable to such functions, as
well as amortization expense.
The Company did not record an income tax provision for any period through April
7, 1999. Until the Reorganization, the Company elected to be treated as a
partnership for federal and state income tax purposes. Accordingly, the
Company's income through April 7, 1999 was directly to the Company's members,
rather than to the Company.
11
Three Months Ended September 30, 1999 Compared with Three Months Ended
September 30, 1998
Net Sales
Net sales in the three months ended September 30, 1999 (the "1999 quarter")
increased 65.5% to $20.0 million from $12.1 million in the three months ended
September 30, 1998 (the "1998 quarter"). The increase in net sales was primarily
attributable to the growth in sales volume, which increased to 60.7 million
pounds of finished product in the 1999 quarter from 38.6 million pounds in the
1998 quarter, and, to a lesser extent, to a price increase of approximately 6%.
Production line rate increases, the addition of two production lines in the
Company's Winchester, Virginia manufacturing facility in the first quarter of
1999 and the opening of the Company's Fernley, Nevada manufacturing facility
with two production lines during the 1999 quarter significantly increased the
Company's production capacity in the 1999 quarter. The increase in the number of
dealer outlets, from approximately 1,850 at September 30, 1998 to approximately
2,000 at September 30, 1999, contributed to the growth in sales volume.
Cost of Sales
Cost of sales increased 43.2% to $9.4 million in the 1999 quarter from $6.5
million in the 1998 quarter. All components of cost of sales increased to
support the higher level of sales activity. Cost of sales as a percentage of net
sales decreased to 46.9% in the 1999 quarter from 54.2% in the 1998 quarter. The
decline principally reflected operating efficiencies from improved production
line rates and the economies of scale resulting from the four additional
production lines.
Gross Profit
Gross profit increased 91.9% to $10.6 million in the 1999 quarter from $5.5
million in the 1998 quarter. The increase in gross profit was attributable to
the higher sales volume and improved operating efficiencies. Gross profit as a
percentage of net sales increased to 53.1% in the 1999 quarter from 45.8% in the
1998 quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 21.4% to $3.9 million in
the 1999 quarter from $3.2 million in the 1998 quarter. The increase was
primarily attributable to higher sales and marketing expenses, which increased
26.3% to $1.9 million in the 1999 quarter from $1.5 million in the 1998 quarter.
The largest component of the increase consisted of branding costs, including
advertising costs, which increased 57.6% as the Company expanded its advertising
and promotional activities. General and administrative expenses increased 17.1%
to $2.0 million in the 1999 quarter from $1.7 million in the 1998 quarter. The
increase was primarily attributable to costs associated with an increase in
staffing necessary to support the Company's growth, the Company's second
manufacturing facility, which started production in the 1999 quarter, and an
increase in research and development activities. Selling, general and
administrative expenses as a percentage of net sales decreased to 19.5% in the
1999 quarter from 26.5% in the 1998 quarter.
Interest Expense
Net interest expense decreased 69.7% to $0.2 million in the 1999 quarter from
$.6 million in the 1998 quarter. The decrease was primarily attributable to
lower average balances outstanding as a result of the repayment, in the second
12
quarter of 1999, of $21.3 million of senior debt and $5.0 million of
subordinated debt with the net proceeds of the Company's initial public offering
(the "IPO").
Income Taxes
The Company was taxed as a partnership for federal and state tax purposes for
all periods through April 7, 1999 and thus recorded no provision for income
taxes. The income tax provision of $2.4 million in the 1999 quarter represents
an assumed 38% combined effective tax.
Net Income
The Company realized net income of $4.1 million in the 1999 quarter compared to
net income of $1.7 million in the 1998 quarter.
Nine Months Ended September 30, 1999 Compared with Nine Months Ended
September 30, 1998
Net Sales
Net sales in the nine months ended September, 30, 1999 (the "1999 nine-month
period") increased 50.0% to $62.1 million from $41.4 million in the nine months
ended September, 30, 1998 (the "1998 nine-month period"). The increase in net
sales was primarily attributable to the growth in sales volume, which increased
to 189.7 million pounds of finished product in the 1999 nine-month period from
133.9 million pounds in the 1998 nine-month period, and, to a lesser extent, to
a price increase of approximately 6%. Production line rate increases, the
addition of two production lines in the Company's Winchester, Virginia
manufacturing facility in the first quarter of 1999 and the opening of the
Company's Fernley, Nevada manufacturing facility with two production lines
during the 1999 quarter significantly increased the Company's production
capacity in the 1999 nine-month period. The increase in the number of dealer
outlets, from approximately 1,850 at September 30, 1998 to approximately 2,000
at September 30, 1999, contributed to the growth in sales volume.
Cost of Sales
Cost of sales increased 39.1% to $27.6 million in the 1999 nine-month period
from $19.8 million in the 1998 nine-month period. All components of cost of
sales increased to support the higher level of sales activity. Cost of sales as
a percentage of net sales decreased to 44.4% in the 1999 nine-month period from
47.9% in the 1998 nine-month period. The decline principally reflected operating
efficiencies from improved production line rates and the economies of scale
resulting from the four additional production lines.
Gross Profit
Gross profit increased 60.1% to $34.5 million in the 1999 nine-month period from
$21.6 million in the 1998 nine-month period. The increase in gross profit was
attributable to the higher sales volume and improved operating efficiencies.
Gross profit as a percentage of net sales increased to 55.6% in the 1999
nine-month period from 52.1% in the 1998 nine-month period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 50.3% to $14.9 million in
the 1999 nine-month period from $9.9 million in the 1998 nine-month period. The
increase was primarily attributable to higher sales and marketing expenses,
13
which increased 49.2% to $8.4 million in the 1999 nine-month period from $5.7
million in the 1998 nine-month period. The largest component of the increase
consisted of branding costs, including advertising costs, which increased 74.7%
as the Company expanded its advertising and promotional activities. General and
administrative expenses increased 51.8% to $6.4 million in the 1999 nine-month
period from $4.2 million in the 1998 nine-month period. The increase was
primarily attributable to costs associated with an increase in staffing
necessary to support the Company's growth, the Company's second manufacturing
facility, which started production in the 1999 quarter, and an increase in
research and development activities. Selling, general and administrative
expenses as a percentage of net sales remained at 23.9%.
Interest Expense
Net interest expense decreased 31.6% to $1.3 million in the 1999 nine-month
period from $1.9 million in the 1998 nine-month period. The decrease was
primarily attributable to lower average balances outstanding as a result of the
repayment, in the second quarter of 1999, of $21.3 million of senior debt and
$5.0 million of subordinated debt with the net proceeds of the IPO.
Income Taxes
The Company was taxed as a partnership for federal and state income tax purposes
for all periods through April 7, 1999 and thus recorded no provision for income
taxes. The income tax provision of $6.7 million in the 1999 nine-month period
represents an assumed 38% combined effective tax rate and a one-time charge for
deferred income taxes of $2.6 million arising from the Company's conversion from
an LLC to a C corporation on April 7, 1999.
Extraordinary Charge
The extraordinary charge of $1.1 million in the 1999 nine-month period reflects
a prepayment penalty of $1.5 million from the early retirement of $26.3 million
of senior and subordinated debt with the net proceeds of the IPO and the related
write-off of unamortized debt discount of $.2 million, both net of taxes.
Net Income
Net income increased 8.7% to $10.7 million in the 1999 nine-month period from
$9.8 million in the 1998 nine-month period.
Liquidity and Capital Resources
The Company's total assets increased from $51.3 million at December 31, 1998 to
$70.3 million at September 30, 1999. Higher receivables balances resulting from
an increase in net sales in the 1999 nine-month period accounted for $4.2
million of the increase. Inventories decreased $2.9 million in relation to the
increased net sales. Property, plant and equipment, net, increased $19.6 million
as the Company installed two additional production lines in its Winchester,
Virginia facility, constructed and opened its second manufacturing facility in
Fernley, Nevada with two production lines and started ordering equipment for
four additional manufacturing lines for its Nevada facility.
The Company historically has financed its operations and growth primarily with
cash flow from operations, operating leases, normal trade credit terms and
borrowings under its credit facility.
The Company's cash flow from operating activities for the 1999 nine-month period
was $20.3 million compared to $13.1 million for the 1998 nine-month
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period. Higher sales volume accounted for the increase in cash flows in the 1999
nine-month period.
The Company's working capital generally averages between 12% and 18% of net
sales. The Company's working capital needs correlate closely with the level of
the Company's net sales. Consequently, the Company's short-term borrowing
requirements are affected by the seasonality of its business. On August 3, 1999,
the Company amended the terms of its revolving credit facility. The new terms of
the facility provide for borrowings of up to $10.0 million on an unsecured basis
for working capital and other general corporate purposes. In addition, under
this facility, the Company may obtain a total of $7.5 million of term loans,
collateralized by certain equipment, to finance equipment purchases and for
other general corporate purposes. Amounts drawn under the revolving credit
facility and any term loans bear interest at an annual rate equal to LIBOR plus
1.00%. The revolving credit facility will mature on July 31, 2000. The unpaid
principal balance of any term loans outstanding on December 31, 1999 will be
payable in consecutive monthly payments beginning February 1, 2000, and the
entire unpaid principal balance of the term loans will be payable in full on
July 31, 2000.
The Company substantially reduced its overall long-term indebtedness on April
13, 1999 following its repayment of $26.3 million principal amount of senior and
subordinated notes with the net proceeds of the Company's initial public
offering. As of September 30, 1999, the Company's indebtedness had an overall
weighted average interest rate of approximately 7.6% per annum.
The Company financed its purchase of its Winchester, Virginia facility in June
1998 with a ten-year term loan of $3.8 million. Pursuant to an interest rate
swap agreement, interest on this loan is payable at an annual rate of 7.12%.
The Company financed its purchase of the Trex Technical Center in November 1998
in part with the proceeds of a ten-year term loan of $1.0 million. Pursuant to
an interest rate swap agreement, interest on this loan is payable at an annual
rate of 6.8%.
The Company financed its acquisition of the site for its second manufacturing
facility located in Nevada in December 1998 in part with a $2.1 million loan
which was payable in September 1999. The Company financed construction of the
facility in part with proceeds of $4.6 million under a construction loan which
was payable in November 1999. The site acquisition and construction loans
accrued interest at an annual rate of 7.5%. The Company refinanced both loans on
September 30, 1999 with a fifteen-year term loan in the original principal
amount of $6.7 million. Pursuant to an interest rate swap agreement, interest on
this loan is payable at an annual rate of 7.90%.
As part of the Reorganization, TREX Company, LLC in April 1999 made a
distribution to its junior members (the "LLC Distribution") of approximately
$12.6 million. See Note 1 to the Consolidated Financial Statements included
elsewhere in this report. The LLC Distribution was funded from $3.9 million of
cash on hand, $4.4 million of borrowings under the credit facility and $4.3
million of net proceeds from the initial public offering. The Company made a
final payout of $822,000 in the third quarter of 1999 relating to the LLC
Distribution.
Expansion of the Company's production capacity will continue to require
significant capital expenditures. Capital expenditures during the 1999
nine-month period totaled approximately $22.3 million. As of September 30, 1999,
the Company estimates $12.5 million will be required to complete the equipping
of four additional manufacturing lines for its Nevada facility. The Company
estimates that its capital expenditures for this purpose in the fourth quarter
15
of 1999 will total approximately $6.5 million and in 2000 will total
approximately $6.0 million. The Company believes that cash on hand, cash flow
from operations and borrowings expected to be available under the Company's
credit facility will provide sufficient funds to enable the Company to expand
its business as currently planned for at least the next 12 months. The actual
amount and timing of the Company's future capital requirements may differ
materially from the Company's estimate depending on the demand for Trex and new
market developments and opportunities. The Company may determine that it is
necessary or desirable to obtain financing for such requirements through bank
borrowings or the issuance of debt or equity securities. Debt financing would
increase the leverage of the Company, while equity financing may dilute the
ownership of the Company's stockholders. There can be no assurance as to
whether, or as to the terms on which, the Company will be able to obtain such
financing.
Year 2000 Issue
The Company's Program. The Company has undertaken a program to address the Year
2000 issue with respect to the following: (1) the Company's information
technology and operating systems, including its billing, accounting and
financial reporting systems; (2) the Company's non-information technology
systems, such as buildings, plant, equipment and other infrastructure systems
that may contain embedded microcontroller technology; (3) certain systems of the
Company's major suppliers and material service providers, insofar as such
systems relate to the Company's business activities with such parties; and (4)
the Company's major distributors, insofar as the Year 2000 issue relates to the
ability of such distributors to distribute Trex to the Company's dealer outlets.
As described below, the Company's Year 2000 program involves (1) an assessment
of the Year 2000 problems that may affect the Company, (2) the development of
remedies to address the problems discovered in the assessment phase and the
testing of such remedies and (3) the preparation of contingency plans to deal
with worst case scenarios.
Assessment Phase. As part of the assessment phase of its program, the Company
has identified substantially all of the major components of the systems
described above. To determine the extent to which such systems are vulnerable to
the Year 2000 issue, the Company has completed an evaluation of its software
applications and began remediation and testing activities for such applications
in the first half of 1999. In addition, the Company has distributed letters to
certain of its major suppliers and other material service providers and to the
Company's major distributors, requesting them to provide the Company with
detailed, written information concerning existing or anticipated Year 2000
compliance by their systems insofar as the systems relate to such parties'
business activities with the Company. The Company has received and analyzed
responses from a majority of these parties. The third parties responding to the
Company's inquiries generally have indicated either that they believe that their
systems are or will be Year 2000 compliant or that they have undertaken programs
seeking to achieve Year 2000 compliance.
Remediation and Testing Phase. Based upon the results of its assessment efforts,
the Company has undertaken remediation and testing activities. The Company
completed this phase during the 1999 quarter. The activities conducted during
the remediation and testing phase addressed potential Year 2000 problems in
computer software used by the Company in its information technology systems. In
this phase, the Company first evaluated a program application and, when
potential Year 2000 problems were identified, attempted to remediate the problem
and individually test the application to confirm that the remediating changes
are effective and have not adversely affected the functionality of that
application. After the individual applications and system components underwent
remediation and testing phases, the Company conducted integrated testing for
16
the purpose of demonstrating functional integrated systems operation. All
applications and systems functioned properly during the testing phase.
Contingency Plans. The Company has developed contingency plans to handle its
most reasonably likely worst case Year 2000 scenarios. The Company believes that
its most reasonably likely worst case scenario is that some of its suppliers of
raw materials may have difficulty filling orders. The Company's plans to
mitigate the impact of such an event on its business would entail the purchase
of additional raw materials from its current suppliers and new supply sources.
In its contingency planning, the Company has identified alternative sources for
its raw materials.
Costs Related to the Year 2000 Issue. To date, the Company has incurred
approximately $35,000 in costs for its Year 2000 program. Such costs do not
include internal staff costs, consisting principally of payroll costs, incurred
on Year 2000 matters, because the Company does not separately track such costs.
The Company does not expect to incur any material additional costs for its Year
2000 program.
Risks Related to the Year 2000 Issue. Although the Company's Year 2000 efforts
are intended to minimize the adverse effects of the Year 2000 issue on the
Company's business and operations, the actual effects of the issue and the
success or failure of the Company's efforts described above cannot be known
until the year 2000. Failure by the Company and its major suppliers, other
material service providers and major distributors to address adequately their
respective Year 2000 issues in a timely manner insofar as such issues relate to
the Company's business could have a material adverse effect on the Company's
business, results of operations and financial condition.
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 a combination of
variable-rate debt under its revolving credit facility and interest rate swap
agreements with respect to its other debt. Amounts drawn under the revolving
credit facility and any term loans bear interest at an annual rate equal to
LIBOR plus 1.00%. As of September 30, 1999, pursuant to interest-rate swap
agreements, the Company had effectively fixed its interest rate exposure under
its other debt at approximately 7.6% through 2014.
The Company does not use foreign currency forward contracts or commodity
contracts and does not have any material foreign currency exposure.
17
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The Company files herewith the following exhibits:
10.1 Amended and Restated Credit Agreement, dated as
of August 3, 1999, among Trex Company, Inc.,
TREX Company, LLC and First Union National Bank
of Virginia. Filed herewith.
10.2 Standing Loan Agreement, dated as of September 28, 1999,
by and between TREX Company, LLC and Bank of America, N.A.
Filed herewith.
10.3 Promissory Note, dated September 28, 1999, made by TREX
Company, LLC payable to Bank of America, N.A.
Filed herewith.
10.4 Payment Guaranty, dated as of September 28, 1999, made
by Trex Company, Inc. in favor of Bank of America, N.A.
Filed herewith.
27. Financial Data Schedule. Filed herewith.
(b) The Company did not file any Current Report on Form 8-K during the
period covered by this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TREX COMPANY, INC.
(Registrant)
Date: November 12, 1999 /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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EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
10.1 Amended and Restated Credit Agreement, dated as of August 3, 1999,
among Trex Company, Inc., TREX Company, LLC and First Union National
Bank of Virginia. Filed herewith.
10.2 Standing Loan Agreement, dated as of September 28, 1999, by and
between TREX Company, LLC and Bank of America, N.A. Filed herewith.
10.3 Promissory Note, dated September 28, 1999, made by TREX Company, LLC
payable to Bank of America, N.A. Filed herewith.
10.4 Payment Guaranty, dated as of September 28, 1999, made by Trex
Company, Inc. in favor of Bank of America, N.A. Filed herewith.
27 Financial Data Schedule. Filed herewith.
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