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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission File Number: 001-14649
Trex Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1910453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 South Cameron Street
Winchester, Virginia 22601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 678-4070
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares of the registrant's common stock, par value $.01 per share,
outstanding at August 8, 2001 was 14,148,861 shares.
TREX COMPANY, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2000
and June 30, 2001 (unaudited) ............................................. 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 2001 (unaudited) ........................... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 2001 (unaudited) ........................... 5
Notes to Condensed Consolidated Financial
Statements (unaudited) .................................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................. 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ......................................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................ 13
Item 2. Changes in Securities and Use Proceeds ....................................... 13
Item 3. Defaults Upon Senior Securities .............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders .......................... 13
Item 5. Other Information ............................................................ 14
Item 6. Exhibits and Reports on Form 8-K ............................................. 14
Signatures
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREX COMPANY, INC.
Condensed Consolidated Balance Sheets
December 31, June 30,
2000 2001
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ................................................. $ -- $ --
Trade accounts receivable ................................................. 10,582,000 7,799,000
Inventories ............................................................... 23,017,000 28,006,000
Prepaid expenses and other assets ......................................... 689,000 555,000
Income taxes receivable ................................................... -- 504,000
Deferred income taxes ..................................................... 478,000 360,000
------------- -------------
Total current assets ..................................................... 34,766,000 37,224,000
------------- -------------
Property, plant, and equipment, net ......................................... 113,635,000 130,677,000
Intangible assets, net ...................................................... 7,544,000 7,190,000
Other ....................................................................... 650,000 500,000
------------- -------------
Total assets ................................................................ $ 156,595,000 $ 175,591,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable .................................................... $ 17,082,000 $ 8,496,000
Accrued expenses .......................................................... 2,053,000 1,909,000
Income taxes payable ...................................................... 574,000 --
Other current liabilities ................................................. 664,000 1,342,000
Line of credit ............................................................ -- 63,785,000
Debt-related derivatives .................................................. -- 850,000
Current portion of long-term debt ......................................... 697,000 10,217,000
------------- -------------
Total current liabilities ................................................ 21,070,000 86,599,000
Deferred income taxes ....................................................... 5,782,000 6,284,000
Line of credit .............................................................. 44,748,000 --
Long-term debt .............................................................. 15,954,000 6,109,000
------------- -------------
Total liabilities ........................................................ 87,554,000 98,992,000
------------- -------------
Stockholders' equity:
Preferred stock, $0.01 par value, 3,000,000 shares authorized;
none issued and outstanding .............................................. -- --
Common stock, $0.01 par value, 40,000,000 shares authorized; 14,135,060 and
14,145,329 shares issued and outstanding ................................ 141,000 141,000
Additional capital ........................................................ 41,330,000 41,473,000
Retained earnings ......................................................... 27,570,000 35,512,000
Accumulated other comprehensive net loss .................................. -- (527,000)
------------- -------------
Total stockholders' equity ............................................... 69,041,000 76,599,000
------------- -------------
Total liabilities and stockholders' equity ............................... $ 156,595,000 $ 175,591,000
============= =============
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,
--------------------------- -------------------------
2000 2001 2000 2001
---- ---- ---- ----
Net sales ............................................. $ 36,449,000 $ 27,727,000 $ 75,502,000 $ 69,923,000
Cost of sales ......................................... 18,436,000 16,060,000 39,327,000 39,038,000
------------- ------------- ------------- -------------
Gross profit .......................................... 18,013,000 11,667,000 36,175,000 30,885,000
Selling, general and administrative expenses .......... 7,940,000 10,721,000 14,450,000 17,124,000
------------- ------------- ------------- -------------
Income from operations ................................ 10,073,000 946,000 21,725,000 13,761,000
Interest income ....................................... 2,000 1,000 2,000 2,000
Interest (expense) .................................... (265,000) (484,000) (542,000) (950,000)
------------- ------------- ------------- -------------
Income before taxes ................................... 9,810,000 463,000 21,185,000 12,813,000
Income taxes .......................................... 3,729,000 176,000 8,047,000 4,871,000
------------- ------------- ------------- -------------
Net income ............................................ $ 6,081,000 $ 287,000 $ 13,138,000 $ 7,942,000
============= ============= ============= =============
Basic earnings per common share ....................... $ 0.43 $ 0.02 $ 0.93 $ 0.56
============= ============= ============= =============
Weighted average basic shares outstanding ............. 14,128,437 14,142,087 14,125,502 14,139,451
============= ============= ============= =============
Diluted earnings per common share ..................... $ 0.43 $ 0.02 $ 0.92 $ 0.56
============= ============= ============= =============
Weighted average diluted shares outstanding ........... 14,227,860 14,177,454 14,206,265 14,174,866
============= ============= ============= =============
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,
-------------------------
2000 2001
---- ----
OPERATING ACTIVITIES
Net income ...................................................................... $ 13,138,000 $ 7,942,000
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes .......................................................... 880,000 943,000
Depreciation and amortization .................................................. 3,195,000 4,017,000
Loss on disposal of property, plant and equipment .............................. -- 16,000
Changes in operating assets and liabilities:
Trade accounts receivable ..................................................... (3,887,000) 2,783,000
Inventories ................................................................... 2,723,000 (4,989,000)
Prepaid expenses and other assets ............................................. (1,011,000) 284,000
Income taxes receivable ....................................................... -- (504,000)
Trade accounts payable ........................................................ 3,219,000 (8,586,000)
Accrued expenses .............................................................. (694,000) (144,000)
Income taxes payable .......................................................... 1,665,000 (574,000)
Other current liabilities ..................................................... 195,000 678,000
------------ ------------
Net cash provided by operating activities ....................................... 19,423,000 1,866,000
------------ ------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment .................................. (24,221,000) (20,721,000)
------------ ------------
Net cash used in investing activities ........................................... (24,221,000) (20,721,000)
------------ ------------
FINANCING ACTIVITIES
Principal payments under mortgages and notes .................................... (212,000) (325,000)
Borrowings under line of credit ................................................. 12,748,000 57,809,000
Principal payments under line of credit ......................................... (7,892,000) (38,772,000)
Proceeds from exercise under employee stock purchase and option plans ........... 154,000 143,000
------------ ------------
Net cash provided by financing activities ....................................... 4,798,000 18,855,000
------------ ------------
Net increase in cash and cash equivalents ....................................... -- --
Cash and cash equivalents at beginning of period ................................ -- --
------------ ------------
Cash and cash equivalents at end of period ...................................... $ -- $ --
============ ============
Supplemental Disclosure
Cash paid for interest ................................................. $ 428,000 $ 618,000
Cash paid for income taxes ............................................. $ 5,505,000 $ 5,011,000
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, 2000 and 2001 (Unaudited)
1. BUSINESS AND ORGANIZATION
Trex Company, Inc. (the "Company"), a Delaware corporation, was incorporated on
September 4, 1998 for the purpose of acquiring 100% of the membership interests
and operating the business of TREX Company, LLC, a Delaware limited liability
company, in connection with an initial public offering of the Company's common
stock. Through its wholly owned subsidiary, TREX Company, LLC, the Company
manufactures and distributes wood/plastic composite products primarily for
residential and commercial decking applications. Trex Wood-Polymer(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.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the accompanying condensed consolidated financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normally recurring
accruals) considered necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements. The consolidated
results of operations for the three-month and six-month periods ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
full fiscal year. These condensed consolidated financial statements should be
read in conjunction with the consolidated audited financial statements as of
December 31, 1999 and 2000 and for each of the three years in the period ended
December 31, 2000 included in the annual report of Trex Company, Inc. on Form
10-K (File No. 001-14649), as filed with the Securities and Exchange Commission.
3. INVENTORY
Inventories consist of the following:
December 31, 2000 June 30, 2001
----------------- -------------
(unaudited)
Finished goods ..................... $ 19,523,000 $ 23,906,000
Raw materials ...................... 3,494,000 4,100,000
--------------- ----------------
$ 23,017,000 $ 28,006,000
============== ===============
4. DEBT
On January 31, 2001, the Company entered into a second credit facility. The new
facility provided for borrowings of up to $15.0 million on an unsecured basis
for working capital and general corporate purposes. Amounts drawn under the
facility accrued interest at an annual rate equal to LIBOR plus 1.00%. The
facility matured on April 30, 2001 and is no longer available.
As of June 30, 2001, the Company was not in compliance with certain requirements
of its revolving credit facility to maintain minimum leverage and capitalization
ratios. As a result of such non-compliance, the Company was in violation of
certain of its mortgage loans as of June 30, 2001. Accordingly, the Company has
classified its credit facility balance of approximately $64.0 million and
mortgage loan balance of approximately $10.0 million as of June 30, 2001 as
current liabilities. Subsequent to June 30, 2001, the lender under the credit
facility waived such non-compliance through August 31, 2001 in consideration for
payment of a $25,000 fee. Also subsequent to June 30, 2001, the Company entered
into a commitment letter for a syndicated credit facility. The Company intends
to use the borrowings anticipated to be available under the new facility, which
is currently expected to close in the third quarter of 2001, to repay its
existing revolving credit facility and to refinance the mortgage loans which
have been reclassified.
6
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,
--------------------------- -------------------------
2000 2001 2000 2001
---- ---- ---- ----
Numerator:
Net income available to common
shareholders, basic and diluted .... $ 6,081,000 $ 287,000 $13,138,000 $ 7,942,000
=========== =========== =========== ===========
Denominator:
Weighted average shares outstanding,
basic ............................ 14,128,437 14,142,087 14,125,502 14,139,451
Impact of potential common shares:
Stock options .................... 99,423 35,367 80,763 35,415
----------- ----------- ----------- -----------
Weighted average shares outstanding,
diluted .......................... 14,227,860 14,177,454 14,206,265 14,174,866
=========== =========== =========== ===========
Basic earnings per share ............. $ 0.43 $ 0.02 $ 0.93 $ 0.56
=========== =========== =========== ===========
Diluted earnings per share ........... $ 0.43 $ 0.02 $ 0.92 $ 0.56
=========== =========== =========== ===========
6. SEASONALITY
The Company's net sales and income from operations have historically varied from
quarter to quarter. Such variations are principally attributable to seasonal
trends in the demand for the Trex product. The Company has historically
experienced lower net sales during the fourth quarter because of holidays and
adverse weather conditions in certain regions, which reduce the level of home
improvement and new construction activity. Net sales during the second quarter
of 2000 accounted for approximately 31.0% of annual sales in 2000. During the
third quarter of 2000, the Company's increased production capacity enabled it to
eliminate the allocation of product supply to its network of wholesale
distributors and retail dealers. Because customer stockpiling of inventories
resulting from this allocation policy affected seasonality, the Company's
historical seasonality may not be a reliable indicator of future seasonality.
7. NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by Statement of Financial Accounting Standard No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement requires that an
entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
In order to manage market risk exposure related to changing interest rates, the
Company has entered into interest rate swap agreements effectively converting
its floating rate mortgage debt to a fixed-rate obligation. These interest rate
swap agreements have the same payment and maturity terms as the underlying debt
and are accounted for under the short-cut method as permitted by SFAS No. 133.
7
The transition adjustment to implement this new standard, which is presented as
a cumulative effect of change in accounting principle, increased liabilities by
approximately $820,000, with a corresponding reduction in stockholders' equity
through other comprehensive income (approximately $508,000, net of tax). The
Company recognized a decrease in the liability of $355,000, with a corresponding
increase to stockholders' equity through other comprehensive income
(approximately $166,000, net of tax and reclassification of earnings), for the
three-month period ended June 30, 2001 and an increase in the liability of
$30,000 with a corresponding decrease to stockholders' equity through other
comprehensive income (approximately $19,000, net of tax and reclassification to
earnings), for the six-month period ended June 30, 2001. To reflect the change
in fair value of the hedges, the Company estimates that of the amounts included
in other comprehensive income, approximately $157,000, net of taxes of
approximately $96,000, will be reclassified to earnings over the next 12 months.
Comprehensive income for the Company includes net income and derivative gains or
losses that are excluded from net income but included as a separate component of
total stockholders' equity. Comprehensive income for the three-month and
six-month periods ended June 30, 2000 and 2001 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 2001 2000 2001
---- ---- ---- ----
Net income ................................ $ 6,081,000 $ 287,000 $13,138,000 $ 7,942,000
Cumulative effect of a change in accounting
principle ............................... -- -- -- (508,000)
Net derivative change in fair value ....... -- 166,000 -- (93,000)
Derivative loss reclassified to earnings .. -- 54,000 -- 74,000
----------- ----------- ----------- -----------
Total comprehensive income ................ $ 6,081,000 $ 507,000 $13,138,000 $ 7,415,000
=========== =========== =========== ===========
The Company implemented the consensus of the Emerging Issues Task Force Issue
00-10, "Accounting for Shipping and Handling Fees and Costs," or EITF 00-10, in
the fourth quarter of 2000. This rule requires that all shipping and handling
fees be recorded in net sales and that the related costs be included in cost of
sales. Previously, the Company had classified shipping and handling fees, net of
shipping and handling costs, as cost of sales. The effect of this
reclassification was to increase net sales and cost of sales by approximately
$0.9 million for three-month period ended June 30, 2000, and approximately $1.9
million for the six-month period ended June 30, 2000. This reclassification had
no effect on net income in any period.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 14, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements regarding the Company's expected financial position and
operating results, its business strategy and its financing plans are
forward-looking statements. These statements are subject to risks and
uncertainties that could cause the Company's actual results to differ
materially. Such risks and uncertainties include the Company's ability to
increase market acceptance of its Trex product; the Company's lack of product
diversification; the Company's current dependence on its two manufacturing
facilities and its ability to increase its manufacturing capacity in its
existing facilities; the Company's reliance on the supply of raw materials used
in its production process; the Company's sensitivity to economic conditions,
which influence the level of activity in home improvements and new home
construction; the Company's ability to manage its growth; the Company's
significant capital requirements; and the Company's dependence on its largest
distributors to market and sell its products. A discussion of these risks and
uncertainties is contained in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 28, 2001. The Company
undertakes no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Overview
The Company is the nation's largest manufacturer of non-wood decking alternative
products, which are marketed under the brand name Trex(R). Trex Wood-Polymer(TM)
lumber ("Trex") is a wood/plastic composite which is manufactured in a
proprietary process that combines waste wood fibers and reclaimed polyethylene.
Trex is used primarily for residential and commercial decking. Trex also has
non-decking product applications, including applications for parks and
recreational areas, floating and fixed docks and other marine applications, and
landscape edging.
Net sales consist of sales and freight, net of returns and discounts. Cost of
sales consists of raw material costs, direct labor costs and manufacturing
costs, including depreciation and freight. The principal component of selling,
general and administrative expenses is branding and other sales and marketing
costs, which have increased significantly as the Company has sought to build
brand awareness of Trex in the decking market. Sales and marketing costs consist
primarily of salaries, commissions and benefits paid to sales and marketing
personnel, advertising expenses and other promotional costs. General and
administrative expenses include salaries and benefits of personnel engaged in
research and development, procurement, accounting and other business functions
and office occupancy costs attributable to such functions, as well as
amortization expense.
Because of the continued expansion of its production capacity, during the third
quarter of 2000 the Company was able to eliminate the allocation of product
supply to its network of wholesale distributors and retail dealers. As a result,
customers generally no longer seek to stockpile inventories. The Company
believes there has been a temporary slowdown in new orders as excess inventories
at the wholesale and retail levels are reduced. The slowdown in new orders and
effect on net sales may continue until the more normal seasonal demand for Trex
products is fully resumed in the second half of 2001. During the quarter ended
June 30, 2001, the Company suspended operations on a portion of its production
capacity to reduce investments in inventory and working capital.
Three Months Ended June 30, 2001 Compared with Three Months Ended June 30, 2000
Net Sales
Net sales in the three months ended June 30, 2001 (the "2001 quarter") decreased
23.9% to $27.7 million from $36.4 million in the three months ended June 30,
2000 (the "2000 quarter"). The decrease in net sales was primarily attributable
to a decrease in sales volume, as the Company eliminated allocation of product
supply in October 2000, which led to customers reducing stockpiles of inventory
in 2001. An increase in the number of dealer outlets, from approximately 2,400
at June 30, 2000 to approximately 2,900 at June 30, 2001, mitigated the
reduction in net sales.
Cost of Sales
Cost of sales decreased 12.9% to $16.1 million in the 2001 quarter from $18.4
million in the 2000 quarter as a result of the lower sales volume. Cost of sales
as a percentage of net sales increased to 57.9% in the 2001 quarter from 50.6%
in the 2000 quarter. The increase principally reflected operating inefficiencies
from the reduced production level in the 2001 quarter.
9
Gross Profit
Gross profit decreased 35.2% to $11.7 million in the 2001 quarter from $18.0
million in the 2000 quarter. The decrease in gross profit was primarily
attributable to the lower sales volume and production inefficiencies from the
reduced production level in the 2001 quarter. Gross profit as a percentage of
net sales decreased to 42.1% in the 2001 quarter from 49.4% in the 2000 quarter,
primarily because of the increase in cost of sales as a percentage of net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 35.0% to $10.7 million in
the 2001 quarter from $7.9 million in the 2000 quarter, primarily because of an
increase of $1.7 million in corporate personnel expenses and related hiring
costs necessary to support the Company's growth and an increase of $1.1 million
in expense incurred in the Company's marketing and branding activities. As a
percentage of net sales, selling, general and administrative expenses increased
to 38.7% in the 2001 quarter from 21.8% in the 2000 quarter.
Interest Expense
Net interest expense increased to $0.5 million in the 2001 quarter from $0.3
million in the 2000 quarter. The increased expense primarily reflected higher
average debt balances incurred since the 2000 quarter to fund the expansion of
the Company's production capacity. The increase was substantially offset by the
capitalization of interest with respect to those projects.
Provision for Income Taxes
The Company recorded a provision for income taxes of $0.2 million in the 2001
quarter compared to a provision of $3.7 million in the 2000 quarter. Both
provisions reflect a 38% combined effective tax rate.
Net Income
The Company's net income decreased 95.3% to $0.3 million in the 2001 quarter
from $6.1 million in the 2000 quarter. The decrease in net income in the 2001
quarter was primarily attributable to lower net sales resulting from the
stockpiling of inventories by customers, production inefficiencies resulting
from the reduced production level, and the increase in selling, general and
administrative expenses.
Six Months Ended June 30, 2001 Compared with Six Months Ended June 30, 2000
Net Sales
Net sales in the six months ended June 30, 2001 (the "2001 six-month period")
decreased 7.4% to $69.9 million from $75.5 million in the six months ended June
30, 2000 (the "2000 six-month period"). The decrease in net sales was primarily
attributable to a reduction in sales volume, as the Company eliminated the
allocation of product supply in October 2000, which led to customers reducing
stockpiles of inventory in 2001. The increase in the number of dealer outlets,
from approximately 2,400 at June 30, 2000 to approximately 2900 at June 30,
2001, mitigated the reduction in net sales.
Cost of Sales
Cost of sales decreased 0.7% to $39.0 million in the 2001 six-month period from
$39.3 million in the 2000 six-month period. Cost of sales as a percentage of net
sales increased to 55.8% in the 2001 six-month period from 52.1% in the 2000
six-month period. The increase principally reflected operating inefficiencies
from the reduced production level in the 2001 six-month period.
Gross Profit
Gross profit decreased 14.6% to $30.9 million in the 2001 six-month period from
$36.2 million in the 2000 six-month period. The decrease in gross profit was
primarily attributable to the lower sales volume and production inefficiencies
from the reduced production level in the 2001 six-month period. Gross profit as
a percentage of net sales decreased to 44.2% in the 2001 six-month period from
47.9% in the 2000 six-month period, primarily because of the increase in cost of
sales as a percentage of net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 18.5% to $17.1 million in
the 2001 six-month period from $14.5 million in the 2000 six-month period. The
increase was primarily attributable to an increase of approximately $1.5 million
in corporate personnel expense necessary to support the Company's growth.
Selling, general and administrative expenses as a percentage of net sales
increased to 24.5% in the 2001 six-month period from 19.1% in the 2000 six-month
period.
10
Interest Expense
Net interest expense increased 75.6% to $0.9 million in the 2001 six-month
period from $0.5 million in the 2000 six-month period. The increased expense
primarily reflected higher average debt balances incurred since the 2000
six-month period to fund the expansion of the Company's production capacity. The
increase was substantially offset by the capitalization of interest with respect
to those projects.
Provision for Income Taxes
The Company recorded a provision for income taxes of $4.9 million in the 2001
six-month period compared to a provision of $8.1 million in the 2000 six-month
period. Both provisions reflect a 38% combined effective tax rate.
Net Income
The Company's net income decreased 39.5% to $7.9 million in the 2001 six-month
period from $13.1 million in the 2000 six-month period. The decrease in net
income in the 2001 six-month period was primarily attributable to lower net
sales resulting from the stockpiling of inventories by customers, production
inefficiencies resulting from the reduced production level, and the increase in
selling, general and administrative expenses.
Liquidity and Capital Resources
The Company's total assets increased from $156.6 million at December 31, 2000 to
$175.6 million at June 30, 2001. Receivables decreased by $2.8 million as the
Company offered some distributors extended payment terms in the fourth quarter
of 2000 to facilitate the addition of new distributors and the introduction on a
national basis of the newest Trex color, Madeira. Inventories increased by $5.0
million from December 31, 2000 to June 30, 2001 as a result of lower net sales
in the 2001 six-month period. Property, plant and equipment, net, increased
$17.0 million as the Company continued construction of a second manufacturing
facility in Winchester, Virginia, installation of manufacturing lines in both
its Winchester, Virginia and Fernley, Nevada facilities, and construction of a
plastic processing facility in Winchester, Virginia. Trade accounts payable
decreased $8.6 million as a result of the timing of payments relating to the
foregoing construction projects. The Company financed these activities in the
2001 six-month period from operating cash flows and additional net draws of
approximately $19.0 million under its revolving credit facilities.
The Company historically has financed its operations and growth primarily with
cash flow from operations and borrowings under its credit facilities.
The Company's cash flow from operating activities for the 2001 six-month period
was $1.9 million compared to cash flow from operating activities of $19.4
million for the 2000 six-month period. Trade accounts receivable, net, increased
from $5.2 million at June 30, 2000 to $7.8 million at June 30, 2001 despite
lower net sales, due to the timing of those sales. Inventories increased from
$5.9 million at June 30, 2000 to $28.0 million at June 30, 2001 as the Company's
production of Trex products grew at a faster rate than net sales. Trade accounts
payable decreased from $9.6 million at June 30, 2000 to $8.5 million at June 30,
2001 as a result of the timing of payments relating to construction projects.
As of June 30, 2001, the Company's indebtedness, excluding amounts outstanding
under its revolving credit facility, totaled $16.3 million and had an overall
weighted average interest rate of approximately 7.7% per annum.
On October 27, 2000, the Company and the lender revised the terms of the
Company's bank revolving credit agreement primarily to increase the maximum
amount of borrowings available to the Company. The terms of this revolving
credit facility currently provide for borrowings of up to $75.0 million on an
unsecured basis for working capital and general corporate purposes through
September 30, 2001 and $50.0 million thereafter. Amounts drawn under the
revolving credit facility bear interest at an annual rate equal to LIBOR plus
1.00%. The facility will mature on June 30, 2003 and contains customary
restrictive and financial covenants.
As of June 30, 2001, the Company was not in compliance with certain requirements
of its revolving credit facility to maintain minimum leverage and capitalization
ratios. As a result of such non-compliance, the Company was in violation of
certain of its mortgage loans as of June 30, 2001. Accordingly, the Company has
classified its credit facility balance of approximately $64.0 million and
mortgage loan balances of approximately $10.0 million as of June 30, 2001 as
current liabilities. Subsequent to June 30, 2001, the lender under the credit
facility waived such non-compliance through August 31, 2001 in consideration for
payment of a $25,000 fee. Also subsequent to June 30, 2001, the Company entered
into a commitment letter for a syndicated credit facility. The Company intends
to use the borrowings anticipated to be available under the new facility, which
is currently expected to close in the third quarter of 2001, to repay its
existing revolving credit facility and to refinance the mortgage loans
11
which have been reclassified.
Expansion of the Company's production capacity will continue to require
significant capital expenditures. In the second quarter of 2000, the Company
accelerated its capital expenditure program to invest in additional production
capacity to meet current and expected demand for its product. Capital
expenditures during the 2001 six-month period totaled $20.7 million and for the
balance of 2001 are expected to total approximately $10.0 million. The Company
believes that cash flow from operations and borrowings anticipated to be
available under the Company's current and expected revolving credit facilities
will provide sufficient funds to enable the Company to expand its business as
currently planned. The actual amount and timing of the Company's future capital
requirements may differ materially from the Company's estimate depending on the
demand for Trex products and evolving market and economic conditions. The
Company may determine that it is necessary or desirable to obtain financing for
such requirements through the issuance of public debt or equity securities. Debt
financing would increase the leverage of the Company, while equity financing may
dilute the ownership of the Company's stockholders. There can be no assurance as
to whether, or as to the terms on which, the Company will be able to obtain such
financing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary existing market risk exposure is to changing interest
rates. The Company's policy is to manage interest rates through a combination of
variable-rate debt under its revolving credit facility and interest rate swap
agreements with respect to its other debt. Amounts drawn under the Company's
revolving credit facility bear interest at an annual rate equal to LIBOR plus
1.00%. As of June 30, 2001, pursuant to interest rate swap agreements, the
Company had effectively fixed its interest rate exposure through 2014 at a rate
of 7.7% on $16.3 million of variable-rate debt.
The Company does not have any material foreign currency forward contracts or
commodity contracts and does not have any material foreign currency exposure.
12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
A number of lawsuits have been filed in the United States District Court
for the Western District of Virginia naming as defendants the Company and
certain directors and officers of the Company, including Robert G. Matheny, the
President and a director of the Company, Roger A. Wittenberg, the Executive Vice
President of Technical Operations and Materials Sourcing and a director of the
Company, and Anthony J. Cavanna, the Executive Vice President, Chief Financial
Officer and a Director of the Company. The complaints, which seek certification
as class actions, principally allege that the Company and certain directors and
officers of the Company violated Sections 10(b) and 20(a) of and Rule 10b-5
under the Securities Exchange Act of 1934 by, among other things, making false
and misleading public statements concerning the Company's operating and
financial results and expectations and by filing misleading and inaccurate
financial statements with the Securities and Exchange Commission. The complaints
also allege that certain directors and officers of the Company sold shares of
the Company's common stock at artificially inflated prices. The plaintiffs in
the lawsuits seek unspecified monetary damages and any extraordinary, equitable
and/or injunctive relief as permitted by law, equity and federal statutory
provisions identified in the complaints. The Company believes that the lawsuits
are without merit and intends to vigorously defend these lawsuits and any other
similar lawsuits that may be served on the Company.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
The information set forth in this report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" is incorporated by reference in this Item.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 2001 annual meeting of stockholders on May 10,
2001.
(c) The following sets forth information regarding each matter voted
upon at the 2001 annual meeting. There were 14,137,586 shares of common stock
outstanding as of the record date for, and entitled to vote at, the 2001 annual
meeting.
Proposal 1. The stockholders approved a proposal to elect each of the
two nominees to the board of directors for a three-year term, which will
expire at the annual meeting of stockholders in 2004. The tabulation of
votes on this proposal is as follows:
Nominees Votes For Votes Withheld
-------- --------- --------------
William F. Andrews 13,067,313 109,255
Andrew U. Ferrari 12,840,187 336,381
Proposal 2. The stockholders approved a proposal to approve the Trex
Company, Inc. 1999 Stock Option and Incentive Plan. The tabulation of
votes on this proposal is as follows:
Votes For 11,066,106
Votes Against 603,753
Abstentions 42,131
Broker Non-Votes 1,464,578
Proposal 3. The stockholders approved a proposal to approve the material
terms for payment of annual executive incentive compensation to permit
the compensation paid pursuant to such material terms to qualify as
performance-based compensation under Section 162(m) of the Internal
Revenue Code. The tabulation of votes on this proposal is as follows:
13
Votes For 13,014,016
Votes Against 113,885
Abstentions 48,667
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Not Applicable
(b) The Company did not file any Current Reports on Form 8-K during the
period covered by this report.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TREX COMPANY, INC.
(Registrant)
Date: August 14, 2001 /s/ Anthony J. Cavanna
----------------------
Anthony J. Cavanna, Executive Vice President
and Chief Financial Officer (Duly Authorized
Officer and Principal Financial Officer)
15
