Trex Co Inc 10-Q for FY2020 Q2
Trex Co Inc (TREX)
10-Q
2020-08-03
For: 2020-06-30
View Original
Added on
April 11, 2026
About this 10-Q
Trex Co Inc filed this 10-Q on August 3, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $220.65M
- up 6.9% from $206.45M a year earlier
- Net income
- $47.22M
- up 32.2% from net income of $35.71M a year earlier
- Diluted EPS
- $0.81
- up 32.8% from $0.61 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
(Address of principal executive offices) |
(Zip Code) | |
Registrant’s telephone number, including area code:
(540 ) 542-6300
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.: ☒ |
Accelerated filer |
☐ | ||||
Non-accelerated filer |
☐ |
Smaller reporting company |
||||
Emerging growth company |
||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule ☒
12b-2
of the Exchange Act): Yes ☐ No The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding at July 20, 2020 was 57,878,154 shares.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
TREX COMPANY, INC.
INDEX
Page |
||||||
2 |
||||||
Item 1. |
2 |
|||||
2 |
||||||
3 |
||||||
4 |
||||||
5 |
||||||
6 |
||||||
Item 2. |
18 |
|||||
Item 3. |
28 |
|||||
Item 4. |
28 |
|||||
29 |
||||||
Item 1. |
29 |
|||||
Item 1A. |
29 |
|||||
Item 2. |
30 |
|||||
Item 5. |
30 |
|||||
Item 6. |
30 |
|||||
1
PART I
FINANCIAL INFORMATION
Item 1. |
Condensed Consolidated Financial Statements |
TREX COMPANY, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except share and per share data)
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Net sales |
$ | |
$ | |
$ | |
$ | |
||||||||
| Cost of sales |
|
|
|
|
||||||||||||
| Gross profit |
|
|
|
|
||||||||||||
| Selling, general and administrative expenses |
|
|
|
|
||||||||||||
| Income from operations |
|
|
|
|
||||||||||||
| Interest income, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income before income taxes |
|
|
|
|
||||||||||||
| Provision for income taxes |
|
|
|
|
||||||||||||
| Net income |
$ | |
$ | |
$ | |
$ | |
||||||||
| Basic earnings per common share |
$ | |
$ | |
$ | |
$ | |
||||||||
| Basic weighted average common shares outstanding |
|
|
|
|
||||||||||||
| Diluted earnings per common share |
$ | |
$ | |
$ | |
$ | |
||||||||
| Diluted weighted average common shares outstanding |
|
|
|
|
||||||||||||
| Comprehensive income |
$ | |
$ | |
$ | |
$ | |
||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
2
TREX COMPANY, INC.
Condensed Consolidated Balance Sheets
(In thousands)
| June 30, 2020 |
December 31, 2019 |
|||||||
| (Unaudited) |
||||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | |
$ | |
||||
| Accounts receivable, net |
|
|
||||||
| Inventories |
|
|
||||||
| Prepaid expenses and other assets |
|
|
||||||
| Total current assets |
|
|
||||||
| Property, plant and equipment, net |
|
|
||||||
| Goodwill and other intangible assets, net |
|
|
||||||
| Operating lease assets |
|
|
||||||
| Other assets |
|
|
||||||
| Total assets |
$ | |
$ | |
||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | |
$ | |
||||
| Accrued expenses and other liabilities |
|
|
||||||
| Accrued warranty |
|
|
||||||
| Total current liabilities |
|
|
||||||
| Operating lease liabilities |
|
|
||||||
| Deferred income taxes |
|
|
||||||
| Non-current accrued warranty |
|
|
||||||
| Other long-term liabilities |
|
|
||||||
| Total liabilities |
|
|
||||||
| Commitments and contingencies |
|
|
||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $ |
|
|
||||||
| Common stock, $ |
|
|
||||||
| Additional paid-in capital |
|
|
||||||
| Retained earnings |
|
|
||||||
| Treasury stock, at cost, |
( |
) | ( |
) | ||||
| Total stockholders’ equity |
|
|
||||||
| Total liabilities and stockholders’ equity |
$ | |
$ | |
||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
3
TREX COMPANY, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
(In thousands, except share data)
| Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Treasury Stock |
Total |
||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||
| Balance, December 31, 2019 |
|
$ | |
$ | |
$ | |
|
$ | ( |
) | $ | |
|||||||||||||||
| Net income |
— |
— |
— |
|
— |
— |
|
|||||||||||||||||||||
| Employee stock plans |
|
— |
|
— |
— |
— |
|
|||||||||||||||||||||
| Shares withheld for taxes on awards |
( |
) | — |
( |
) | — |
— |
— |
( |
) | ||||||||||||||||||
| Stock-based compensation |
|
— |
|
— |
— |
— |
|
|||||||||||||||||||||
| Repurchases of common stock |
( |
) | — |
— |
— |
|
( |
) | ( |
) | ||||||||||||||||||
| Balance, March 31, 2020 |
|
$ | |
$ | |
$ | |
|
$ | ( |
) | $ | |
|||||||||||||||
| Net income |
— |
— |
— |
|
— |
— |
|
|||||||||||||||||||||
| Employee stock plans |
|
— |
|
— |
— |
— |
|
|||||||||||||||||||||
| Shares withheld for taxes on awards |
( |
) | — |
( |
) | — |
— |
— |
( |
) | ||||||||||||||||||
| Stock-based compensation |
|
|
|
— |
— |
— |
|
|||||||||||||||||||||
| Balance, June 30, 2020 |
|
$ | |
$ | |
$ | |
|
$ | ( |
) | $ | |
|||||||||||||||
| Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Treasury Stock |
Total |
||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||
| Balance, December 31, 2018 |
|
$ | |
$ | |
$ | |
|
$ | ( |
) | $ | |
|||||||||||||||
| Net income |
— |
— |
— |
|
— |
— |
|
|||||||||||||||||||||
| Employee stock plans |
|
— |
|
— |
— |
— |
|
|||||||||||||||||||||
| Shares withheld for taxes on awards |
( |
) | — |
( |
) | — |
— |
— |
( |
) | ||||||||||||||||||
| Stock-based compensation |
|
|
|
— |
— |
— |
|
|||||||||||||||||||||
| Repurchases of common stock |
( |
) | — |
— |
— |
|
( |
) | ( |
) | ||||||||||||||||||
| Balance, March 31, 2019 |
|
$ | |
$ | |
$ | |
|
$ | ( |
) | $ | |
|||||||||||||||
| Net income |
— |
— |
— |
|
— |
— |
|
|||||||||||||||||||||
| Employee stock plans |
|
— |
|
— |
— |
— |
|
|||||||||||||||||||||
| Shares withheld for taxes on awards |
( |
) | — |
( |
) | — |
— |
— |
( |
) | ||||||||||||||||||
| Stock-based compensation |
|
— |
|
— |
— |
— |
|
|||||||||||||||||||||
| Repurchases of common stock |
( |
) | — |
— |
— |
|
( |
) | ( |
) | ||||||||||||||||||
| Balance, June 30, 2019 |
|
$ | |
$ | |
$ | |
|
$ | ( |
) | $ | |
|||||||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
4
TREX COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| Six Months Ended June 30, |
||||||||
| 2020 |
2019 |
|||||||
| Operating Activities |
||||||||
| Net income |
$ | |
$ | |
||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
||||||||
| Depreciation and amortization |
|
|
||||||
| Stock-based compensation |
|
|
||||||
| (Gain) loss on disposal of property, plant and equipment |
( |
) | |
|||||
| Other non-cash adjustments |
( |
) | ( |
) | ||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
( |
) | ( |
) | ||||
| Inventories |
|
|
||||||
| Prepaid expenses and other assets |
( |
) | |
|||||
| Accounts payable |
|
( |
) | |||||
| Accrued expenses and other liabilities |
( |
) | ( |
) | ||||
| Income taxes receivable/payable |
|
( |
) | |||||
| Net cash (used in) provided by operating activities |
( |
) | |
|||||
| Investing Activities |
||||||||
| Expenditures for property, plant and equipment |
( |
) | ( |
) | ||||
| Proceeds from sales of property, plant and equipment |
|
— |
||||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Financing Activities |
||||||||
| Borrowings under line of credit |
|
|
||||||
| Principal payments under line of credit |
( |
) | ( |
) | ||||
| Repurchases of common stock |
( |
) | ( |
) | ||||
| Financing costs |
|
|
( |
) |
|
|
— |
|
| Proceeds from employee stock purchase and option plans |
|
|
||||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Net (decrease) increase in cash and cash equivalents |
( |
) | |
|||||
| Cash and cash equivalents, beginning of period |
|
|
||||||
| Cash and cash equivalents, end of period |
$ | |
$ | |
||||
| Supplemental Disclosure: |
||||||||
| Cash paid for interest |
$ | |
$ | |
||||
| Cash paid for income taxes, net |
$ | |
$ | |
||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
5
TREX COMPANY, INC.
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2020 and 2019
(Unaudited)
1. |
BUSINESS AND ORGANIZATION |
Trex Company, Inc. (Company) is the world’s largest manufacturer of high-performance, two reportable segments, Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). The Company is incorporated in Delaware. The principal executive offices are located at 160 Exeter Drive, Winchester, Virginia 22603, and the telephone number at that address is (540)
low-maintenance
wood-alternative decking and residential railing and outdoor living products and accessories, marketed under the brand name Trex®
, with more than 25 years of product experience. A majority of its products are manufactured in a proprietary process that combines reclaimed wood fibers and scrap polyethylene. Also, the Company is a leading national provider of custom-engineered railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues. The Company operates in 542-6300.
2. |
BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form
10-Q
and Article 10 of Regulation S-X
and, accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments except as otherwise described herein) considered necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Trex Commercial Products, Inc., for all periods presented.The unaudited consolidated results of operations for the three and six
months
ended June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. As of the date of this report, the Company has not experienced any material disruptions to its operations due to the COVID-19
pandemic. However, the pandemic remains an evolving situation due to the continuation of the outbreak and any future measures that may be taken to contain the spread of the virus. In addition, the extent and duration of the economic fallout from COVID-19
remains unclear. The Company is actively managing its business to respond to the impact and will continue to evaluate the nature and extent of the impact to its business and consolidated results of operations and financial condition. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019 included in the Annual Report of Trex Company, Inc. on Form
10-K,
as filed with the U.S. Securities and Exchange Commission.3. |
RECENTLY ADOPTED ACCOUNTING STANDARDS |
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ”. The new guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an
No. 2018-15,
“Intangibles – Goodwill and Other –
Internal-Use
Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of FASB Emerging Issues Task Force)internal-use
software license. Under that model, implementation costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred. Capitalized implementation costs are amortized over the term of the associated hosted cloud computing arrangement service contract on a straight-line basis, unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from its right to access the hosted software. Capitalized implementation costs would then be assessed for impairment in a manner similar to long-lived assets. The new guidance was effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Entities can adopt the new guidance either prospectively to eligible costs incurred on or after the date the guidance is first applied or retrospectively. The Company adopted the guidance prospectively on January 1, 2020. Adoption did not have a material impact on its consolidated financial condition or results of operations. 6
In January 2017, the FASB issued ASU No.”. The guidance removes Step 2 of the goodwill impairment test and eliminates the need to determine the fair value of individual assets and liabilities to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The guidance was applied prospectively, and was effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted the guidance on January 1, 2020. Adoption did not have a material impact on its consolidated financial condition or results of operations.
2017-04,
“Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
In June 2016, the FASB issued ASU ,” as amended. The ASU amends the guidance on the impairment of financial instruments and adds an impairment model, known as the current expected credit loss (CECL) model. The CECL model requires an entity to recognize its current estimate of all expected credit losses, rather than incurred losses, and applies to trade receivables and other receivables. The CECL model is designed to capture expected credit losses through the establishment of an allowance account, which will be presented as an offset to the amortized cost basis of the related financial asset. The new guidance was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is applied using the modified-retrospective approach. The Company adopted the guidance on January 1, 2020. Adoption did not have a material impact on its consolidated financial condition or results of operations.
2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses in Financial Instruments
4. |
NEW ACCOUNTING STANDARDS NOT YET ADOPTED |
In March 2020, the FASB issued ASU No.”. The guidance provides temporary optional expedients and exceptions related to contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. The new guidance allows entities to elect not to apply certain modification accounting requirements, if certain criteria are met, to contracts affected by what the guidance calls reference rate reform. An entity that makes this election would consider changes in reference rates and other contract modifications related to reference rate reform to be events that do not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The ASU notes that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition. The guidance is effective upon issuance and generally can be applied as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of the standard on its contract accounted for under Codification topic ASC 470, “” but does not expect adoption of the guidance to have a material effect on its consolidated financial statements.
2020-04,
“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Debt
In December 2019, the FASB issued ASU No.”. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a
2019-12,
“Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes
step-up
in the tax basis of goodwill. The standard will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company does not intend to early adopt the standard and is currently evaluating the impact of the standard on its consolidated financial condition and results of operations. It does not expect the standard to have a material effect on its consolidated financial statements.5. |
INVENTORIES |
Inventories valued at LIFO
(last-in,
first-out),
consist of the following (in thousands):June 30, 2020 |
December 31, 2019 |
|||||||
Finished goods |
$ | $ | ||||||
Raw materials |
||||||||
Total FIFO (first-in, first-out) inventories |
||||||||
Reserve to adjust inventories to LIFO value |
( |
) | ( |
) | ||||
Total LIFO inventories |
$ | $ | ||||||
7
The Company utilizes the LIFO method of accounting to its Trex Residential wood-alternative decking and residential railing products, which generally provides for the matching of current costs with current revenues. However, under the LIFO method, reductions in annual inventory balances cause a portion of the Company’s cost of sales to be based on historical costs rather than current year costs (LIFO liquidation). Reductions in interim inventory balances expected to be replenished by no LIFO inventory liquidations or related impact on cost of sales in the six months ended June 30, 2020.
year-end
do not result in a LIFO liquidation. Accordingly, interim LIFO calculations are based, in part, on management’s estimates of expected year-end
inventory levels and costs, which may differ from actual results. Since inventory levels and costs are subject to factors beyond management’s control, interim results are subject to the final year-end
LIFO inventory valuation. As of June 30, 2020, management estimates that interim inventory balances will be replenished by year-end
and there were Inventories valued at lower of cost (FIFO method) and net realizable value were $1.4 million at June 30, 2020 and $1.2 million at December 31, 2019, consisting primarily of raw materials. The Company utilizes the FIFO method of accounting to its Trex Commercial architectural railing and staging system products.
6. |
PREPAID EXPENSES AND OTHER ASSETS |
June 30, 2020 |
December 31, 2019 |
|||||||
Revenues in excess of billings |
$ | $ | ||||||
Prepaid expenses |
||||||||
Contract retainage |
| |||||||
Income tax receivable |
||||||||
Other |
||||||||
Total prepaid expenses and other assets |
$ |
$ | ||||||
7. |
GOODWILL AND OTHER INTANGIBLE ASSETS |
The carrying amount of goodwill by reportable segment at June 30, 2020 and December 31, 2019 was $14.2 million for Trex Residential and $54.3 million for Trex Commercial.
The Company’s intangible assets consist of domain names. At June 30, 2020 and December 31, 2019, intangible assets were $6.3 0.9 million and $0.7 million, respectively. Intangible asset amounts were determined based on the estimated economics of the asset and are amortized over the estimated useful lives on a straight-line basis over 15 years, which approximates the pattern in which the economic benefits are expected to be received. The Company evaluates the recoverability of intangible assets periodically and considers events or circumstances that may warrant revised estimates of useful lives or that may indicate an impairment. Intangible asset amortization expense for the six months ended June 30, 2020 and June 30, 2019, was $0.2 million and $0.2 million, respectively.
8. |
ACCRUED EXPENSES AND OTHER LIABILITIES |
June 30, 2020 |
December 31, 2019 |
|||||||
Sales and marketing |
$ |
$ | ||||||
Income taxes |
— |
|||||||
Compensation and benefits |
||||||||
Operating lease liabilities |
||||||||
Manufacturing costs |
| |||||||
Customer deposits |
||||||||
Billings in excess of revenues |
||||||||
Other |
||||||||
Total accrued expenses and other liabilities |
$ | $ | ||||||
8
9. DEBT
The Company’s outstanding debt consists of a revolving credit facility. The Company had no outstanding borrowings under its revolving credit facility and remaining available borrowing capacity of $350 million at June 30, 2020
, and $300 million from July 1, 2020 through December 31, 2020.
Revolving Credit Facility
On November 5, 2019, the Company entered into a Fourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) as borrower, Trex Commercial Products, Inc., as guarantor; Bank of America, N.A. as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; and certain other lenders including Wells Fargo Bank, N.A., who is also Syndication Agent, and Truist Bank, arranged by BOA Securities, Inc., as Sole Lead Arranger and Sole Bookrunner, to amend and restate the Third Amended and Restated Credit Agreement (Third Amended Credit Agreement), dated as of January 12, 2016, as amended. The Fourth Amended Credit Agreement provides the Company with one or more Revolving Loans in a collective maximum principal amount of $250 million from January 1 through June 30 of each year and a maximum principal amount of $200 million from July 1 through December 31 of each year throughout the term, which ends November 5, 2024 .
On May 26, 2020, the Company entered into a First Amendment to the Original Credit Agreement (the First Amendment) to provide for an additional $100 million line of credit
through May 26, 2022.
The purpose of the additional $100 million line of credit is primarily to reduce risk associated with the COVID-19
pandemic should the Company need to secure additional capital to continue its strategy of accelerating the conversion of wood decking to Trex composite decking and expanding its addressable market. As a matter of convenience, the parties incorporated the amendments to the Original Credit Agreement made by the First Amendment into a new Fourth Amended and Restated Credit Agreement (New Credit Agreement). In the New Credit Agreement, the revolving commitments under the Original Credit Agreement are referred to as Revolving A Commitments and the new $100 million line of credit is referred to as Revolving B Commitments. In the New Credit Agreement, all of the material terms and conditions related to the original line of credit (Revolving A Commitments) remain unchanged from the Original Credit Agreement.The Company entered into the First Amendment, as borrower; Trex Commercial Products, Inc. (TCP), as guarantor; Bank of America, N.A. (BOA), as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; and certain other lenders including Wells Fargo Bank, N.A. (Wells Fargo), who is also Syndication Agent; Truist Bank (Truist); and Regions Bank (Regions) (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner. The First Amendment further provides that the New Credit Agreement is amended and restated by changing Schedule 2.01 to add applicable Lender percentages related to the Revolving B Commitment for BOA of 47.5 %, Well Fargo of 28.0 % and Regions of 24.5 %.
The Notes and interest rates for the Revolving A Commitments remained unchanged and are the same as previously disclosed. The Notes for Revolving A Commitments and Revolving B Commitments provide the Company, in the aggregate, the ability to borrow an amount up to the respective Revolving A Loan Limit and Revolving B Loan Limit during the respective Revolving A Term and Revolving B Term. The Company is not obligated to borrow any amount under either the Revolving A Loan or the Revolving B Loan. Within either the Revolving A Loan or the Revolving B Loan, the Company may borrow, repay and reborrow at any time or from time to time while the respective Revolving A Loan or Revolving B Loan remains in effect.
Base Rate Loans (as defined in the Fourth Amended Credit Agreement) under the Revolving Loans and the Swing Line Loans accrue interest at the Base Rate plus the Applicable Rate (as defined in the Fourth Amended Credit Agreement) and Eurodollar Rate Loans for the Revolving Loans and Swing Line Loans accrue interest at the Adjusted London InterBank Offered Rate plus the Applicable Rate (as defined in the Fourth Amended Credit Agreement).
The Base Rate for any day is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50 %, (b) the rate of interest in effect for such day as publicly announced from time to time by BOA as its prime rate, and (c) the Eurodollar Rate plus 1.0 %.
The Applicable Rate for Revolving B Commitments means the following percentages per annum, based upon the Consolidated Debt to Consolidated EBITDA Ratio as set forth in the most recent Compliance Certificate received by BOA as the Administrative Agent and as set forth in the New Credit Agreement:
9
Pricing Tier |
Consolidated Debt to Consolidated EBITDA Ratio |
Eurodollar Rate Loans / LIBOR Index Rate |
Base Rate Loans |
Revolving B Commitment Fee |
||||||||||||
1 |
% |
% |
% | |||||||||||||
2 |
< but > 2.00:1.00 |
% |
% |
% | ||||||||||||
3 |
< 2.00:1.00 but > 1.50:1.00 |
% |
% |
% | ||||||||||||
4 |
% |
% |
% | |||||||||||||
Compliance with Debt Covenants and Restrictions
Pursuant to the terms of the Fourth Amended Credit Agreement, the Company is subject to certain loan compliance covenants. The Company was in compliance with all covenants as of June 30, 2020. Failure to comply with the financial covenants could be considered a default of repayment obligations and, among other remedies, could accelerate payment of any amounts outstanding.
10. |
LEASES |
The Company leases office space, storage warehouses and certain plant equipment under various operating leases. The Company’s operating leases have remaining lease terms of 1 year to 8 years. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
For the six months ended June 30, 2020 and June 30, 2019, total operating lease 4.3 million and $4.2 million, respectively. The weighted average remaining lease term at June 30, 2020 and December 31, 2019 was 6 years and 6.5 years, respectively. The weighted average discount rate at June 30, 2020 and December 31, 2019 was 3.64 % and 3.66 %, respectively.
expense
was $The following table includes supplemental cash flow information for the six months ended June 30, 2020 and June 30, 2019 and supplemental balance sheet information at June 30, 2020 and December 31, 2019 related to operating leases (in thousands):
Six Months Ended |
||||||||
Supplemental cash flow information |
June 30, 2020 |
June 30, 2019 |
||||||
Cash paid for amounts included in the measurement of operating lease liabilities |
$ | $ | ||||||
Operating ROU assets obtained in exchange for lease liabilities |
$ | $ | ||||||
Supplemental balance sheet information |
June 30, 2020 |
December 31, 2019 |
||||||
Operating lease ROU assets |
$ |
$ |
||||||
Operating lease liabilities: |
||||||||
Accrued expenses and other current liabilities |
$ |
$ |
||||||
Operating lease liabilities |
||||||||
Total operating lease liabilities |
$ |
$ |
||||||
The following table summarizes maturities of operating lease liabilities at June 30, 2020 (in thousands):
| Maturities of operating lease liabilities |
||||
| 2020 |
$ | |
||
| 2021 |
|
|||
| 2022 |
|
|||
| 2023 |
|
|||
| 2024 |
|
|||
| Thereafter |
|
|||
| Total lease payments |
|
|||
| Less imputed interest |
( |
) | ||
| Total operating liabilities |
$ |
|
||
10
11. |
FINANCIAL INSTRUMENTS |
The Company considers the recorded value of its financial assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, other current liabilities, and debt to approximate the fair value of the respective assets and liabilities on the Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019.
12. |
STOCKHOLDERS’ EQUITY |
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Numerator: |
||||||||||||||||
| Net income available to common shareholders |
$ | |
$ | |
$ | |
$ | |
||||||||
| Denominator: |
||||||||||||||||
| Basic weighted average shares outstanding |
|
|
|
|
||||||||||||
| Effect of dilutive securities: |
||||||||||||||||
| Stock appreciation rights and options |
|
|
|
|
||||||||||||
| Restricted stock |
|
|
|
|
||||||||||||
| Diluted weighted average shares outstanding |
|
|
|
|
||||||||||||
| Basic earnings per share |
$ | |
$ | |
$ | |
$ | |
||||||||
| Diluted earnings per share |
$ | |
$ | |
$ | |
$ | |
||||||||
Diluted earnings per share is computed using the weighted average number of shares determined for the basic earnings per share computation plus the dilutive effect of common stock equivalents using the treasury stock method. The computation of diluted earnings per share excludes the following potentially dilutive securities because the effect would be anti-dilutive:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Stock appreciation rights |
|
|
|
|
||||||||||||
Stock Repurchase Programs
On February 16, 2018, the Board of Directors adopted a stock repurchase program of up to 5.8 million shares of the Company’s outstanding common stock (Stock Repurchase Program). As of June 30, 2020, the Company ha1.4
s
repurchased million
shares of the Company’s outstanding common stock under the Stock Repurchase Program. Due to the volatility and uncertainty in the stock market associated with the
COVID-19
pandemic, the Company suspended repurchases of its common stock under the Stock Repurchase Program on March 12, 2020. As of the date of this report, the Stock Repurchase Program remains in effect with repurchases suspended. However, the Company may determine to resume repurchases at any time. 11
Amendment of Restated Certificate of Incorporation
At the annual meeting of stockholders of the Company held on April 29, 2020, the Company’s stockholders approved an amendment of the Company’s Restated Certificate of Incorporation (Amendment), effective as of April 29, 2020. The Company’s Board of Directors unanimously approved the Amendment on February 19, 2020, subject to stockholder approval. The Amendment increases the number of shares of common stock, par value $0.01 per share, that the Company is authorized to issue from 120 million shares to 180 million shares.
Stock Split
On July 29, 2020, the Company’s Board of Directors approved a two-for-one stock split of the Company’s common stock, par value, $0.01 . The stock split will be in the form of a stock dividend to be distributed on September 14, 2020, to stockholders of record at the close of business on August 19, 2020. The condensed consolidated financial statements presented in this Form
10-Q
appropriately do not reflect the effects of the stock split.13. |
REVENUE FROM CONTRACTS WITH CUSTOMERS |
Trex Residential Products
Trex Residential principally generates revenue from the manufacture and sale of its high-performance,
low-maintenance,
eco-friendly
wood-alternative composite decking and residential railing products and accessories. Substantially all of its revenues are from contracts with customers, which are purchase orders of short-term duration of less than one year. Its customers, in turn, sell primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products. Trex Residential satisfies its performance obligations at a point in time. The shipment of each product is a separate performance obligation as the customer is able to derive benefit from each product shipped and no performance obligation remains after shipment. Upon shipment of the product, the customer obtains control over the distinct product and Trex Residential satisfies its performance obligation. Any performance obligation that remains unsatisfied at the end of a reporting period is part of a contract that has an original expected duration of one year or less. Any variable consideration related to the unsatisfied performance obligation is allocated wholly to the unsatisfied performance obligation, is recognized when the product ships and the performance obligation is satisfied and is included in “Accrued expenses and other liabilities, Sales and marketing” in Note 8 to the Condensed Consolidated Financial Statements.Trex Commercial Products
Trex Commercial generates revenue from the manufacture and sale of its modular and architectural railing and staging systems. All of its revenues are from fixed-price contracts with customers. Trex Commercial contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and is, therefore, not distinct. The transaction price allocated to remaining performance obligations on contracts with an original duration greater than one year was $63.7 million as of June 30, 2020. The Company will recognize this revenue as contracts are completed, which is expected to occur within the next 24 months.
For the three months and six months ended June 30, 2020 and 2019, net sales were disaggregated in the following tables by (1) market, (2) timing of revenue recognition, and (3) type of contract. The tables also include a reconciliation of the respective disaggregated net sales with the Company’s reportable segments (in thousands).
| Three Months Ended June 30, 2020 |
Reportable Segment |
|||||||||||
| Trex |
Trex |
|||||||||||
| Residential |
Commercial |
Total |
||||||||||
| Timing of Revenue Recognition and Type of Contract |
||||||||||||
| Products transferred at a point in time and variable consideration contracts |
$ | |
$ | |
$ | |
||||||
| Products transferred over time and fixed price contracts |
|
|
|
|||||||||
| $ | |
$ | |
$ | |
|||||||
12
| Six Months Ended June 30, 2020 |
Reportable Segment |
|||||||||||
| Trex |
Trex |
|||||||||||
| Residential |
Commercial |
Total |
||||||||||
| Timing of Revenue Recognition and Type of Contract |
||||||||||||
| Products transferred at a point in time and variable consideration contracts |
$ | |
$ | |
$ | |
||||||
| Products transferred over time and fixed price contracts |
|
|
|
|||||||||
| $ | |
$ | |
$ | |
|||||||
| Three Months Ended June 30, 2019 |
Reportable Segment |
|||||||||||
| Trex |
Trex |
|||||||||||
| Residential |
Commercial |
Total |
||||||||||
| Timing of Revenue Recognition and Type of Contract |
||||||||||||
| Products transferred at a point in time and variable consideration contracts |
$ | |
$ | — |
$ | |
||||||
| Products transferred over time and fixed price contracts |
— |
|
|
|||||||||
| $ | |
$ | |
$ | |
|||||||
| Six Months Ended June 30, 2019 |
Reportable Segment |
|||||||||||
| Trex |
Trex |
|||||||||||
| Residential |
Commercial |
Total |
||||||||||
| Timing of Revenue Recognition and Type of Contract |
||||||||||||
| Products transferred at a point in time and variable consideration contracts |
$ | |
$ | — |
$ | |
||||||
| Products transferred over time and fixed price contracts |
— |
|
|
|||||||||
| $ | |
$ | |
$ | |
|||||||
14. |
STOCK-BASED COMPENSATION |
The Company has one stock-based compensation plan, the 2014 Stock Incentive Plan (Plan), approved by the Company’s stockholders in April 2014. The Plan amended and restated in its entirety the Trex Company, Inc. 2005 Stock Incentive Plan. The Plan was subsequently amended and restated by the Company’s Board of Directors in May 2014 and May 2018. The Plan is administered by the Compensation Committee of the Company’s Board of Directors. Stock-based compensation is granted to officers, directors and certain key employees in accordance with the provisions of the Plan. The Plan provides for grants of stock options, restricted stock, restricted stock units, stock appreciation rights (SARs), and unrestricted stock. The total aggregate number of shares of the Company’s common stock that may be issued under the Plan is 12,840,000 and as of June 30, 2020, the total number of shares available for future issuance is 5,642,795 .
The following table summarizes the Company’s stock-based compensation grants for the six months ended June 30, 2020:
| Stock Awards Granted |
Weighted-Average Grant Per Share |
|||||||
| Time-based restricted stock units |
|
$ | |
|||||
| Performance-based restricted stock units (a) |
|
$ | |
|||||
| Stock appreciation rights |
|
$ | |
|||||
| |
(a) | Includes ) , |
The fair value of each SAR is estimated on the date of grant using a
.
13
| Six Months Ended June 30, 2020 |
Six Months Ended June 30, 2019 |
|||||||
| Weighted-average fair value of grants |
$ | |
$ | |
||||
| Dividend yield |
|
% | |
% | ||||
| Average risk-free interest rate |
|
% | |
% | ||||
| Expected term (years) |
|
|
||||||
| Expected volatility |
|
% | |
% | ||||
The Company recognizes stock-based compensation expense ratably over the period from the grant date to the earlier of: (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For performance-based restricted stock and performance-based restricted stock units, expense is recognized ratably over the performance and vesting period of each tranche based on management’s judgment of the ultimate award that is likely to be paid out based on the achievement of the predetermined performance measures. For the employee stock purchase plan, compensation expense is recognized related to the discount on purchases. Stock-based compensation expense in included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Comprehensive Income. The following table summarizes the Company’s stock-based compensation expense (in thousands):
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Stock appreciation rights |
$ | |
$ | |
$ | |
$ | |
||||||||
| Time-based restricted stock and restricted stock units |
|
|
|
|
||||||||||||
| Performance-based restricted stock and restricted stock units |
|
|
|
|
||||||||||||
| Employee stock purchase plan |
|
|
|
|
||||||||||||
| Total stock-based compensation |
$ | |
$ | |
$ | |
$ | |
||||||||
Total unrecognized compensation cost related to unvested awards as of June 30, 2020 was $6.8 million. The cost of these unvested awards is being recognized over the requisite vesting period of each award.
15. |
INCOME TAXES |
The Company’s effective tax rate for the six months ended June 30, 2020 and 2019 was 24.8 % and 22.7 %, respectively, which resulted in expense of $29.5 million and $19.7 million, respectively. The 2.1 % in the effective tax rate was primarily due to a current year
in
crease of de
crease in excess tax benefits from the exercise of share-based payments and an increase in non-deductible
executive compensation.During the six months ended June 30, 2020 and 2019, the Company realized $1.1 million and $2.6 million, respectively, of excess tax benefits from stock-based awards and recorded a corresponding benefit to income tax expense.
The Company analyzes its deferred tax assets each reporting period, considering all available positive and negative evidence in determining the expected realization of those deferred tax assets. As of June 30, 2020, the Company maintains a valuation allowance of $3.0 million against deferred tax assets primarily related to state tax credits it estimates will expire before they are realized.
In response to
COVID-19,
Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including deferring the due dates of certain tax payment requirements, including the employer portion of the Social Security tax, and the creation of certain refundable employee retention credits. The Company evaluated the impact on its consolidated financial statements and determined that as of June 30, 2020, the CARES Act did not have a material impact on its consolidated financial condition or results of operations and the Company did not receive any financial assistance under the CARES Act or similar programs.14
The Company operates in multiple tax jurisdictions and, in the normal course of business, its tax returns are subject to examination by various taxing authorities. Such examinations may result in future assessments by these taxing authorities, and the Company accrues a liability when it believes that it is more likely than not that benefits of tax positions will not be realized. The Company believes that adequate provisions have been made for all tax returns subject to examination. As of June 30, 2020, for certain tax jurisdictions tax years 2016 through 2019 remain subject to examination. The Company’s
returns filed with the state of Michigan for the tax years 2016 through 2018 are currently under examination. No material adjustments are expected as a result of the audit. Sales made to foreign distributors are not taxable in any foreign jurisdiction as the Company does not have a taxable presence in any foreign jurisdiction.
16. |
SEGMENT INFORMATION |
The Company operates in two reportable segments:
• |
Trex Residential manufactures wood-alternative decking and residential railing and related products marketed under the brand name Trex ® . Trex Residential products are sold to distributors and home centers for final resale primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products. |
• |
Trex Commercial designs, engineers, and markets modular and architectural railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues. Trex Commercial products are marketed to architects, specifiers, contractors, and others doing business within the commercial and multi-family market. |
The Company’s reportable segments have been determined in accordance with its internal management structure, which is organized based on residential and commercial sales activities. The Company evaluates performance of each segment primarily based on net sales and earnings before interest, income taxes, depreciation and amortization (EBITDA). The Company uses net sales to assess performance and allocate resources as this measure represents the amount of business the segment engaged in during a given period of time, is an indicator of market growth and acceptance of segment products, and represents the segment’s customers’ spending habits along with the amount of product the segment sells relative to its competitors. The Company uses EBITDA to assess performance and allocate resources because it believes that EBITDA facilitates performance comparison between the segments by eliminating interest, income taxes, and depreciation and amortization charges to income. The below segment data for the three and six months ended June 30, 2020 and 2019 includes data for Trex Residential and Trex Commercial (in thousands):
Segment Data:
Three Months Ended June 30, 2020 |
Three Months Ended June 30, 2019 |
|||||||||||||||||||||||
Trex Residential |
Trex |
Total |
Trex |
Trex |
|
Total |
||||||||||||||||||
Net sales |
$ | |
$ | $ | $ | $ | $ | |||||||||||||||||
Net income |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
EBITDA |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Depreciation and amortization |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Income tax expense |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Capital expenditures |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Total assets |
$ | $ | $ | $ | $ | |
$ | |||||||||||||||||
Reconciliation of Net Income to EBITDA:
Three Months Ended June 30, 2020 |
Three Months Ended June 30, 2019 |
|||||||||||||||||||||||
Trex Residential |
Trex |
Total |
Trex |
Trex |
Total |
|||||||||||||||||||
Net income |
$ | $ | $ | $ |
$ | $ | ||||||||||||||||||
Interest (income) expense , net |
( |
) | — |
( |
) | ( |
) | ( |
) | |||||||||||||||
Income tax expense |
||||||||||||||||||||||||
Depreciation and amortization |
||||||||||||||||||||||||
EBITDA |
$ |
$ | $ |
$ | $ | $ |
||||||||||||||||||
15
Segment Data:
Six Months Ended June 30, 2020 |
Six Months Ended June 30, 2019 |
|||||||||||||||||||||||
Trex Residential |
Trex |
Total |
Trex |
Trex |
|
Total |
||||||||||||||||||
Net sales |
$ | $ | $ | $ | |
$ | $ | |||||||||||||||||
Net income |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
EBITDA |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Depreciation and amortization |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Income tax expense |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Capital expenditures |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Total assets |
$ | $ | $ | $ | $ | |
$ | |||||||||||||||||
Reconciliation of Net Income to EBITDA:
Six Months Ended June 30, 2020 |
Six Months Ended June 30, 2019 |
|||||||||||||||||||||||
Trex Residential |
Trex |
Total |
Trex |
Trex |
Total |
|||||||||||||||||||
Net income |
$ | $ | $ | $ |
|
$ | $ |
|||||||||||||||||
Interest income, net |
( |
) | — |
( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||
Income tax expense |
||||||||||||||||||||||||
Depreciation and amortization |
||||||||||||||||||||||||
EBITDA |
$ | $ | $ | $ |
$ | $ |
||||||||||||||||||
17. |
SEASONALITY |
The operating results for Trex Residential have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift demand for its products to a later period. As part of its normal business practice and consistent with industry practice, Trex Residential has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of its product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs. The operating results for Trex Commercial have not historically varied from quarter to quarter as a result of seasonality. However, they are driven by the timing of individual projects, which may vary each quarterly period.
18. |
COMMITMENTS AND CONTINGENCIES |
Product Warranty
The Company warrants that its decking and residential railing products will be free from material defects in workmanship and materials for warranty periods ranging from 10 years to 25 years, depending on the product and its use. If there is a breach of such warranties, the Company has an obligation either to replace the defective product or refund the purchase price. The Company continues to receive and settle claims for products manufactured at its Nevada facility prior to 2007 that exhibit surface flaking and maintains a warranty reserve to provide for the settlement of these claims. Estimating the warranty reserve for surface flaking claims requires management to estimate (1) the number of claims to be settled with payment and (2) the average cost to settle each claim.
To estimate the number of claims to be settled with payment, the Company utilizes actuarial techniques to quantify both the expected number of claims to be received and the percentage of those claims that will ultimately require payment (collectively, elements). Estimates for these elements are quantified using a range of assumptions derived from claim count history and the identification of factors influencing the claim counts. The cost per claim varies due to a number of factors, including the size of affected decks, the availability and type of replacement material used, the cost of production of replacement material and the method of claim settlement.
16
The Company monitors surface flaking claims activity each quarter for indications that its estimates require revision. Typically, a majority of surface flaking claims received in a year are received during the summer outdoor season, which spans the second and third quarters. It has been the Company’s practice to utilize the actuarial techniques discussed above during the third quarter, after a significant portion of all claims has been received for the fiscal year and variances to annual claims expectations are more meaningful. The number of incoming claims received in the six months ended June 30, 2020, was higher than the number of claims received in the six months ended June 30, 2019 and exceeded the Company’s expectations for the current year. Average settlement cost per claim experienced in the six months ended June 30, 2020, was considerably higher than that experienced in the six months ended June 30, 2019, due to an increase in larger claims settled
and changes in the mix of settlement methods that occurred in the second half of 2019, but was consistent with the Company’s expectations for the current year and, and lower than that experienced for the full year ended December 31, 2019. The Company believes its reserve at June 30, 2020 is sufficient to cover future surface flaking obligations and no adjustments were required in the current period.
The Company’s analysis is based on currently known facts and a number of assumptions, as discussed above, and current expectations. Projecting future events such as the number of claims to be received, the number of claims that will require payment and the average cost of claims could cause actual warranty liabilities to be higher or lower than those projected, which could materially affect the Company’s consolidated financial condition, results of operations or cash flows. The Company estimates that the annual number of claims received will continue to decline over time and that the average cost per claim will increase slightly, primarily due to inflation. If the level of claims received or average cost per claim differs materially from expectations, it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flows in future periods. The Company estimates that a 10 % change in the expected number of remaining claims to be settled with payment or the expected cost to settle claims may result in approximately a $1.7 million change in the surface flaking warranty reserve.
The following is a reconciliation of the Company’s residential product warranty reserve (in thousands):
Six Months Ended June 30, 2020 |
||||||||||||
Surface Flaking |
Other Residential |
Total |
||||||||||
Beginning balance, January 1 |
$ | $ | $ | |||||||||
Provisions and changes in estimates |
— |
|||||||||||
Settlements made during the period |
( |
) | ( |
) | ( |
) | ||||||
Ending balance, June 30 |
$ | $ | $ | |||||||||
Six Months Ended June 30, 2019 |
||||||||||||
Surface Flaking |
Other Residential |
Total |
||||||||||
Beginning balance, January 1 |
$ | $ | $ | |||||||||
Provisions and changes in estimates |
— |
|||||||||||
Settlements made during the period |
( |
) | ( |
) | ( |
) | ||||||
Ending balance, June 30 |
$ | $ | $ | |||||||||
Legal Matters
The Company has lawsuits, as well as other claims, pending against it which are ordinary routine litigation and claims incidental to the business. Management has evaluated the merits of these lawsuits and claims, and believes that their ultimate resolution will not have a material effect on the Company’s consolidated financial condition, results of operations, liquidity or competitive position.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management discussion should be read in conjunction with the Trex Company, Inc. (Company, we or our) Annual Report on Form
10-K
for the year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (SEC) and the condensed consolidated financial statements and notes thereto included in Part I, Item 1. “Financial Statements” of this quarterly report. NOTE ON FORWARD-LOOKING STATEMENTS
This management’s discussion and analysis 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 our expected financial position and operating results, our business strategy, our financing plans, forecasted demographic and economic trends relating to our industry and similar matters are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” “intend” or similar expressions. We cannot promise you that our expectations in such forward-looking statements will turn out to be correct. Our actual results could be materially different from our expectations because of various factors, including the factors discussed under “Item 1A. Risk Factors” in our Annual Report on Form
10-K
for the year ended December 31, 2019 filed with the SEC, and the factor discussed under “Item 1A. Risk Factors” in this quarterly report on form 10-Q.
These statements are also subject to risks and uncertainties that could cause the Company’s actual operating results to differ materially. Such risks and uncertainties include, but are not limited to: the extent of market acceptance of the Company’s current and newly developed products; the costs associated with the development and launch of new products and the market acceptance of such new products; the sensitivity of the Company’s business to general economic conditions; the impact of seasonal and weather-related demand fluctuations on inventory levels in the distribution channel and sales of the Company’s products; the availability and cost of third-party transportation services for the Company’s products and raw materials; the Company’s ability to obtain raw materials, including scrap polyethylene, wood fiber, and other materials used in making our products, at acceptable prices; the Company’s ability to maintain product quality and product performance at an acceptable cost; the Company’s ability to increase throughput and capacity to adequately match supply with demand; the level of expenses associated with product replacement and consumer relations expenses related to product quality; the highly competitive markets in which the Company operates; cyber-attacks, security breaches or other security vulnerabilities; the impact of upcoming data privacy laws and the EU General Data Protection Regulation and the related actual or potential costs and consequences; and material adverse impacts from global public health pandemics, including the strain of coronavirus known as COVID-19.
OVERVIEW
COVID-19:
COVID-19
pandemic has increased the level of volatility and uncertainty globally and has created economic disruption. We are actively managing our business to respond to this health crisis and will continue to evaluate the nature and extent of its impact. As of the date of this report, we have not experienced any material disruptions to our operations due to the COVID-19
pandemic. However, the pandemic remains an evolving situation due to the continuation of the outbreak and any future measures that may be taken to contain the spread of the virus. In addition, the extent and duration of the economic fallout from COVID-19
remains unclear. Our commitment to stakeholders is to take the appropriate actions to ensure the safety and well-being of our employees and partners, comply with any governmental orders relating to COVID-19,
which may result in a period of disruption to our business, while at the same time leveraging our strengths and ensuring financial flexibility.As of June 30, 2020, our facilities continue to operate at output levels similar to those prior to the
COVID-19
pandemic and we are following or exceeding all Centers for Disease Control and Prevention (CDC) and public officials’ guidelines. We have also adopted a business continuity plan and local emergency response plans at each location. We continue to take precautionary measures, make contingency plans and improve our response to the developing situation. We have assembled a cross-functional team whose chief charge is to oversee our efforts to ensure the health and safety of all employees and supply product to our customers. That team constantly monitors the latest CDC, Federal, state and other regulatory guidance, works to secure personal protective equipment, finds new ways to help mitigate risk, and identifies opportunities for us to exceed recommendations.18
We have implemented preventative or protective actions at our facilities, our corporate headquarters and with field sales personnel. In order to mitigate the spread of the virus, we instructed our employees to practice social distancing. Efforts for social distancing included employees working from home, where possible, revising our production processes to allow for compliance with our social distancing efforts, suspending air travel and enabling technologies to allow employees to effectively perform their functions remotely. Our sales force worked from home and conducted training sessions with our channel partners by utilizing online audio and visual technologies. Late in the second quarter, our employees began transitioning back to the workplace and conducting customer visits on a voluntary basis. In addition, face masks and other protective equipment have been distributed to employees across all of our facilities, handwashing and hand sanitizing stations have been installed, and automated temperature scanners have been provided at the entrances to our manufacturing facilities and corporate office. We have installed air purifier systems for all enclosed areas in every one of our buildings. Our internal cleaning crew sanitizes an extensive checklist of high-touch items and areas across work facilities, and our facilities are cleaned repeatedly throughout each shift with
CDC-recommended
chemicals and disinfectants by internal and external groups. In addition, we fabricated face shields, donated the proceeds from decking sample sales to Feeding America, and supported the COVID-19
Relief Fund of our local United Way, supplementing our annual fund-raising campaign.Since we cannot predict the duration or scope of the pandemic, we cannot fully anticipate or reasonably estimate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future. During the latter part of the first quarter and continuing into the first two months of the second quarter, some jurisdictions into which we sell had deemed the construction industry as
non-essential
and ordered the closure of those businesses. In addition, we experienced areas where the availability of our products was limited due to the closure of certain of our channel partners. However, during the latter part of the second quarter, jurisdictions began to lift their respective closure restrictions and certain of our channel partners that were closed reopened. As a result, the slowdown in net sales that we experienced early in the second quarter was offset by the pickup of those sales in the latter part of the quarter when jurisdictions began to lift their closure restrictions. As of June 30, 2020 we have no significant supply issues and maintain inventories of materials sourced from diversified geographies, allowing us to better tolerate short-term supply chain disruptions.In May 2020, we amended and restated our revolving credit agreement to provide us with an additional Revolving Line of Credit for Aggregate Revolving B Commitments in the amount of $100 million. The purpose of the additional $100 million is primarily to reduce risk, if necessary, associated with the
COVID-19
pandemic should the Company need to secure additional capital to continue its strategy of accelerating the conversion of wood decking to Trex composite decking and expanding its addressable market. As of June 30, 2020, we had no outstanding indebtedness under our revolving credit facilities and $350 million in available borrowing capacity. As the impact of COVID-19
evolves, we will continue to evaluate our financial position and liquidity needs in light of future developments.Operations and Products:
Trex Residential
®
and manufactured in the United States. We offer a comprehensive set of aesthetically appealing and durable, low-maintenance
product offerings in the decking, residential railing, fencing, steel deck framing, and outdoor lighting categories. A majority of the products are eco-friendly
and leverage recycled materials to the extent possible. Trex Residential decking is made in a proprietary process that combines reclaimed wood fibers and recycled polyethylene film, making Trex one of the largest recyclers of plastic film in North America. In addition to resisting fading and surface staining, Trex Residential products require no sanding and sealing, resist moisture damage, provide a splinter-free surface and do not require chemical treatment against rot or insect infestation. Combined, these aspects yield significant aesthetic advantages and lower maintenance than wood decking and railing and ultimately render Trex products less costly than wood over the life of the deck. Special characteristics (including resistance to splitting, the ability to bend, and ease and consistency of machining and finishing) facilitate installation, reduce contractor call-backs and afford consumers a wide range of design options. Trex Residential products are sold to distributors and home centers for final resale primarily to the residential market.Trex offers the following products through Trex Residential:
| Decking and Accessories |
Our principal decking products are Trex Transcend ® , Trex Select® ® . Differentiating the Enhance collection is a scalloped profile that is lighter weight for easier handling and installation. Our high-performance, low-maintenance, eco-friendly composite decking products are comprised of a blend of 95 percent reclaimed wood fibers and recycled polyethylene film and feature a protective polymer shell for enhanced protection against fading, staining, mold and scratching.We also offer Trex Hideaway ® , a hidden fastening system for grooved boards, and Trex DeckLighting™ , an outdoor lighting system. Trex DeckLighting is a line of energy-efficient LED dimmable deck lighting, which is designed for use on posts, floors and steps. The line includes a post cap light, deck rail light, riser light and a recessed deck light. | |
19
| Railing |
Our residential railing products are Trex Transcend Railing, Trex Select Railing, Trex Enhance Railing and Trex Signature ® aluminum railing. Trex Transcend Railing, made from approximately 40 percent recycled content, is available in the colors of Trex Transcend decking and finishes that make it appropriate for use with Trex decking products as well as other decking materials, which we believe enhances the sales prospects of our railing products. Trex Select Railing, made from approximately 40 percent recycled content, is offered in a white finish and is ideal for consumers who desire a simple clean finished look for their deck. Trex Enhance, made from approximately 40 percent recycled content, is available in three colors and is offered through home improvement retailers in kits that contain the complete railing system. Trex Signature aluminum railing, made from a minimum of 50 percent recycled content, is available in three colors and designed for consumers who want a sleek, contemporary look. | |
| Fencing |
Our Trex Seclusions ® fencing product is offered through two specialty distributors. This product consists of structural posts, bottom rail, pickets, top rail and decorative post caps. | |
| Steel Deck Framing |
Our triple-coated steel deck framing system called Trex Elevations ® leverages the strength and dimensional stability of steel to create a flat surface for our decking. Trex Elevations provides consistency and reliability that wood does not and is fire resistant. | |
Trex Commercial
Trex offers the following products through Trex Commercial:
| Architectural Railing Systems |
Our architectural railing systems are pre-engineered guardrails with options to accommodate styles ranging from classic and elegant wood top rail combined with sleek stainless components and glass infill, to modern and minimalist stainless cable and rod infill choices. Trex Commercial can also design, engineer and manufacture custom railing systems tailored to the customer’s specific material, style and finish. Many railing styles are achievable, including glass, mesh, perforated railing and cable railing. | |
| Aluminum Railing Systems |
Trex Signature ® aluminum railing collection, made from a minimum of 50 percent recycled content, combines superior styling with the unparalleled strength of aluminum – making it an ideal railing choice for a variety of commercial settings. Its straightforward, unobtrusive design features traditional balusters and contemporary vertical rods, and can be installed with continuously graspable rail options for added safety, comfort and functionality. Trex Signature is available in three colors – charcoal black, bronze and classic white – and is available in a variety of stock lengths. | |
| Staging Equipment and Accessories |
Our advanced modular, lightweight custom staging systems include portable platforms, orchestra shells, guardrails, stair units, barricades, camera platforms, VIP viewing decks, ADA infills, DJ booths, pool covers, and other custom applications. Our systems provide superior staging product solutions for facilities and venues with custom needs. Our modular stage equipment is designed to appear seamless, feel permanent, and maximize the functionality of the space. | |
20
Highlights for the three months ended June 30, 2020:
| • | Increase in net sales of 6.9%, or $14.2 million, to $220.6 million for the three months ended June 30, 2020 compared to $206.5 million for the three months ended June 30, 2019. |
| • | Increase in gross profit of 10.7%, or $9.0 million, to $92.4 million for the three months ended June 30, 2020 compared to $83.4 million for the three months ended June 30, 2019. |
| • | Increase in net income to $47.2 million, or $0.81 per diluted share, for the three months ended June 30, 2020 compared to $35.7 million, or $0.61 per diluted share, for the three months ended June 30, 2019. |
| • | Capital expenditures of $39.9 million primarily to increase production capacity at the Trex Residential facilities in Virginia and Nevada and for general plan cost reduction initiatives and other production improvements. |
Net Sales
Gross Profit.
Product Warranty.
We continue to receive and settle claims for decking products manufactured at our Nevada facility prior to 2007 that exhibit surface flaking and maintain a warranty reserve to provide for the settlement of these claims. We monitor surface flaking claims activity each quarter for indications that our estimates require revision. Typically, a majority of surface flaking claims received in a fiscal year are received during the summer outdoor season, which spans the second and third fiscal quarters. It has been our practice to utilize actuarial techniques during the third quarter, after a significant portion of all claims has been received for the fiscal year and variances to annual claims expectations are more meaningful. Our actuarial analysis is based on currently known facts and a number of assumptions. Projecting future events such as the number of claims to be received, the number of claims that will require payment and the average cost of claims could cause the actual warranty liabilities to be higher or lower than those projected, which could materially affect our financial condition, results of operations or cash flows. The number of incoming claims received in the six months ended June 30, 2020 was higher than the number of claims received in the six months ended June 30, 2019 and exceeded our expectations for the current year. Average settlement cost per claim experienced in the six months ended June 30, 2020 was considerably higher than the average settlement cost per claim experienced in the six months ended June 30, 2019, due to an increase in larger claims settled and changes in the mix of settlement methods that occurred in the second half of 2019, but was consistent with our expectations for the current year, and lower than that experienced for the full year ended December 31, 2019. We believe that our reserve at June 30, 2020 is sufficient to cover future surface flaking obligations.
The following table details surface flaking claims activity related to our warranty:
Six Months Ended June 30, |
||||||||
2020 |
2019 |
|||||||
| Claims open, beginning of period |
1,724 | 2,021 | ||||||
| Claims received (1) |
782 | 700 | ||||||
| Claims resolved (2) |
(572 | ) | (716 | ) | ||||
| |
|
|
|
|||||
| Claims open, end of period |
1,934 | 2,005 | ||||||
| |
|
|
|
|||||
| Average cost per claim (3) |
$ | 3,263 | $ | 2,992 | ||||
21
| (1) | Claims received include new claims received or identified during the period. |
| (2) | Claims resolved include all claims settled with or without payment and closed during the period. |
| (3) | Average cost per claim represents the average settlement cost of claims closed with payment during the period. |
Selling, General and Administrative Expenses.
RESULTS OF OPERATIONS
Below is our discussion and analysis of our operating results and material changes in our operating results for the three months ended June 30, 2020 (2020 quarter) compared to the three months ended June 30, 2019 (2019 quarter), and for the six months ended June 30, 2020 (2020
six-month
period) compared to the six months ended June 30, 2019 (2019 six-month
period).Three Months Ended June 30, 2020 Compared To The Three Months Ended June 30, 2019
Net Sales
Three Months Ended June 30, |
$ Change |
% Change |
||||||||||||||
2020 |
2019 |
|||||||||||||||
(dollars in thousands) |
||||||||||||||||
| Total net sales |
$ | 220,648 | $ | 206,453 | $ | 14,195 | 6.9 | % | ||||||||
| Trex Residential net sales |
$ | 208,877 | $ | 193,468 | $ | 15,409 | 8.0 | % | ||||||||
| Trex Commercial net sales |
$ | 11,771 | $ | 12,985 | $ | (1,214 | ) | (9.4 | )% | |||||||
Total net sales increased by 6.9% in the 2020 quarter compared to the 2019 quarter reflecting an increase in Trex Residential net sales, offset by a small decrease in Trex Commercial net sales. The increase of 8.0% in Trex Residential net sales was primarily driven by volume growth of our residential decking and railing products, strong demand for our outdoor living products, a strong residential repair and remodeling sector and our initiatives to accelerate conversion from wood. The 9.4% decrease in Trex Commercial net sales during the 2020 quarter was due primarily to fewer large projects compared to the 2019 quarter.
Gross Profit
Three Months Ended June 30, |
$ Change |
% Change |
||||||||||||||
2020 |
2019 |
|||||||||||||||
(dollars in thousands) |
||||||||||||||||
| Cost of sales |
$ | 128,243 | $ | 123,009 | $ | 5,234 | 4.3 | % | ||||||||
| % of total net sales |
58.1 | % | 59.6 | % | ||||||||||||
| Gross profit |
$ | 92,405 | $ | 83,444 | $ | 8,961 | 10.7 | % | ||||||||
| Gross margin |
41.9 | % | 40.4 | % | ||||||||||||
Gross profit as a percentage of net sales, gross margin, was 41.9% in the 2020 quarter compared to 40.4% in the 2019 quarter and reflects the increase in gross margin for Trex Residential and Trex Commercial to 42.5% and 30.7%, respectively, in the 2020 quarter compared to 41.7% and 21.4%, respectively, in the 2019 quarter. The increase in Trex Residential gross margin in the 2020 quarter compared to the 2019 quarter was primarily due to the
non-recurrence
of Enhance startup costs related to reduced throughput, equipment failures and other inefficiencies at Trex Residential manufacturing facilities in 2019. Also, a number of manufacturing lines were retrofitted to allow production of the reduced weight Enhance profile. We expect to be essentially at the original design target for Enhance by the end of the third quarter of 2020. The increase in Trex Residential gross margin was offset by startup costs associated with the expansion of capacity at our Nevada facility. The increase in gross margin at Trex Commercial was primarily due to non-recurrence
of legacy low margin contracts coupled with a mix of higher margin contracts in the 2020 quarter, and initiatives aimed at improving project estimating, project management, and manufacturing cost savings initiatives.22
Selling, General and Administrative Expenses
Three Months Ended June 30, |
$ Change |
% Change |
||||||||||||||
2020 |
2019 |
|||||||||||||||
(dollars in thousands) |
||||||||||||||||
| Selling, general and administrative expenses |
$ | 29,009 | $ | 35,705 | $ | (6,696 | ) | (18.8 | )% | |||||||
| % of total net sales |
13.2 | % | 17.3 | % | ||||||||||||
The $6.7 million decrease in selling, general and administrative expenses in the 2020 quarter compared to the 2019 quarter resulted primarily from a decrease of $4.9 million in branding and advertising spend and a $2.0 million decrease in personnel related expenses. The decrease in personnel related expenses included a decrease in executive severance benefits compared to 2019, a decrease in meals and entertainment expenses and a reduction in medical claims, offset primarily by an increase in incentive compensation.
Provision for Income Taxes
Three Months Ended June 30, |
$ Change |
% Change |
||||||||||||||
2020 |
2019 |
|||||||||||||||
(dollars in thousands) |
||||||||||||||||
| Provision for income taxes |
$ | 16,249 | $ | 12,030 | $ | 4,219 | 35.1 | % | ||||||||
| Effective tax rate |
25.6 | % | 25.2 | % | ||||||||||||
The effective tax rate for the 2020 quarter of 25.6% was relatively unchanged compared to the effective tax rate of 25.2% for the 2019 quarter.
Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
1
(in thousands) Reconciliation of net income (GAAP) to EBITDA
(non-GAAP):
Three Months Ended June 30, 2020 |
||||||||||||
Trex Residential |
Trex Commercial |
Total |
||||||||||
| Net income |
$ | 45,912 | $ | 1,306 | $ | 47,218 | ||||||
| Interest income, net |
(71 | ) | — | (71 | ) | |||||||
| Income tax expense |
15,789 | 460 | 16,249 | |||||||||
| Depreciation and amortization |
3,865 | 198 | 4,063 | |||||||||
| |
|
|
|
|
|
|||||||
| EBITDA |
$ | 65,495 | $ | 1,964 | $ | 67,459 | ||||||
| |
|
|
|
|
|
|||||||
1 |
EBITDA represents net income before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP). We have included data with respect to EBITDA because management believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important information regarding the operating performance of the Company and its reportable segments. |
23
Three Months Ended June 30, 2019 |
||||||||||||
Trex Residential |
Trex Commercial |
Total |
||||||||||
| Net income |
$ | 35,223 | $ | 487 | $ | 35,710 | ||||||
| Interest expense (income), net |
6 | (7 | ) | (1 | ) | |||||||
| Income tax expense |
11,866 | 164 | 12,030 | |||||||||
| Depreciation and amortization |
3,258 | 141 | 3,399 | |||||||||
| |
|
|
|
|
|
|||||||
| EBITDA |
$ | 50,353 | $ | 785 | $ | 51,138 | ||||||
| |
|
|
|
|
|
|||||||
Three Months Ended June 30, |
$ Change |
% Change |
||||||||||||||
2020 |
2019 |
|||||||||||||||
(dollars in thousands) |
||||||||||||||||
| Total EBITDA |
$ | 67,459 | $ | 51,138 | $ | 16,321 | 31.9 | % | ||||||||
| Trex Residential EBITDA |
$ | 65,495 | $ | 50,353 | $ | 15,142 | 30.1 | % | ||||||||
| Trex Commercial EBITDA |
$ | 1,964 | $ | 785 | $ | 1,179 | 150.2 | % | ||||||||
Total EBITDA increased 31.9% to $67.5 million for the 2020 quarter compared to $51.1 million for the 2019 quarter. The increase was primarily driven by a 30.1% increase in Trex Residential EBITDA due to net sales and gross margin and by an increase in Trex Commercial EBITDA primarily related to an increase in gross margin.
Six Months Ended June 30, 2020 Compared To The Six Months Ended June 30, 2019
Net Sales
Six Months Ended June 30, |
$ Change |
% Change |
||||||||||||||
2020 |
2019 |
|||||||||||||||
(dollars in thousands) |
||||||||||||||||
| Total net sales |
$ | 421,043 | $ | 386,024 | $ | 35,019 | 9.1 | % | ||||||||
| Trex Residential net sales |
$ | 395,751 | $ | 358,947 | $ | 36,804 | 10.3 | % | ||||||||
| Trex Commercial net sales |
$ | 25,292 | $ | 27,077 | $ | (1,785 | ) | (6.6 | )% | |||||||
The 9.1% increase in total net sales in the 2020
six-month
period compared to the 2019 six-month
period was due primarily to volume growth at Trex Residential for both our legacy and new decking and residential railing products. The increase of 10.3% in Trex Residential net sales during the 2020 six-month
period was primarily driven by volume growth, strong demand for our outdoor living products, a strong residential repair and remodeling sector and our initiatives to accelerate conversion from wood. The 6.6% decrease in Trex Commercial net sales during the 2020 six-month
period was due primarily to fewer large projects compared to the 2019 six-month
period.Gross Profit
Six Months Ended June 30, |
$ Change |
% Change |
||||||||||||||
2020 |
2019 |
|||||||||||||||
(dollars in thousands) |
||||||||||||||||
| Cost of sales |
$ | 238,941 | $ | 233,214 | $ | 5,727 | 2.5 | % | ||||||||
| % of total net sales |
56.8 | % | 60.4 | % | ||||||||||||
| Gross profit |
$ | 182,102 | $ | 152,810 | $ | 29,292 | 19.2 | % | ||||||||
| Gross margin |
43.3 | % | 39.6 | % | ||||||||||||
24
Gross profit as a percentage of net sales, gross margin, was 43.3% in the 2020
six-month
period compared to 39.6% in the 2019 six-month
period. Gross margin for Trex Residential and Trex Commercial products in the 2020 six-month
period were 44.0% and 32.3%, respectively, compared to 41.0% and 21.0%, respectively, in the 2019 six-month
period. The increase in Trex Residential gross margin in the 2020 six-month
period compared to the 2019 six-month
period was primarily due to non-recurrence
of Enhance startup costs related to reduced throughput, equipment failures and other inefficiencies at Trex Residential manufacturing facilities in 2019. Also, a number of manufacturing lines were retrofitted to allow production of the reduced weight Enhance profile. We expect to be essentially at the original design target for Enhance by the end of the third quarter of 2020. The increase in Trex Residential gross margin was offset by startup costs associated with the expansion of capacity at our Nevada facility. The increase in gross margin at Trex Commercial was primarily due to non-recurrence
of legacy low margin contracts coupled with a mix of higher margin contracts in the 2020 quarter, and initiatives aimed at improving project estimating, project management, and manufacturing cost savings initiatives.Selling, General and Administrative Expenses
Six Months Ended June 30, |
$ Change |
% Change |
||||||||||||||
2020 |
2019 |
|||||||||||||||
(dollars in thousands) |
||||||||||||||||
| Selling, general and administrative expenses |
$ | 63,571 | $ | 65,872 | $ | (2,301 | ) | (3.5 | )% | |||||||
| % of total net sales |
15.1 | % | 17.1 | % | ||||||||||||
The $2.3 million decrease in selling, general and administrative expenses in the 2020
six-month
period compared to the 2019 six-month
period resulted primarily from a decrease of $3.8 million in branding and advertising spend and a $1.4 million decrease in research and development expenses. The decreases were offset by a $1.3 million increase in personnel related expenses and an increase of $1.6 million in other operating expenses.Provision for Income Taxes
Six Months Ended June 30, |
$ Change |
% Change |
||||||||||||||
2020 |
2019 |
|||||||||||||||
(dollars in thousands) |
||||||||||||||||
| Provision for income taxes |
$ | 29,504 | $ | 19,730 | $ | 9,774 | 49.5 | % | ||||||||
| Effective tax rate |
24.8 | % | 22.7 | % | ||||||||||||
The effective tax rate for the 2020
six-month
period increased by 2.1% compared to the effective tax rate for the 2019 six-month
period primarily due to a current year decrease in excess tax benefits from the exercise of share-based payments and an increase in non-deductible
executive compensation.Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
2
(in thousands) Reconciliation of net income (GAAP) to EBITDA
(non-GAAP):
Six Months Ended June 30, 2020 |
||||||||||||
Trex Residential |
Trex Commercial |
Total |
||||||||||
| Net income |
$ | 86,932 | $ | 2,688 | $ | 89,620 | ||||||
| Interest income, net |
(593 | ) | — | (593 | ) | |||||||
| Income tax expense |
28,577 | 927 | 29,504 | |||||||||
| Depreciation and amortization |
7,529 | 386 | 7,915 | |||||||||
| |
|
|
|
|
|
|||||||
| EBITDA |
$ | 122,445 | $ | 4,001 | $ | 126,446 | ||||||
| |
|
|
|
|
|
|||||||
2 |
EBITDA represents net income before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP). We have included data with respect to EBITDA because management believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important information regarding the operating performance of the Company and its reportable segments. |
25
Six Months Ended June 30, 2019 |
||||||||||||
Trex Residential |
Trex Commercial |
Total |
||||||||||
| Net income |
$ | 66,478 | $ | 787 | $ | 67,265 | ||||||
| Interest income, net |
(50 | ) | (7 | ) | (57 | ) | ||||||
| Income tax expense |
19,466 | 264 | 19,730 | |||||||||
| Depreciation and amortization |
6,525 | 268 | 6,793 | |||||||||
| |
|
|
|
|
|
|||||||
| EBITDA |
$ | 92,419 | $ | 1,312 | $ | 93,731 | ||||||
| |
|
|
|
|
|
|||||||
Six Months Ended June 30, |
$ Change |
% Change |
||||||||||||||
2020 |
2019 |
|||||||||||||||
(dollars in thousands) |
||||||||||||||||
| Total EBITDA |
$ | 126,446 | $ | 93,731 | $ | 32,715 | 34.9 | % | ||||||||
| Trex Residential EBITDA |
$ | 122,445 | $ | 92,419 | $ | 30,026 | 32.5 | % | ||||||||
| Trex Commercial EBITDA |
$ | 4,001 | $ | 1,312 | $ | 2,689 | 205.0 | % | ||||||||
Total EBITDA increased 34.9% to $126.4 million for the 2020
six-month
period compared to $93.7 million for the 2019 six-month
period. The increase was primarily driven by a 32.5% increase in Trex Residential EBITDA due to net sales and gross margin and by an increase in Trex Commercial EBITDA primarily related to an increase in gross margin.LIQUIDITY AND CAPITAL RESOURCES
We finance operations and growth primarily with cash flows from operations, borrowings under our revolving credit facilities, operating leases and normal trade credit terms from operating activities. At June 30, 2020 we had $12.2 million of cash and cash equivalents.
SThe following table summarizes our cash flows from operating, investing and financing activities (in thousands):
ources and Uses of Cash.
Six Months Ended June 30, |
||||||||
2020 |
2019 |
|||||||
| Net cash (used in) provided by operating activities |
$ | (32,332 | ) | $ | 43,058 | |||
| Net cash used in investing activities |
(60,467 | ) | (19,061 | ) | ||||
| Net cash used in financing activities |
(43,797 | ) | (23,612 | ) | ||||
| |
|
|
|
|||||
| Net (decrease) increase in cash and cash equivalents |
$ | (136,596 | ) | $ | 385 | |||
| |
|
|
|
|||||
Operating Activities
Cash used in operations was $32.3 million during the 2020
six-month
period compared to cash provided by operations of $43.1 million during the 2019 six-month
period. The use of cash flows in operations was primarily due to higher working capital investment in accounts receivable as a result of the timing of sales within the period and related payment discounts offered to our Trex Residential decking and railing customers. The majority of the accounts receivable balance at June 30, 2020, will be collected in the third quarter. The decrease was primarily by offset increased net income, increase in accounts payable and the timing of payment for Federal income taxes.Investing Activities
Capital expenditures in the 2020
six-month
period were $62.6 million, consisting primarily of $52.6 million for capacity expansion at our Virginia and Nevada facilities and $8.8 million for general plant cost reduction initiatives and other production improvements.Financing Activities
Net cash used in financing activities was $43.8 million in the 2020
six-month
period primarily for repurchases of our common stock of $44.1 million.26
Amendment of Restated Certificate of Incorporation.
Stock Repurchase Programs.
Due to the volatility and uncertainty in the stock market associated with the
COVID-19
pandemic, we suspended repurchases of our common stock under the Stock Repurchase Program on March 12, 2020. As of the date of this report, the Stock Repurchase Program remains in effect with repurchases suspended. However, we may determine to resume repurchases at any time.Stock Split.
two-for-one
10-Q
appropriately do not reflect the effects of the stock split.Indebtedness.
On May 26, 2020, the Company entered into a First Amendment to the Original Credit Agreement (the First Amendment) to provide for an additional $100 million line of credit. The purpose of the additional $100 million line of credit is primarily to reduce risk associated with the
COVID-19
pandemic should the Company need to secure additional capital to continue its strategy of accelerating the conversion of wood decking to Trex composite decking and expanding its addressable market. As a matter of convenience, the parties incorporated the amendments to the Original Credit Agreement made by the First Amendment into a new Fourth Amended and Restated Credit Agreement (New Credit Agreement). In the New Credit Agreement, the revolving commitments under the Original Credit Agreement are referred to as Revolving A Commitments and the new $100 million line of credit is referred to as Revolving B Commitments. In the New Credit Agreement, all of the material terms and conditions related to the original line of credit (Revolving A Commitments) remain unchanged from the Original Credit Agreement.The Company entered into the First Amendment, as borrower; Trex Commercial Products, Inc. (TCP), as guarantor; Bank of America, N.A. (BOA), as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; and certain other lenders including Wells Fargo Bank, N.A. (Wells Fargo), who is also Syndication Agent; Truist Bank (Truist); and Regions Bank (Regions) (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner. The First Amendment further provides that the New Credit Agreement is amended and restated by changing Schedule 2.01 to add applicable Lender percentages related to the Revolving B Commitment for BOA of 47.5%, Wells Fargo of 28.0% and Regions of 24.5%.
Compliance with Debt Covenants.
We believe that cash on hand, cash from operations and borrowings expected to be available under our revolving credit facilities, as amended, will provide sufficient funds to fund planned capital expenditures, make scheduled principal and interest payments, fund warranty payments, and meet other cash requirements. We currently expect to fund future capital expenditures from operations and financing activities. The actual amount and timing of future capital requirements may differ materially from our estimate depending on the demand for Trex products and new market developments and opportunities.
In addition, we believe our financial resources will allow us to manage the impact of the
COVID-19
pandemic on the Company’s business operations for the foreseeable future. However, as the impact of COVID-19
evolves, we will continue to evaluate our financial position and liquidity needs in light of future developments.27
Capital Requirements.
Inventory in Distribution Channels. We sell our Trex Residential decking and railing products through a tiered distribution system. We have over 50 distributors worldwide and two national retail merchandisers to which we sell our products. The distributors in turn sell the products to dealers and retail locations who in turn sell the products to end users. Significant increases in inventory levels in the distribution channel without a corresponding change in
end-use
demand could have an adverse effect on future sales. We cannot definitively determine the level of inventory in the distribution channels at any time. We are not aware of any significant increases in the levels of inventory in the distribution channels at June 30, 2020 compared to inventory levels at June 30, 2019.Seasonality
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” in Part II, Item 7A of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019. There were no material changes to the Company’s market risk exposure during the six months ended June 30, 2020.Item 4. |
Controls and Procedures |
The Company’s management, with the participation of its President and Chief Executive Officer, who is the Company’s principal executive officer, and its Vice President and Chief Financial Officer, who is the Company’s principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2020. Based on this evaluation, the President and Chief Executive Officer and the Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective. There have been no changes in the Company’s internal control over financial reporting during the
six-month
period ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.28
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company has lawsuits, as well as other claims, pending against it which are ordinary routine litigation and claims incidental to the business. Management has evaluated the merits of these lawsuits and claims, and believes that their ultimate resolution will not have a material effect on the Company’s consolidated financial condition, results of operations, liquidity or competitive position.
Item 1A. Risk Factors
The Company’s business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary from recent results or from anticipated future results. Other than the supplemental risk factor set forth below, there have been no material changes to the risk factors disclosed in Part I—Item 1A, Risk Factors of our Form
10-K
for the year ended December 31, 2019.Risk |
Discussion | |||
| Description: Our business, results of operations and financial condition may be disrupted and adversely affected by global public health pandemics, including the strain of coronavirus known as COVID-19. Impact: If our employees or the employees of our suppliers or transportation providers are unable to work because of illness related to the COVID-19 pandemic, or if we or our suppliers or transportation providers are forced to temporarily cease operations, either on a voluntary or mandatory basis, then we may have a period of reduced operations and be unable to supply our customers in a timely manner, which could have a material negative impact on our business.If the COVID-19 outbreak disrupts the operations of our distributors and retail outlets and negatively impacts economies in the United States, Canada and the rest of the world, our business, results of operations and financial condition may be adversely affected. |
In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. It spread to other countries, including the United States, and efforts to contain COVID-19 have intensified. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Our business, results of operations and financial condition may be adversely affected if COVID-19 interferes with the ability of our employees, suppliers and other business partners to perform their respective responsibilities and obligations relative to the conduct of our business.We continue to monitor the outbreak of COVID-19 and evaluate its impact on our business, including new information as it emerges concerning its severity and the continuation and possible escalation of new cases, and any actions to prevent, contain or treat it, among others. The extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted. |
29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table provides information relating to the purchases of our common stock during the three months ended June 30, 2020 in accordance with Item 703 of Regulation
S-K:
| Period |
(a) Total Number of Shares (or Units) Purchased (1) |
(b) Average Price Paid per Share (or Unit) ($) |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2) |
(d) Maximum number of Shares (or Units) that May Yet Be Purchased Under the Plan or Program |
||||||||||||
| April 1, 2020 – April 30, 2020 |
12,393 | $ | 96.66 | — | 4,398,611 | |||||||||||
| May 1, 2020 – May 31, 2020 |
— | — | — | 4,398,611 | ||||||||||||
| June 1, 2020 – June 30, 2020 |
— | — | — | 4,398,611 | ||||||||||||
| |
|
|
|
|||||||||||||
| Quarterly period ended June 30, 2020 |
12,393 | — | ||||||||||||||
| |
|
|
|
|||||||||||||
| (1) | Includes shares withheld by, or delivered to, the Company pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s 2014 Stock Incentive Plan allowing the Company to withhold, or the recipient to deliver to the Company, the number of shares having the fair value equal to tax withholding due. |
| (2) | On February 16, 2018, the Company’s Board of Directors authorized a common stock repurchase program of up to 5.8 million shares of the Company’s outstanding common stock (Stock Repurchase Program). The Stock Repurchase Program was publicly announced on February 21, 2018. The Company did not purchase any shares under the Stock Repurchase Program during the three months ended June 30, 2020. |
Due to the volatility and uncertainty in the stock market associated with the
COVID-19
pandemic, we suspended repurchases of our common stock under the Stock Repurchase Program on March 12, 2020. As of the date of this report, the Stock Repurchase Program remains in effect with repurchases suspended. However, we may determine to resume repurchases at any time.Item 5. Other Information
Stock Split
On July 29, 2020, the Company’s Board of Directors approved a stock split of the Company’s common stock, par value, $0.01. The stock split will be in the form of a stock dividend to be distributed on September 14, 2020, to stockholders of record at the close of business on August 19, 2020. The condensed consolidated financial statements presented in this Form
two-for-one
10-Q
appropriately do not reflect the effects of the stock split.Item 6. Exhibits
See Exhibit Index at the end of the Quarterly Report on Form
10-Q
for the information required by this Item which is incorporated by reference.30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TREX COMPANY, INC. | ||||||
| Date: August 3, 2020 | By: | /s/ Dennis C. Schemm | ||||
| Dennis C. Schemm | ||||||
| Vice President and Chief Financial Officer | ||||||
| (Duly Authorized Officer and Principal Financial Officer) | ||||||
EXHIBIT INDEX
| * | Filed herewith |
| ** | Furnished herewith |
| *** | Management contract or compensatory plan or agreement |