TREX CO INC - Quarter Report: 2020 March (Form 10-Q)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		54-1910453
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
160 Exeter Drive Winchester, Virginia		22603-8605
(Address of principal executive offices)		(Zip Code)

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock		TREX		New York Stock Exchange LLC

		Three Months Ended March 31,
		2020				2019
Net sales		$	200,395			$	179,571
Cost of sales			110,699				110,206
Gross profit			89,696				69,365
Selling, general and administrative expenses			34,561				30,166
Income from operations			55,135				39,199
Interest income, net			(522	)			(56	)
Income before income taxes			55,657				39,255
Provision for income taxes			13,255				7,700
Net income		$	42,402			$	31,555
Basic earnings per common share		$	0.73			$	0.54
Basic weighted average common shares outstanding			58,129,529				58,543,478
Diluted earnings per common share		$	0.73			$	0.54
Diluted weighted average common shares outstanding			58,323,721				58,829,177
Comprehensive income		$	42,402			$	31,555

		March 31, 2020				December 31, 2019
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	5,339			$	148,833
Accounts receivable, net			241,242				78,462
Inventories			58,716				56,106
Prepaid expenses and other assets			16,582				19,803
Total current assets			321,879				303,204
Property, plant and equipment, net			193,099				171,300
Goodwill and other intangible assets, net			73,980				74,084
Operating lease assets			38,329				40,049
Other assets			3,569				3,602
Total assets		$	630,856			$	592,239
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	28,917			$	15,227
Accrued expenses and other liabilities			54,355				58,265
Accrued warranty			5,178				5,178
Line of credit			28,500				—
Total current liabilities			116,950				78,670
Operating lease liabilities			32,440				34,242
Deferred income taxes			9,831				9,831
Non-current accrued warranty			19,912				20,317
Other long-term liabilities			—				4
Total liabilities			179,133				143,064
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, $0.01 par value, 3,000,000 shares authorized; none issued and outstanding			—				—
Common stock, $0.01 par value, 120,000,000 shares authorized; 70,241,911 and 70,187,463 shares issued and 57,853,160 and 58,240,721 shares outstanding at March 31, 2020 and December 31, 2019, respectively			702				702
Additional paid-in capital			123,214				123,996
Retained earnings			604,082				561,680
Treasury stock, at cost, 12,388,751 and 11,946,742 shares at March 31, 2020 and December 31, 2019, respectively			(276,275	)			(237,203	)
Total stockholders’ equity			451,723				449,175
Total liabilities and stockholders’ equity		$	630,856			$	592,239

		Common Stock								Additional Paid-In Capital				Retained Earnings				Treasury Stock								Total
		Shares				Amount												Shares				Amount
Balance, December 31, 2019			58,240,721			$	702			$	123,996			$	561,680				11,946,742			$	(237,203	)		$	449,175
Net income			—				—				—				42,402				—				—				42,402
Employee stock plans			16,386				—				299				—				—				—				299
Shares withheld for taxes on awards			(38,142	)			—				(3,856	)			—				—				—				(3,856	)
Stock-based compensation			76,204				—				2,775				—				—				—				2,775
Repurchases of common stock			(442,009	)			—				—				—				442,009				(39,072	)			(39,072	)
Balance, March 31, 2020			57,853,160			$	702			$	123,214			$	604,082				12,388,751			$	(276,275	)		$	451,723

		Common Stock								Additional Paid-In Capital				Retained Earnings				Treasury Stock								Total
		Shares				Amount												Shares				Amount
Balance, December 31, 2018			58,551,653			$	700			$	124,224			$	416,942				11,446,683			$	(198,903	)		$	342,963
Net income			—				—				—				31,555				—				—				31,555
Employee stock plans			24,472				—				302				—				—				—				302
Shares withheld for taxes on awards			(74,010	)			—				(5,727	)			—				—				—				(5,727	)
Stock-based compensation			160,359				1				2,793				—				—				—				2,794
Repurchases of common stock			(124,989	)			—				—				—				124,989				(8,730	)			(8,730	)
Balance, March 31, 2019			58,537,485			$	701			$	121,592			$	448,497				11,571,672			$	(207,633	)		$	363,157

		Three Months Ended March 31,
		2020				2019
Operating Activities
Net income		$	42,402			$	31,555
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			3,851				3,394
Stock-based compensation			2,775				2,793
(Gain) loss on disposal of property, plant and equipment			(123	)			10
Other non-cash adjustments			32				31
Changes in operating assets and liabilities:
Accounts receivable			(162,780	)			(128,182	)
Inventories			(2,610	)			7,645
Prepaid expenses and other assets			1,059				1,214
Accounts payable			8,865				(7,556	)
Accrued expenses and other liabilities			(14,089	)			(27,332	)
Income taxes receivable/payable			11,850				6,438
Net cash used in operating activities			(108,768	)			(109,990	)
Investing Activities
Expenditures for property, plant and equipment			(22,733	)			(8,647	)
Proceeds from sales of property, plant and equipment			2,136				—
Net cash used in investing activities			(20,597	)			(8,647	)
Financing Activities
Borrowings under line of credit			36,500				35,000
Principal payments under line of credit			(8,000	)			—
Repurchases of common stock			(42,929	)			(14,457	)
Proceeds from employee stock purchase and option plans			300				302
Net cash (used in) provided by financing activities			(14,129	)			20,845
Net decrease in cash and cash equivalents			(143,494	)			(97,792	)
Cash and cash equivalents, beginning of period			148,833				105,699
Cash and cash equivalents, end of period		$	5,339			$	7,907
Supplemental Disclosure:
Cash paid for interest		$	1			$	11
Cash paid for income taxes, net		$	1,405			$	1,262

1.	BUSINESS AND ORGANIZATION

2.	BASIS OF PRESENTATION

3.	RECENTLY ADOPTED ACCOUNTING STANDARDS

4.	NEW ACCOUNTING STANDARDS NOT YET ADOPTED

5.	INVENTORIES

		March 31, 2020				December 31, 2019
Finished goods		$	43,458			$	42,281
Raw materials			33,050				31,686
Total FIFO (first-in, first-out) inventories			76,508				73,967
Reserve to adjust inventories to LIFO value			(19,062	)			(19,062	)
Total LIFO inventories		$	57,446			$	54,905

6.	PREPAID EXPENSES AND OTHER ASSETS

		March 31, 2020				December 31, 2019
Prepaid expenses		$	6,901			$	8,282
Revenues in excess of billings			6,247				6,664
Contract retainage			2,273				1,832
Income tax receivable			513				2,675
Other			648				350
Total prepaid expenses and other assets		$	16,582			$	19,803

7.	GOODWILL AND OTHER INTANGIBLE ASSETS

8.	ACCRUED EXPENSES AND OTHER LIABILITIES

		March 31, 2020				December 31, 2019
Sales and marketing		$	18,392			$	28,402
Income taxes			9,688				—
Compensation and benefits			7,721				13,475
Operating lease liabilities			7,111				7,079
Customer deposits			3,232				2,905
Manufacturing costs			2,504				2,564
Billings in excess of revenues			2,125				816
Other			3,582				3,024
Total accrued expenses and other liabilities		$	54,355			$	58,265

9.

DEBT

10.

LEASES

		Three Months Ended
Supplemental cash flow information		March 31, 2020				March 31, 2019
Cash paid for amounts included in the measurement of operating lease liabilities		$	2,143			$	2,118
Operating ROU assets obtained in exchange for lease liabilities		$	—			$	388

Supplemental balance sheet information		March 31, 2020				December 31, 2019
Operating lease ROU assets		$	38,329			$	40,049
Operating lease liabilities:
Accrued expenses and other current liabilities		$	7,111			$	7,079
Operating lease liabilities			32,440				34,242
Total operating lease liabilities		$	39,551			$	41,321

Maturities of operating lease liabilities
2020		$	6,329
2021			8,279
2022			6,464
2023			6,109
2024			6,146
Thereafter			11,079
Total lease payments			44,406
Less imputed interest			(4,855	)
Total operating liabilities		$	39,551

		Three Months Ended March 31,
		2020				2019
Numerator:
Net income available to common shareholders		$	42,402			$	31,555
Denominator:
Basic weighted average shares outstanding			58,129,529				58,543,478
Effect of dilutive securities:
Stock appreciation rights and options			90,723				154,076
Restricted stock			103,469				131,623
Diluted weighted average shares outstanding			58,323,721				58,829,177
Basic earnings per share		$	0.73			$	0.54
Diluted earnings per share		$	0.73			$	0.54

		Three Months Ended March 31,
		2020				2019
Stock appreciation rights			9,135				12,813

13.	REVENUE FROM CONTRACTS WITH CUSTOMERS

Three Months Ended March 31, 2020		Reportable Segment
		Trex  Residential				Trex  Commercial				Total
Timing of Revenue Recognition and Type of Contract
Products transferred at a point in time and variable consideration contracts		$	186,874			$	—			$	186,874
Products transferred over time and fixed price contracts			—				13,521				13,521
		$	186,874			$	13,521			$	200,395

Three Months Ended March 31, 2019		Reportable Segment
		Trex  Residential				Trex  Commercial				Total
Timing of Revenue Recognition and Type of Contract
Products transferred at a point in time and variable consideration contracts		$	165,479			$	—			$	165,479
Products transferred over time and fixed price contracts			—				14,092				14,092
		$	165,479			$	14,092			$	179,571

14.	STOCK-BASED COMPENSATION

		Stock Awards Granted				Weighted-Average  Grant Price Per Share
Time-based restricted stock units			19,769			$	101.53
Performance-based restricted stock units (a)			36,510			$	78.18
Stock appreciation rights			19,792			$	101.66

(a)

Includes 24,320 of target performance-based restricted stock unit awards granted during the three months ended March 31, 2020, and adjustments of (2,562), 3,029 and 11,723 to grants due to the actual performance level achieved for restricted stock and restricted stock units awarded in 2019, 2018 and 2017, respectively.

		Three Months Ended March 31, 2020				Three Months Ended March 31, 2019
Weighted-average fair value of grants		$	35.65			$	29.56
Dividend yield			0	%			0	%
Average risk-free interest rate			1.4	%			2.5	%
Expected term (years)			5				5
Expected volatility			37.8	%			39.1	%

		Three Months Ended March 31
		2020				2019
Stock appreciation rights		$	354			$	295
Time-based restricted stock and restricted stock units			1,256				1,149
Performance-based restricted stock and restricted stock units			1,135				1,314
Employee stock purchase plan			30				35
Total stock-based compensation		$	2,775			$	2,793

15.	INCOME TAXES

16.	SEGMENT INFORMATION

•

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.

		Three Months Ended March 31, 2020												Three Months Ended March 31, 2019
		Trex   Residential				Trex   Commercial				Total				Trex   Residential				Trex   Commercial				Total
Net sales		$	186,874			$	13,521			$	200,395			$	165,479			$	14,092			$	179,571
Net income		$	41,020			$	1,382			$	42,402			$	31,255			$	300			$	31,555
EBITDA		$	56,950			$	2,036			$	58,986			$	42,067			$	526			$	42,593
Depreciation and amortization		$	3,664			$	187			$	3,851			$	3,268			$	126			$	3,394
Income tax expense		$	12,788			$	467			$	13,255			$	7,600			$	100			$	7,700
Capital expenditures		$	22,416			$	317			$	22,733			$	7,694			$	953			$	8,647
Total assets		$	539,352			$	91,504			$	630,856			$	448,303			$	87,342			$	535,645

		Three Months Ended March 31, 2020												Three Months Ended March 31, 2019
		Trex   Residential				Trex   Commercial				Total				Trex   Residential				Trex   Commercial				Total
Net income		$	41,020			$	1,382			$	42,402			$	31,255			$	300			$	31,555
Interest income, net			(522	)			—				(522	)			(56	)			—				(56	)
Income tax expense			12,788				467				13,255				7,600				100				7,700
Depreciation and amortization			3,664				187				3,851				3,268				126				3,394
EBITDA		$	56,950			$	2,036			$	58,986			$	42,067			$	526			$	42,593

17.	SEASONALITY

18.	COMMITMENTS AND CONTINGENCIES

		Three Months Ended March 31, 2020
		Surface Flaking				Other Residential				Total
Beginning balance, January 1		$	19,024			$	6,470			$	25,494
Provisions and changes in estimates			—				321				321
Settlements made during the period			(557	)			(168	)			(725	)
Ending balance, March 31		$	18,467			$	6,623			$	25,090

		Three Months Ended March 31, 2019
		Surface Flaking				Other Residential				Total
Beginning balance, January 1		$	23,951			$	6,803			$	30,754
Provisions and changes in estimates			—				505				505
Settlements made during the period			(633	)			(292	)			(925	)
Ending balance, March 31		$	23,318			$	7,016			$	30,334

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 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 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 our products and raw materials; the Company’s ability to obtain raw materials 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

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence. The 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. 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 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 March 31, 2020, our facilities continue to operate at output levels similar to those prior to the pandemic and we are following or exceeding all 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.

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 have instructed our employees to practice social distancing. Efforts for social distancing include 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 is working from home and conducting training sessions with our channel partners by utilizing online audio and visual technologies. Face masks and other protective equipment have been distributed to employees across all of our facilities, and handwashing and hand sanitizing stations have been installed. In addition, we have made a donation of face masks to the local healthcare community. We have installed air purifier systems for all enclosed areas in every one of our buildings. In addition, 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 chemicals and disinfectants by internal and external groups.

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. Some jurisdictions into which we sell have now deemed the construction industry as and ordered the closure of those businesses. In addition, we have experienced areas where the availability of our products is limited due to the closure of certain of our channel partners. As of March 31, 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.

The impact that the  pandemic will have on our consolidated results of operations for fiscal year 2020 is uncertain. Although net sales increased considerably during the three months ended March 31, 2020, due to a number of our channel partners on both the distribution and consumer side closing or significantly curtailing operations in their respective localities because of restrictions, net sales for our second quarter may be impacted and this trend could continue until the pandemic subsides and macro-economics, particularly in the United States, return to normal. Also, we have stress tested our financials and believe our available financial resources will allow us to manage the impact of the pandemic on the Company’s business operations for the foreseeable future. As of March 31, 2020, our revolving credit facility provides us with $221.5 million in liquidity and we see no need to modify our current capital expansion program, which can be adjusted if necessary. As the impact of evolves, we will continue to evaluate our financial position and liquidity needs in light of future developments.

Trex Company, Inc. currently operates in two reportable segments: Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). The Company is focused on using renewable resources within both our Residential and Commercial segments. 

Trex Residential is the world’s largest manufacturer of high-performance, composite decking and residential railing products, which are marketed under the brand name Trex and manufactured in the United States. We offer a comprehensive set of aesthetically appealing and durable, product offerings in the decking, residential railing, fencing, steel deck framing, and outdoor lighting categories. A majority of the products are 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.

 

 

is a leading national provider of custom-engineered railing and staging systems. Trex Commercial designs and engineers custom solutions, which are prevalent in professional and collegiate sports facilities, commercial and high-rise applications, performing arts, sports, and event production and rental markets. With a team of devoted engineers, and an industry-leading reputation for quality and dedication to customer service, Trex Commercial markets to architects, specifiers, contractors, and building owners.

 

 

 

 

 

 

. Net sales consist of sales and freight, net of discounts. The level of net sales is principally affected by sales volume and the prices paid for Trex products. Trex Residential operating results have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home and commercial improvement and residential and commercial construction and can shift demand for our products to a later period. As part of our normal business practice and consistent with industry practice, we have historically provided our distributors and dealers of our Trex Residential products incentives to build inventory levels before the start of the prime deck-building season to ensure adequate availability of our product to meet anticipated seasonal consumer demand and to enable production planning. These incentives include payment discounts and favorable payment terms. In addition, we offer price discounts or volume rebates on specified products and other incentives based on increases in purchases as part of specific promotional programs. The timing of sales incentive programs can significantly impact sales, receivables and inventory levels during the offering period. However, the timing and terms of the majority of our programs are generally consistent from year to year. In addition, the operating results for Trex Commercial are driven by the timing of individual projects, which may vary significantly each period.

Gross profit represents the difference between net sales and cost of sales. Cost of sales consists of raw material costs, direct labor costs, manufacturing costs, subcontract costs and freight. Raw material costs generally include the costs to purchase and transport reclaimed wood fiber, reclaimed polyethylene, pigmentation for coloring our products, and commodities used in the production of railing and staging. Direct labor costs include wages and benefits of personnel engaged in the manufacturing process. Manufacturing costs consist of costs of depreciation, utilities, maintenance supplies and repairs, indirect labor, including wages and benefits, and warehouse and equipment rental activities.

We warrant that our Trex Residential 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, we have an obligation either to replace the defective product or refund the purchase price. Depending on the product and its use, we also warrant that our Trex Commercial products will be free of manufacturing defects for 1 to 3 years.

 

 

 

 

The largest component of selling, general and administrative expenses is personnel related costs, which includes salaries, commissions, incentive compensation, and benefits of personnel engaged in sales and marketing, accounting, information technology, corporate operations, research and development, and other business functions. Another component of selling, general and administrative expenses is branding and other sales and marketing costs, which are used to build brand awareness. These costs consist primarily of advertising, merchandising, and other promotional costs. Other general and administrative expenses include professional fees, office occupancy costs attributable to the business functions previously referenced, and consumer relations expenses. As a percentage of net sales, selling, general and administrative expenses may vary from quarter to quarter due, in part, to the seasonality of our business.