☒ | ANNUAL 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) |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to thisForm 10-K. ☒
Large accelerated filer ☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer ☐ | Smaller reporting company | ☐ | ||||
Emerging growth company | ☐ |
58,192,180.
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Document | Part of 10-K into which incorporated | |
Proxy Statement relating to Registrant’s
20 20 Annual Meeting of Stockholders | Part III |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock | TREX | New York Stock Exchange |
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Item 1A. | ||||||||
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PART II | ||||||||
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Item 9B. | 41 | |||||||
PART III | ||||||||
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PART IV | ||||||||
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Item 15. | 43 | |||||||
F- 1 |
Item 1. | Business |
Decking and Accessories | Our principal decking products are Trex Transcend ® , Trex ® , and Trex ® . Late in 2018, were-engineered our Enhance line to provide homeowners with a high-performance, lower-cost deck board designed to compete more directly with wood. 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 We also offer accessories to our decking products, including Trex Hideaway ® , a hidden fastening system for grooved ™ , 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. | ||
Railing | Our 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. | ||
| 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. | ||
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Trex Outdoor Furniture ™ | A line of outdoor furniture products manufactured and sold by PolyWood, Inc. | ||
Trex RainEscape ® | An above joist deck drainage system manufactured and sold by DriDeck Enterprises, LLC. | ||
Trex CustomCurve ® | A system manufactured and sold by Curvelt, LLC that allows contractors to heat and bend Trex Products while on the job site. | ||
Trex ™ | Pergolas made from low maintenance cellular PVC product, manufactured by Home & Leisure, Inc. dba Structureworks Fabrication. | ||
Trex ™ | Outdoor lattice boards manufactured and sold by Rhea Products, Inc. dba Acurio Latticeworks. | ||
Trex ™ Boards | Cornhole boards manufactured and sold by IPC Global Marketing LLC. | ||
Diablo ® Trex Blade | A specialty saw blade for | ||
Trex ™ and Structural Steel Posts |
A staircase alternative and structural steel posts for use with all deck substructures manufactured and sold by M. Cohen and Sons, Inc. dba The Iron Shop. | ||
| Outdoor kitchens, cabinetry and storage manufactured and sold by NatureKast Products, LLC prior to December 31, 2019, and Danver Stainless Outdoor Kitchens on and after January 1, 2020. | ||
Trex Outdoor Fire & Water ™ | A line of outdoor fire features, water elements and decorative planters manufactured by Custom Molded Products, LLC. |
markets.market. 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.
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. | ||
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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 | Our Trex Signature aluminum railings, made from a minimum of 50 percent recycled content, are a versatile, cost-effective and low-maintenance choice for a variety of interior and exterior applications that we believe blend form, function and style. The strength and durability of Trex Signature railings make them a choice for any commercial setting, from high-rise condominiums and resort projects to public walkways and balconies. Aluminum railings come in a variety of colors and stock lengths to accommodate project needs. | ||
Staging Equipment and Accessories | Our advanced modular, lightweight custom staging systems include portable platforms, orchestral 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. |
2019.
Trex Residential products
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their manufacturing operations. If the reclaimed wood fiber meets our specifications, our reclaimed wood fiber supply agreements generally require us to purchase at least a specified minimum and at most a specified maximum amount of reclaimed wood |
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During 2016, we launched
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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 Products 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 significantly each quarterly period.
Trex’s
manufacturer to hold this title since 2009.
items are addressed. A fully empowered Plant Safety Committee performs safety audits and observations, reviews and trends all incidents, writes their own Safety Work Orders, and participates in all PSSRs. Each member is required to successfully complete an Occupational Safety and Health Training course in General Industry Safety and Health, which is sanctioned and accredited by the U.S. Department of Labor/Occupational Safety and Health Administration. In addition, each manufacturing operation has an Employee Health and Safety Manager who is a Certified Occupational Safety Specialist and Certified Occupational Safety Manager. The Company is a member of the Voluntary Protection Program Participants Association, the National Safety Council, and the National Fire Protection Association.
Item 1A. | Risk Factors |
We may not be ablefollowing. If applicable to grow unlessa particular segment, we increase market acceptance of our products, compete effectively and develop new products and applications.
Our primary competition for Trex Residential products consists of wood products, which constitute a substantial majority of decking, railing, fencing, and deck framing sales. Since wood-alternative products were introducedhave specified the respective segment subject to the market in the late 1980s, their market acceptance has increased. Our ability to grow depends, in part, on our success in continuing to convert demand for wood products into demand for wood-alternative Trex products. To increase our market share, we must overcome:
Risk | Discussion | |
Description: We may not be able to grow unless we increase market acceptance of our products, compete effectively and develop new products and applications. Impact: Our failure to compete successfully could have a material adverse effect on the ability of Trex Residential to replace wood products or increase our market share amongst wood-alternative products. • If our Trex Residential products do not meet emerging demands and preferences, we could lose market share, which could have a material adverse effect on our business.• In addition, substantially all of our revenues are derived from sales of our proprietary wood/polyethylene composite material. Although we have developed, and continue to develop, new products made from other materials, if we should experience significant problems, real or perceived, with acceptance of the Trex wood/polyethylene composite material, our lack of product diversification could have a significant adverse impact on our net sales levels.If our Trex Commercial products do not keep up with consumer trends, demands, and preferences we could lose market share, which could have a material adverse effect on our business. | Our primary competition for Trex Residential products consists of wood products, which constitute a substantial majority of decking, railing, fencing, and deck framing sales. Since composite products were introduced to the market in the late 1980s, their market acceptance has increased. Our ability to grow depends, in part, on our success in continuing to convert demand for wood products into demand for composite Trex Residential products. Many of the conventional lumber suppliers with which we compete have established ties to the building and construction industry and have well-accepted products. Our ability to compete depends, in part, upon a number of factors outside our control, including the ability of competitors to develop new alternatives that are more competitive with Trex products. Our ability to identify and respond to emerging consumer demands and preferences for Trex Residential products depends, in part, on how successfully we develop, manufacture and market new products. To increase our market share, we must overcome: • Lack of awareness of the enhanced value of composite products in general and Trex Residential brand products in particular;• Resistance of many consumers and contractors to change from well-established wood products;• Consumer lack of awareness that the greater initial expense of Trex Residential products compared to wood is aone-time cost that is reduced over time as Trex Residential products have lower maintenance costs and a longer life span than wood;• Established relationships existing between suppliers of wood products and contractors and homebuilders;• Actual and perceived quality issues with first generation composite products; and | |
Lack
• Competition from other wood-alternative manufacturers.Although Trex Commercial is a leading national provider of custom-engineered railing and staging systems for the commercial and multi-family market, including performing arts venues and sports stadiums, there is significant competition for projects. In order to effectively compete, we must continually produce and install high quality products and innovate with new products. |
Risk | Discussion | |
Description: We may not be able to fully maintain our Trex Residential wholesaler and dealer channels. Impact: If Trex Residential fails to compete successfully for wholesale distributors and dealers, our business could experience material adverse effects, which could negatively impact profitability and cash flows. | Trex Residential sells most of our composite decking and railing products through our network of wholesale distributors who, in turn, sell to retail lumber outlets. Our Trex Residential growth strategy depends on maintaining this network and on our ability to compete with other entities for these channels. In order to successfully compete for wholesaler distributors, dealers and retail lumber outlets, we must accurately assess their customers’ needs and preferences. | |
Risk | Discussion | |
Description: Certain of our Trex Residential product customers account for a significant portion of our sales, and the loss of one or more of these customers could have an adverse effect on our business. Impact: The loss of a significant customer could have a significant negative impact on our business, results of operations and financial condition. | A limited number of our Trex Residential product customers account for a significant percentage of our sales. We expect that a significant portion of our Trex Residential sales will continue to be sold through a small number of customers, and certain customers will continue to account for a significant portion of our sales. | |
Risk | Discussion | |
Description: Our Trex Residential business is dependent on consistently producing a product which is available when needed to meet the demands of our customers. As our business grows, we must adjust capacity to meet customer needs and provide increased throughput on our existing capacity. Impact: Our Trex Residential sales growth and profitability could suffer from our failure to effectively pair supply and demand for our products. Our customers’ demands for varying quantities of products and delivery items throughout the year, and increased demand year to year, require monitoring and the ability to adjust production in accordance with these demands. Failure to do so can lead to lost or reduced sales and have a negative effect on earnings. | In order to meet Trex Residential customer demand in a timely manner, we must adjust capacity to meet customer needs and provide increased throughput on our existing capacity. Our sourcing team must obtain raw materials on a timely basis at an appropriate volume. | |
Risk | Discussion | |
Description: Our prospects for sales growth and profitability may be adversely affected if we fail to maintain product quality and product performance at an acceptable cost. Impact: If we are unable to produce high-quality products at standard manufacturing rates and yields, unit costs may be higher. A lack of product performance could impede acceptance of our products in the marketplace and negatively affect our profitability. Future increases to our Trex Residential warranty reserve could have a material adverse effect on our profitability and cash flows. In the event lawsuits relating to alleged product quality issues are brought against us in the future, such lawsuits may be costly and could cause adverse publicity, which in turn could result in a loss of consumer confidence in our products and reduce our sales. Product quality claims could increase our expenses, have a material adverse effect on demand for our products and decrease net sales, net income and liquidity. | In order to expand our net sales and sustain profitable operations we must maintain the quality and performance of our products. Trex Residential continues to receive and settle claims and maintain a warranty reserve related to decking product produced at our Nevada facility prior to 2007 that exhibits surface flaking. We have limited our financial exposure by settling a nationwide class action lawsuit that provides that a consumer’s remedy is limited to the replacement of product and a partial labor reimbursement. However, because the establishment of reserves is an inherently uncertain process involving estimates of the number of future claims and the average cost of claims, our ultimate losses may differ from our warranty reserve. Increases to the warranty reserve and payments for related claims have had a material adverse effect on our profitability and cash flows. A number of class action lawsuits alleging defects in our products have been brought against us, all of which have been settled. | |
Resistance
Risk | Discussion | |
Description: Our business is subject to risks in obtaining the raw materials we use at acceptable prices. Impact: Our business could suffer from the termination of significant sources of raw materials, the payment of higher prices for raw materials, the quality of available raw materials, or from the failure to obtain sufficient additional raw materials to meet planned increases in production. | The manufacture of our Trex Residential composite decking and railing products requires substantial amounts of wood fiber and scrap polyethylene. Our business strategy is to create a substantial cost advantage over our competitors by using scrap polyethylene. Our ability to obtain adequate supplies of wood fiber and scrap polyethylene depends on our success in developing new sources that meet our quality requirements, maintaining favorable relationships with suppliers and managing the collection of supplies from geographically dispersed locations. In addition to wood fiber and scrap polyethylene, we also use a small percentage of other materials in making our products, which are sometimes subject to volatility in supply and pricing and could negatively affect our profitability. The manufacture of our Trex Commercial products requires substantial amounts of aluminum, steel, glass and wood. These materials are also sometimes subject to volatility in pricing, which could negatively affect our profitability. | |
Risk | Discussion | |
Description: We have limited ability to project inventory build-ups in our Trex Residential distribution channel that can negatively affect our sales in subsequent periods.Impact: We cannot definitively determine the level of inventory in the Trex Residential distribution channels at any time and, therefore, have limited ability to precisely project inventory build-ups in the Trex Residentialtwo-step distribution channel. Significant increases in inventory levels in the distribution channel without a corresponding change inend-use demand could have an adverse effect on the timing of future sales. | Trex Residential sells most of our composite decking and railing products through our network of wholesale distributors who, in turn, sell to retail outlets. The seasonal nature of, and changing conditions in, our industry can result in substantial fluctuations in inventory levels of Trex Residential products carried in our two-step distribution channel. Because of the seasonal nature of the demand for our products, our distribution channel partners must forecast demand for our products, place orders for the products, and maintain Trex Residential product inventories in advance of the prime deck-building season, which generally occurs in the latter part of the first calendar quarter through the third calendar quarter. Accordingly, our results for the second and third quarters are difficult to predict and past performance will not necessarily indicate future performance. Inventory levels respond to a number of changing conditions in our industry, including product price increases, increases in the number of competitive producers, the rapid pace of product introduction and innovation, changes in the levels of home-building and remodeling expenditures and the cost and availability of consumer credit. | |
Consumer
Risk | Discussion | |
Description: The demand for our Trex Residential products is negatively affected by adverse weather conditions. Impact: Seasonal, erratic, or prolonged adverse weather conditions may shift sales of Trex Residential products to future periods or decrease overall sales given the limited decking season in many locations, which could have a negative impact on our results of operations and liquidity. | Our Trex Residential products are generally purchased shortly before installation and used in outdoor environments. As a result, there is a correlation between the amount of product we sell and weather conditions during the time they are to be installed. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions may interfere with ordinary construction, delay projects or lead to cessation of construction involving our products. | |
Risk | Discussion | |
Description: We depend on third parties for transportation services and the lack of availability of transportation and/or increases in cost could materially adversely affect our business and operations. Impact: If the required supply of third-party transportation services is unavailable when needed, we may be unable to deliver our products in a timely manner and, therefore, unable to sell our products at full value, or at all. Similarly, if any of these providers were unavailable to deliver raw materials to us in a timely manner, we may be unable to manufacture our products in response to customer demand. This could harm our reputation, negatively impact our customer relationships and have a material adverse effect on our financial condition and results of operations. In addition, a material increase in transportation rates or fuel surcharges could have a material adverse effect on our profitability. | Our business depends on the transportation by third parties of both raw materials to us and finished goods to our customers. In particular, a significant portion of our finished goods are transported by flatbed trucks, which are occasionally in high demand (especially at the end of calendar quarters) and/or subject to price fluctuations based on market conditions and the price of fuel. | |
Risk | Discussion | |
Description: The demand for our products is influenced by the home improvement and commercial construction markets and could be adversely affected by conditions that negatively impact these markets. Impact: We cannot predict conditions that may negatively impact the home remodeling and new home construction environment. Any economic downturn or adverse changes in the home improvement market could reduce consumer income or equity capital available for spending on discretionary items, which could adversely affect the demand for our Trex Residential products. We cannot predict conditions that may negatively impact the commercial construction environment. Any economic downturn could negatively impact the availability of funding for commercial construction projects and the ability of Trex Commercial customers to engage in commercial construction activity, which could adversely affect the demand for Trex Commercial products. | The demand for Trex Residential composite decking and railing products is influenced by the general health of the economy, the level of home improvement activity and, to a much lesser extent, new home construction. These factors are affected by home equity values, credit availability and interest rates, consumer confidence, income and spending habits, employment, inflation and general economic conditions. The demand for Trex Commercial railing and staging system products is influenced by the general health of the economy and the level of commercial construction activity, building variances, funding availability for large public use facilities, including sports stadiums and arenas, and the construction schedules of our projects. |
Risk | Discussion | |
Description: We have significant capital invested in assets that may become obsolete or impaired and result in a charge to our earnings. Impact: The recognition of goodwill may result in an impairment charge to our earnings if circumstances change and reduce the fair value of the goodwill acquired below its carrying amount. Significant replacement of equipment or changes in the expected cash flows related to our assets could result in reduced earnings or cash flows in future periods. | We have made and may continue to make significant capital investments in order to acquire businesses or operations that allow us to diversify into new product markets. These investments have resulted in, and may in the future result in, the recognition of goodwill. In addition, we have made and may continue to make significant capital investments to our property plant and equipment in order to improve or expand our manufacturing capabilities. These investments sometimes involve the implementation of new technology and replacement of existing equipment at our manufacturing facilities, which may result in charges to our earnings if the existing equipment is not fully depreciated. | |
Established relationships existing between suppliers
Risk | Discussion | |
Description: Our ability to continue to obtain financing on favorable terms, and the level of any outstanding indebtedness, could adversely affect our financial health and ability to compete. Impact: Our ability to make future principal and interest payments, borrow and repay amounts under our senior credit facility and continue to comply with our loan covenants will depend primarily on our ability to generate sufficient cash flow from operations. Our failure to comply with our loan covenants might cause our lenders to accelerate our repayment obligations under our senior credit facility, which may be declared payable immediately based on a default. | Our ability to continue to obtain financing on favorable terms may limit our discretion on some business matters, which could make it more difficult for us to expand, finance our operations and engage in other business activities that may be in our interest. In addition, our senior credit facility may impose operating and financial restrictions. At certain periods during the year, we may borrow significant amounts on our senior credit facility for working capital purposes. In addition, we may borrow on the senior credit facility to pursue strategic opportunities or other general business matters. Accordingly, our future level of indebtedness and the terms of our borrowings could have important consequences. | |
Risk | Discussion | |
Description: Cyberattacks and other security breaches could compromise our proprietary and confidential information which could harm our business and reputation. Impact: While we have certain safeguards in place to reduce the risk of and detect cyber-attacks, our information technology networks and infrastructure may be vulnerable to unpermitted access by hackers or other breaches, or employee error or malfeasance. Any such compromise of our data security and access to, or public disclosure or loss of, confidential business or proprietary information could disrupt our operations, damage our reputation, provide our competitors with valuable information and subject us to additional costs, which could adversely affect our business. | In the ordinary course of our business, we generate, collect and store confidential and proprietary information, including intellectual property and business information. The secure storage, maintenance, and transmission of and access to this information is important to our operations and reputation. Computer hackers may attempt to penetrate our computer systems and, if successful, misappropriate our proprietary and confidential information including e-mails and other electronic communications.In addition, an employee, contractor, competitor, or other third party with whom we do business may attempt to obtain such information, and may purposefully or inadvertently cause a breach involving such information. We also collect limited information on consumers. Although we do not collect any highly sensitive information, there is a risk that a cybersecurity attack could compromise consumer’s names, addresses and other personal information. | |
Actual and perceived quality issues with first generation wood-alternative products; and
Competition from other wood-alternative manufacturers.
Our failure to compete successfully in such markets could have a material adverse effect on our ability to replace wood or increase our market share amongst wood-alternatives. Many of the conventional lumber suppliers with which we compete have established ties to the building and construction industry and have well-accepted products. Our ability to compete depends, in part, upon a number of factors outside our control, including the ability of competitors to develop new alternatives that are more competitive with Trex products.
Our ability to identify and respond to emerging consumer demands and preferences depends, in part, on how successfully we develop, manufacture and market new products. If our products do not meet emerging demands and preferences, we could lose market share, which could have a material adverse effect on our business. In addition, substantially all of our revenues are derived from sales of our proprietary wood/polyethylene composite material. Although we have developed, and continue to develop, new products made from other materials, if we should experience significant problems, real or perceived, with acceptance of the Trex wood/polyethylene composite material, our lack of product diversification could have a significant adverse impact on our net sales levels.
Although Trex Commercial is a leading national provider of custom-engineered railing and staging systems for the commercial and multi-family market, including performing arts venues and sports stadiums, there is intense competition for projects. In order to effectively compete, we must continually produce and install high quality products and innovate with new products. If our products do not keep up with consumer trends, demands, and preferences we could lose market share, which could have a material adverse effect on our business.
We may not be able to fully maintain our wholesaler and dealer channels.
Our Trex Residential growth strategy depends on maintaining our network of wholesale and dealer channels, and on our ability to compete with other entities for these channels. In order to successfully compete for wholesaler distributors and dealers, we must accurately assess their customers’ needs and preferences. If we fail to compete successfully, our business could experience material adverse effects.
Our prospects for sales growth and profitability may be adversely affected if we fail to maintain product quality and product performance at an acceptable cost.
In order to expand our net sales and sustain profitable operations we must maintain the quality and performance of our products. If we are unable to produce high-quality products at standard manufacturing rates and yields, unit costs may be higher. A lack of product performance could impede acceptance of our products in the marketplace and negatively affect our profitability. We continue to receive and settle claims and maintain a warranty reserve related to decking product produced at our Nevada facility prior to 2007 that exhibits surface flaking. We have limited our financial exposure by settling a nationwide class action lawsuit that provides that a consumer’s remedy is limited to the replacement of product and a partial labor reimbursement. However, because the establishment of reserves is an inherently uncertain process involving estimates of the number of future claims and the average cost of claims, our ultimate losses may differ from our warranty reserve. Increases to the warranty reserve and payments for related claims have had a material adverse effect on our profitability and cash flows. Future increases to the warranty reserve could have a material adverse effect on our profitability and cash flows.
A number of class action lawsuits alleging defects in our products have been brought against us, all of which have been settled. In the event future lawsuits relating to alleged product quality issues are brought against us, such lawsuits may be costly and could cause adverse publicity, which in turn could result in a loss of consumer confidence in our products and reduce our sales. Product quality claims could increase our expenses, have a material adverse effect on demand for our products and decrease net sales, net income and liquidity.
Our business is subject to risks in obtaining the raw materials we use at acceptable prices.
The manufacture of our Trex Residential wood-alternative decking and railing products requires substantial amounts of wood fiber and scrap polyethylene. Our business strategy is to create a substantial cost advantage over our competitors by using scrap polyethylene. Our ability to obtain adequate supplies of wood fiber and scrap polyethylene depends on our success in developing new sources that meet our quality requirements, maintaining favorable relationships with suppliers and managing the collection of supplies from geographically dispersed locations. In addition to wood fiber and scrap polyethylene, we also use a small percentage of other materials in
making our products, which are sometimes subject to volatility in supply and pricing and could negatively affect our profitability. The manufacture of our Trex Commercial products requires substantial amounts of aluminum, steel, glass and wood. These materials are also sometimes subject to volatility in pricing, which could negatively affect our profitability.
Our business could suffer from the termination of significant sources of raw materials, the payment of higher prices for raw materials, the quality of available raw materials, or from the failure to obtain sufficient additional raw materials to meet planned increases in production.
Certain of our residential product customers account for a significant portion of our sales, and the loss of one or more of these customers could have an adverse effect on our business.
A limited number of our residential product customers account for a significant percentage of our sales. Specifically, sales through our 15 largest customers accounted for approximately 85.0% and 90.0% of gross sales during fiscal years 2018 and 2017, respectively.
We expect that a significant portion of our residential sales will continue to be sold through a small number of customers, and certain customers will continue to account for a significant portion of our sales. The loss of a significant customer could have a significant negative impact on our business, results of operations and financial condition.
We have limited ability to project inventorybuild-ups in our distribution channel that can negatively affect our sales in subsequent periods.
The seasonal nature of, and changing conditions in, our industry can result in substantial fluctuations in inventory levels of Trex Residential products carried in ourtwo-step distribution channel. We have limited ability to precisely project inventorybuild-ups, which can adversely affect our net sales levels in subsequent periods. We sell to wholesale distributors, who, in turn, sell our products to local dealers. Because of the seasonal nature of the demand for our products, our distribution channel partners must forecast demand for our products, place orders for the products, and maintain Trex product inventories in advance of the prime deck-building season, which generally occurs in the latter part of the first calendar quarter through the third calendar quarter. Accordingly, our results for the second and third quarters are difficult to predict and past performance will not necessarily indicate future performance. Inventory levels respond to a number of changing conditions in our industry, including product price increases, increases in the number of competitive producers, the rapid pace of product introduction and innovation, changes in the levels of home-building and remodeling expenditures and the cost and availability of consumer credit.
The demand for our Trex Residential products is negatively affected by adverse weather conditions.
Our Trex Residential products are generally purchased shortly before installation and used in outdoor environments. As a result, there is a correlation between the amount of product we sell and weather conditions during the time they are to be installed. Adverse weather conditions may interfere with ordinary construction, delay projects or lead to cessation of construction involving our products. These interferences may shift sales to subsequent reporting periods or decrease overall sales, given the limited decking season in many locations. Prolonged adverse weather conditions could have a negative impact on our results of operations and liquidity.
We depend on third parties for transportation services and the lack of availability of transportation and/or increases in cost could materially adversely affect our business and operations.
Our business depends on the transportation of both finished goods to our distributors and the transportation of raw materials to us. We rely on third parties for transportation of these items. In particular, a significant portion of our finished goods are transported by flatbed trucks, which are occasionally in high demand (especially at the end of calendar quarters) and/or subject to price fluctuations based on market conditions and the price of fuel.
If the required supply of transportation services is unavailable when needed, we may be unable to sell our products at full value, or at all. Similarly, if any of these providers were unavailable to deliver raw materials to us in a timely manner, we may be unable to manufacture our products in response to customer demand. This could harm our reputation, negatively impact our customer relationships and have a material adverse effect on our financial condition and results of operations. In addition, a material increase in transportation rates or fuel surcharges could have a material adverse effect on our profitability.
The demand for our products is influenced by general economic conditions and could be adversely affected by economic downturns.
The demand for Trex Residential wood-alternative decking and railing products is influenced by the general health of the economy, the level of home improvement activity and, to a much lesser extent, new home construction. These factors are affected by home equity values, credit availability and interest rates, consumer confidence, income and spending habits, employment, inflation and general economic conditions. Devaluation in home equity values can adversely affect the availability of home equity withdrawals and result in decreased home improvement spending. We cannot predict general economic conditions or the home remodeling and new home construction environment. Any economic downturn or adverse changes in any of these factors could reduce consumer income or equity capital available for spending on discretionary items, which could adversely affect the demand for our products.
The demand for Trex Commercial railing and staging system products is influenced by the general health of the economy and the level of commercial construction activity, building variances, funding availability for large public use facilities, including sports stadiums and arenas, and the construction schedules of our projects. We cannot predict general economic conditions or the commercial construction environment. Any economic downturn could negatively impact the availability of funding for commercial construction projects and the ability of our customers to engage in commercial construction activity, which could adversely affect the demand for our products.
We have significant capital invested in assets that may become obsolete or impaired and result in a charge to our earnings.
We have made and may continue to make significant capital investments to our property plant and equipment in order to improve or expand our manufacturing capabilities. These investments sometimes involve the implementation of new technology and replacement of existing equipment at our manufacturing facilities, which may result in charges to our earnings if the existing equipment is not fully depreciated. We have also made and may continue to make significant capital investments in order to acquire businesses or operations that allow us to diversify into new product markets. These investments have resulted in, and may in the future result in, the recognition of goodwill, which may result in an impairment charge to our earnings if circumstances change and reduce the fair value of the goodwill acquired below its carrying amount. Significant replacement of equipment or changes in the expected cash flows related to our assets could result in reduced earnings or cash flows in future periods.
Our ability to continue to obtain financing on favorable terms, and the level of any outstanding indebtedness, could adversely affect our financial health and ability to compete.
Our ability to continue to obtain financing on favorable terms may limit our discretion on some business matters, which could make it more difficult for us to expand, finance our operations and engage in other business activities that may be in our interest. In addition, our senior credit facility may impose operating and financial restrictions.
At certain periods during the year, we borrow significant amounts on our senior credit facility for working capital purposes. In addition, we may borrow on the senior credit facility to pursue strategic opportunities or other general business matters. Accordingly, our future level of indebtedness could have important consequences.
Our ability to make future principal and interest payments, borrow and repay amounts under our senior credit facility and continue to comply with our loan covenants will depend primarily on our ability to generate sufficient cash flow from operations. Our failure to comply with our loan covenants might cause our lenders to accelerate our repayment obligations under our senior credit facility, which may be declared payable immediately based on a default.
Cyberattacks and other security breaches could compromise our proprietary and confidential information which could harm our business and reputation.
In the ordinary course of our business, we generate, collect and store confidential and proprietary information, including intellectual property and business information. The secure storage, maintenance, and transmission of and access to this information is important to our operations and reputation. Computer hackers may attempt to penetrate our computer systems and, if successful, misappropriate our proprietary and confidential information includinge-mails and other electronic communications. In addition, an employee, contractor, competitor, or other third party with whom we do business may attempt to obtain such information, and may purposefully or inadvertently cause a breach involving such information. While we have certain safeguards in place to reduce the risk of and detect cyber-attacks, our information technology networks and infrastructure may be vulnerable to unpermitted access by hackers or other breaches, or employee error or malfeasance. Any such compromise of our data security and access to, or public disclosure or loss of, confidential business or proprietary information could disrupt our operations, damage our reputation, provide our competitors with valuable information and subject us to additional costs, which could adversely affect our business. We also collect limited information on consumers. Although we do not collect any highly sensitive information, there is a risk that a cybersecurity attack could compromise consumer’s names, addresses and other personal information.
Item 1B. | Unresolved Staff Comments |
Item 2. | Properties |
We lease our corporate headquarters in Winchester, Virginia, which consists of approximately 36,000 square feet of office space, under a lease that expires in March 2025. In addition, we lease 55,047 square feet of office and storage space in Dulles, Virginia, that we do not occupy. We have sublet all of the office space in Dulles, Virginia, for the remainder of the term of the lease obligation, which expires inmid-2019.
Square Footage/ Acres | Leased / Owned | Lease Expiration Dates | Location | Purpose | |||||||
Corporate Headquarters | 39,250 SF | Leased | 2025 | Virginia | Office Space | ||||||
Trex Residential | 1,671,852 SF | Leased | 2020 – 2028 | Virginia / Nevada | Warehouse, Research and Development, Storage, Training and Manufacturing Facilities | ||||||
Trex Residential | 705,000 SF / 129 Acres | Owned | N/A | Virginia / Nevada | Manufacturing Facilities, Storage and Office Space | ||||||
Trex Commercial | 142,808 SF | Leased | 2022 – 2028 | Minnesota | Warehouse, Facility and Office Space |
make capital investments where necessary. In September 2007,2019, we suspended operations at our Olive Branch, Mississippi facility (Olive Branch facility) and consolidated all of our manufacturing operations into our Winchester and Fernley sites. In January 2016, we sold a portion of the Olive Branch facility that contained the buildings. As of the date of this report, we continue to own approximately 62 acres of undeveloped land at the Olive Branch facility.
We leasespent a total of $67 million on capital expenditures, including $60 million related to capacity expansion and general plant cost reduction initiatives, $5 million for other production improvements and $2 million for general support initiatives. In order to keep pace with demand, in June 2019 we announced a new multi-year capital expenditure program projected at approximately 1.7$200 million square feetbetween 2019 and 2021. The program will increase production capacity by at least 70% at our Trex Residential facilities in Virginia and Nevada and will bring further manufacturing efficiencies to our production operations. In the third quarter of warehouse2019, we installed two additional lines in our Nevada facility and facility space under leases with expiration dates ranging fromthree new lines will begin ramping up in Nevada in the second quarter of 2020. One new production line was operational in Virginia in the fourth quarter of 2019, and a new building being constructed in Virginia is scheduled to 2028. start ramping up production by early 2021 at the latest. These investments will allow us to increase production output for future projected growth related to our strategy of converting wood demand to Trex Residential composite decking.
We regularly evaluate our various facilities and equipment and make capital investments where necessary. In 2018, we spent a total of $33.8 million on capital expenditures, primarily related to general plant cost reduction initiatives, the purchase of certain domain names, and equipment and new product development. We estimate that our capital expenditures in 2019 will be approximately $40 million to $45 million. We expect to use these expenditures principally to support cost reduction initiatives, new product launches in current and adjacent categories and general business support.
Item 3. | Legal Proceedings |
Item 4. | Mine Safety Disclosures. |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Period | (a) Total Number of Shares (or Units) Purchased (1) | (b) Average Price Paid per Share (or Unit) ($) | (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 | ||||||||||||
October 1, 2018 – October 31, 2018 | 209,277 | $ | 59.07 | 209,277 | 5,340,679 | |||||||||||
November 1, 2018 – November 30, 2018 | — | — | — | 5,340,679 | ||||||||||||
December 1, 2018 – December 31, 2018 | — | — | — | 5,340,649 | ||||||||||||
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Quarter ended December 31, 2018 | 209,277 | 209,277 | ||||||||||||||
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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 | ||||||||||||
October 1, 2019 – October 31, 2019 | 48,489 | $ | 88.97 | 44,919 | 4,920,640 | |||||||||||
November 1, 2019 – November 30, 2019 | 39,060 | $ | 87.49 | 39,060 | 4,881,580 | |||||||||||
December 1, 2019 – December 31, 2019 | 40,960 | $ | 87.68 | 40,960 | 4,840,620 | |||||||||||
Quarter ended December 31, 2019 | 128,509 | 124,939 | ||||||||||||||
(1) | During the three months ended December 31, |
(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 |
2019.
12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | |||||||||||||||||||
Trex Company, Inc. | $ | 100.00 | $ | 107.09 | $ | 95.67 | $ | 161.97 | $ | 272.59 | $ | 298.59 | ||||||||||||
Russell 2000 Index | $ | 100.00 | $ | 104.89 | $ | 100.26 | $ | 121.63 | $ | 139.45 | $ | 124.10 | ||||||||||||
S&P 600 Building Products | $ | 100.00 | $ | 99.76 | $ | 119.68 | $ | 155.32 | $ | 186.73 | $ | 147.91 |
�� | ||||||||||||||||||||||||
12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | |||||||||||||||||||
Trex Company, Inc. | $ | 100.00 | $ | 89.34 | $ | 151.24 | $ | 254.53 | $ | 278.82 | $ | 422.17 | ||||||||||||
Russell 2000 Index | $ | 100.00 | $ | 95.59 | $ | 115.96 | $ | 132.95 | $ | 118.31 | $ | 148.52 | ||||||||||||
S&P 600 Building Products | $ | 100.00 | $ | 119.97 | $ | 155.70 | $ | 187.18 | $ | 148.27 | $ | 210.82 |
Item 6. | Selected Financial Data |
2019.
Year Ended December 31, (1) | ||||||||||||||||||||
2018 | 2017 (2) | 2016 (3) | 2015 (4) | 2014 | ||||||||||||||||
(In thousands, except share and per share data) | ||||||||||||||||||||
Statement of Comprehensive Income Data: | ||||||||||||||||||||
Net sales | $ | 684,250 | $ | 565,153 | $ | 479,616 | $ | 440,804 | $ | 391,660 | ||||||||||
Cost of sales | 389,356 | 321,780 | 292,521 | 285,935 | 251,464 | |||||||||||||||
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Gross profit | 294,894 | 243,373 | 187,095 | 154,869 | 140,196 | |||||||||||||||
Selling, general and administrative expenses | 118,225 | 100,993 | 83,140 | 77,463 | 72,370 | |||||||||||||||
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Income from operations | 176,669 | 142,380 | 103,955 | 77,406 | 67,826 | |||||||||||||||
Interest (income) expense, net | (192 | ) | 461 | 1,125 | 619 | 878 | ||||||||||||||
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Income before income taxes | 176,861 | 141,919 | 102,830 | 76,787 | 66,948 | |||||||||||||||
Provision (benefit) for income taxes | 42,289 | 46,791 | 34,983 | 28,689 | 25,427 | |||||||||||||||
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Net income | $ | 134,572 | $ | 95,128 | $ | 67,847 | $ | 48,098 | $ | 41,521 | ||||||||||
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Basic earnings per share | $ | 2.29 | $ | 1.62 | $ | 1.15 | $ | 0.77 | $ | 0.64 | ||||||||||
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Basic weighted average shares outstanding | 58,739,670 | 58,785,118 | 58,789,118 | 62,701,084 | 64,639,298 | |||||||||||||||
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Diluted earnings per share | $ | 2.28 | $ | 1.61 | $ | 1.15 | $ | 0.76 | $ | 0.63 | ||||||||||
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Diluted weighted average shares outstanding | 59,067,302 | 59,150,920 | 59,225,338 | 63,365,018 | 65,502,148 | |||||||||||||||
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Cash Flow Data: | ||||||||||||||||||||
Cash provided by operating activities | $ | 138,121 | $ | 101,865 | $ | 85,293 | $ | 62,634 | $ | 58,642 | ||||||||||
Cash used in investing activities | (33,733 | ) | (86,789 | ) | (10,202 | ) | (23,329 | ) | (12,873 | ) | ||||||||||
Cash used in financing activities | (29,203 | ) | (3,226 | ) | (62,422 | ) | (42,854 | ) | (39,997 | ) | ||||||||||
Other Data (unaudited): | ||||||||||||||||||||
EBITDA(non-GAAP) (5) | $ | 193,136 | $ | 159,110 | $ | 118,136 | $ | 91,701 | $ | 82,653 | ||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents and restricted cash | $ | 105,699 | $ | 30,514 | $ | 18,664 | $ | 5,995 | $ | 9,544 | ||||||||||
Working capital | 177,450 | 86,289 | 54,264 | 38,581 | 35,787 | |||||||||||||||
Total assets | 465,122 | 326,227 | 221,430 | 211,998 | 195,824 | |||||||||||||||
Total debt | — | — | — | 7,000 | — | |||||||||||||||
Total stockholder’s equity | $ | 342,963 | $ | 231,250 | $ | 134,161 | $ | 116,463 | $ | 113,385 |
Year Ended December 31, (1) | ||||||||||||||||||||
2019 (2) | 2018 | 2017 (3) | 2016 (4) | 2015 (5) | ||||||||||||||||
(In thousands, except share and per share data) | ||||||||||||||||||||
Statement of Comprehensive Income Data: | ||||||||||||||||||||
Net sales | $ | 745,347 | $ | 684,250 | $ | 565,153 | $ | 479,616 | $ | 440,804 | ||||||||||
Cost of sales | 438,844 | 389,356 | 321,780 | 292,521 | 285,935 | |||||||||||||||
Gross profit | 306,503 | 294,894 | 243,373 | 187,095 | 154,869 | |||||||||||||||
Selling, general and administrative expenses | 118,304 | 118,225 | 100,993 | 83,140 | 77,463 | |||||||||||||||
Income from operations | 188,199 | 176,669 | 142,380 | 103,955 | 77,406 | |||||||||||||||
Interest (income) expense, net | (1,503 | ) | (192 | ) | 461 | 1,125 | 619 | |||||||||||||
Income before income taxes | 189,702 | 176,861 | 141,919 | 102,830 | 76,787 | |||||||||||||||
Provision for income taxes | 44,964 | 42,289 | 46,791 | 34,983 | 28,689 | |||||||||||||||
Net income | $ | 144,738 | $ | 134,572 | $ | 95,128 | $ | 67,847 | $ | 48,098 | ||||||||||
Basic earnings per share | $ | 2.48 | $ | 2.29 | $ | 1.62 | $ | 1.15 | $ | 0.77 | ||||||||||
Basic weighted average shares outstanding | 58,430,597 | 58,739,670 | 58,785,118 | 58,789,118 | 62,701,084 | |||||||||||||||
Diluted earnings per share | $ | 2.47 | $ | 2.28 | $ | 1.61 | $ | 1.15 | $ | 0.76 | ||||||||||
Diluted weighted average shares outstanding | 58,657,749 | 59,067,302 | 59,150,920 | 59,225,338 | 63,365,018 | |||||||||||||||
Cash Flow Data: | ||||||||||||||||||||
Cash provided by operating activities | $ | 156,352 | $ | 138,121 | $ | 101,865 | $ | 85,293 | $ | 62,634 | ||||||||||
Cash used in investing activities | (67,244 | ) | (33,733 | ) | (86,789 | ) | (10,202 | ) | (23,329 | ) | ||||||||||
Cash used in financing activities | (45,974 | ) | (29,203 | ) | (3,226 | ) | (62,422 | ) | (42,854 | ) | ||||||||||
Other Data (unaudited): | ||||||||||||||||||||
EBITDA (non-GAAP) (6) | $ | 202,230 | $ | 193,136 | $ | 159,110 | $ | 118,136 | $ | 91,701 | ||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 148,833 | $ | 105,699 | $ | 30,514 | $ | 18,664 | $ | 5,995 | ||||||||||
Working capital | 224,534 | 177,450 | 86,289 | 54,264 | 38,581 | |||||||||||||||
Total assets | 592,239 | 465,122 | 326,227 | 221,430 | 211,998 | |||||||||||||||
Total debt | — | — | — | — | 7,000 | |||||||||||||||
Total stockholders’ equity | $ | 449,175 | $ | 342,963 | $ | 231,250 | $ | 134,161 | $ | 116,463 |
1) | All common stock share and per share data in the above table are presented on a post-split basis to reflect the |
2) | In January 1, 2019, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842), |
guidance within ASU Nos. 2018-01, 2018-10, 2018-11, 2018-20, and2019-01 (collectively, the standard). The standard requires lessees to recognize operating leases on the balance sheet as aright-of-use (ROU) asset and a lease liability (current andnon-current). The liability is equal to the present value of the lease payments over the remaining lease term. The asset is based on the liability, subject to certain adjustments. The Company elected the modified retrospective method of adoption, which allowed the Company to apply the standard as of the beginning of the period of adoption. As a result, at December 31, 2019 the Company reported an ROU asset in total assets and included the current portion of the lease liability in working capital. |
3) | On July 31, 2017, the Company’s newly-formed, wholly-owned subsidiary, Trex Commercial Products, Inc. acquired certain assets and assumed certain liabilities of Staging Concepts Acquisition, LLC. The Consolidated Financial Statements include the accounts of Trex Commercial Products, Inc. from the date of acquisition. Also, the tax legislation H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” known as the Tax Cuts and Jobs Act (Act), was enacted on December 22, 2017. Accordingly, we have recognized the tax effects of the Act in our financial statements and related notes as of and for the year ended December 31, 2017. Deferred tax assets that existed as of the enactment date and that reversed after the Act’s effective date of January 1, 2018 were adjusted to reflect the new Federal statutory tax rate of 21%. The effect of the change in tax rate on the deferred tax assets was allocated to continuing operations as a discrete item. We finalized our analysis of the Act in 2018, which did not give rise to new deferred tax amounts. |
Year ended December 31, 2016 was materially affected by a |
Because the Company applied ASUNo. |
Year ended December 31, 2015 was materially affected by a |
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). The Company has included data with respect to EBITDA because management evaluates and projects the performance of the Company’s business using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of the Company’s operating performance, particularly as compared to the operating performance of the Company’s competitors, because this measure eliminates many differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets, as well as some recurring |
Year Ended December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net income | $ | 134,572 | $ | 95,128 | $ | 67,847 | $ | 48,098 | $ | 41,521 | ||||||||||
Plus interest (income) expense, net | (192 | ) | 461 | 1,125 | 619 | 878 | ||||||||||||||
Plus income tax provision | 42,289 | 46,791 | 34,983 | 28,689 | 25,427 | |||||||||||||||
Plus depreciation and amortization | 16,467 | 16,730 | 14,181 | 14,295 | 14,827 | |||||||||||||||
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EBITDA(non-GAAP) | $ | 193,136 | $ | 159,110 | $ | 118,136 | $ | 91,701 | $ | 82,653 | ||||||||||
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2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net income | $ | 144,738 | $ | 134,572 | $ | 95,128 | $ | 67,847 | $ | 48,098 | ||||||||||
Plus interest (income) expense, net | (1,503 | ) | (192 | ) | 461 | 1,125 | 619 | |||||||||||||
Plus income tax provision | 44,964 | 42,289 | 46,791 | 34,983 | 28,689 | |||||||||||||||
Plus depreciation and amortization | 14,031 | 16,467 | 16,730 | 14,181 | 14,295 | |||||||||||||||
EBITDA (non-GAAP) | $ | 202,230 | $ | 193,136 | $ | 159,110 | $ | 118,136 | $ | 91,701 | ||||||||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
high performance,high-performance, low maintenance,wood-alternativecomposite decking and railing products:products through Trex Residential:Decking Trex Transcend®Trex Enhance®Trex Select®Railing Outdoor Lighting SystemsTrex DeckLighting™Trex LandscapeLighting™Hidden Fastening System for Specially Grooved BoardsTrex Hideaway®
In addition, we
20182019 include:
Net income of $134.6 million also reflects the highest of any year in our history.
SC CompanyStaging Concepts Acquisition, LLC (SC Company) and on that date acquired certain assets and liabilities of SC Company for $71.8 million in cash. We used cash on hand and $30.0 million from our existing revolving credit facility to acquire the business. The acquisition provides us with the opportunity to offer full service railing systems in the growing commercial and multi-family markets, access to a complementary product category with a track record of substantial revenue growth, the ability to achieve economies of scale around raw material procurement, and an increase in the range of products the Company may offer its core customers. The Consolidated Financial Statements include the accounts of Trex Commercial Products, Inc. from the date of acquisition.quarterly period.
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 have varied from quarter to quarter due, in part, to the seasonality of our business.
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. We estimate 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. We estimate 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 $2.6$1.9 million change in the surface flaking warranty reserve.
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Claims unresolved beginning of period | 2,306 | 2,755 | 2,500 | |||||||||
Claims received (1) | 1,481 | 2,250 | 2,615 | |||||||||
Claims resolved (2) | (1,766 | ) | (2,699 | ) | (2,360 | ) | ||||||
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Claims unresolved end of period | 2,021 | 2,306 | 2,755 | |||||||||
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Average cost per claim (3) | $ | 2,631 | $ | 2,546 | $ | 2,639 |
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Claims unresolved beginning of period | 2,021 | 2,306 | 2,755 | |||||||||
Claims received (1) | 1,394 | 1,481 | 2,250 | |||||||||
Claims resolved (2) | (1,691 | ) | (1,766 | ) | (2,699 | ) | ||||||
Claims unresolved end of period | 1,724 | 2,021 | 2,306 | |||||||||
Average cost per claim (3) | $ | 3,447 | $ | 2,631 | $ | 2,546 |
(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. |
Inventories. We account for inventories of our wood-alternative decking and railing products at the lower of cost(last-in,first-out, or LIFO) or market value. At December 31, 2018, the excess of the replacement cost of inventory over the LIFO value of inventory was approximately $18.4 million. Inventories for our railing and staging products are accounted for at the lower of cost(first-in,first-out method) and net realizable value. We believe that our current inventory of finished goods will be saleable in the ordinary course of business and, accordingly, have not established significant reserves for estimated slow moving products or obsolescence.
the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of our contracts with our customers. Topic 606 provides a single, comprehensive model for revenue recognition arising from contracts with customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when or as the Company satisfies the performance obligation. Revenue is recognized at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring control of the goods or services to a customer. Adoption of Topic 606 did not have an impact on the Company’s financial condition or results of operations. The following provides additional information about our contracts with customers.
Income Taxes.We recognize deferred tax assets and liabilities based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect during the year in which it is expected that the differences reverse. We assess the likelihood that our deferred tax assets will be realized. Deferred tax assets are reduced by a valuation allowance when, after considering all available positive and negative evidence, it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. On December 22, 2017, the tax legislation H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,”
known as the Tax Cuts and Jobs Act (Act), was enacted. The Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Accordingly, we recognized the tax effects of the Act in our financial statements and related notes as of and for the year ended December 31, 2017. The Company has finalized its analysis of the Act, which did not give rise to new deferred tax amounts. As of December 31, 2018, we have a valuation allowance of $3.0 million against the deferred tax assets related to state tax credits we estimate will expire before they are realized. We will analyze our position in subsequent reporting periods, considering all available positive and negative evidence, in determining the expected realization of our deferred tax assets.
2018.
2018
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2018 | 2017 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Total net sales | $ | 684,250 | $ | 565,153 | $ | 119,097 | 21.1 | % | ||||||||
Trex Residential net sales | $ | 613,229 | $ | 543,346 | $ | 69,883 | 12.9 | % | ||||||||
Trex Commercial net sales | $ | 71,021 | $ | 21,807 | $ | 49,214 | 225.7 | % |
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2019 | 2018 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Total net sales | $ | 745,347 | $ | 684,250 | $ | 61,097 | 8.9 | % | ||||||||
Trex Residential net sales | $ | 694,267 | $ | 613,229 | $ | 81,038 | 13.2 | % | ||||||||
Trex Commercial net sales | $ | 51,080 | $ | 71,021 | $ | (19,941 | ) | (28.1 | )% |
2018.
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2018 | 2017 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Cost of sales | $ | 389,356 | $ | 321,780 | $ | 67,576 | 21.0 | % | ||||||||
% of total net sales | 56.9 | % | 56.9 | % | ||||||||||||
Gross profit | $ | 294,894 | $ | 243,373 | $ | 51,521 | 21.2 | % | ||||||||
Gross margin | 43.1 | % | 43.1 | % |
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2019 | 2018 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Cost of sales | $ | 438,844 | $ | 389,356 | $ | 49,488 | 12.7 | % | ||||||||
% of total net sales | 58.9 | % | 56.9 | % | ||||||||||||
Gross profit | $ | 306,503 | $ | 294,894 | $ | 11,609 | 3.9 | % | ||||||||
Gross margin | 41.1 | % | 43.1 | % |
expenses related to new products introduced in the latter part overhead as a result of 2018. In addition, project completion costs at Trex Commercial increased approximately $1.8 million primarily related to contracts executed prior to our acquisition of SC Company in July 2017.
lower net sales.
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2018 | 2017 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Selling, general and administrative expenses | $ | 118,225 | $ | 100,993 | $ | 17,232 | 17.1 | % | ||||||||
% of total net sales | 17.3 | % | 17.9 | % |
The $17.2 million increase in selling,
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2019 | 2018 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Selling, general and administrative expenses | $ | 118,304 | $ | 118,225 | $ | 79 | 0.1 | % | ||||||||
% of total net sales | 15.9 | % | 17.3 | % |
other miscellaneous expenses.
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2018 | 2017 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Provision for income taxes | $ | 42,289 | $ | 46,791 | $ | (4,502 | ) | (9.6 | )% | |||||||
Effective tax rate | 23.9 | % | 33.0 | % |
We have recognized the tax effects of the Tax Cuts and Jobs Act in our financial statements and related notes as of and for the year ended December 31, 2017. Deferred tax assets that existed as of the enactment date and that reversed after the Act’s effective date of January 1, 2018 were adjusted to reflect the new Federal statutory tax rate of 21%. The effect of the change in tax rate on the deferred tax assets and deferred tax liabilities resulted in a tax benefit of $1.9 million for the year ended December 31, 2017, which was allocated to continuing operations. We finalized our calculation, which did not give rise to new deferred tax amounts.
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2019 | 2018 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Provision for income taxes | $ | 44,964 | $ | 42,289 | $ | 2,675 | 6.3 | % | ||||||||
Effective tax rate | 23.7 | % | 23.9 | % |
share-based payments.
Year Ended December 31 | 2018 Trex Residential | 2018 Trex Commercial | 2018 Consolidated | |||||||||
Net income | $ | 131,823 | $ | 2,749 | $ | 134,572 | ||||||
Interest (income) expense, net | (192 | ) | — | (192 | ) | |||||||
Taxes | 41,421 | 868 | 42,289 | |||||||||
Depreciation and amortization | 13,216 | 3,251 | 16,467 | |||||||||
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EBITDA | $ | 186,268 | $ | 6,868 | $ | 193,136 | ||||||
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Year Ended December 31 | 2019 Trex Residential | 2019 Trex Commercial | 2019 Trex Consolidated | |||||||||
Net income | $ | 142,811 | $ | 1,927 | $ | 144,738 | ||||||
Interest income, net | (1,496 | ) | (7 | ) | (1,503 | ) | ||||||
Income tax expense | 44,292 | 672 | 44,964 | |||||||||
Depreciation and amortization | 13,413 | 618 | 14,031 | |||||||||
EBITDA | $ | 199,020 | $ | 3,210 | $ | 202,230 | ||||||
Year Ended December 31 | 2017 Trex Residential | 2017 Trex Commercial | 2017 Consolidated | |||||||||
Net income | $ | 97,412 | $ | (2,284 | ) | $ | 95,128 | |||||
Interest | 461 | — | 461 | |||||||||
Taxes | 47,911 | (1,120 | ) | 46,791 | ||||||||
Depreciation and amortization | 14,598 | 2,132 | 16,730 | |||||||||
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EBITDA | $ | 160,382 | $ | (1,272 | ) | $ | 159,110 | |||||
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Year Ended December 31, | $ Change | % Change | ||||||||||||||
2018 | 2017 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Total EBITDA | $ | 193,136 | $ | 159,110 | $ | 34,026 | 21.4 | % | ||||||||
Trex Residential EBITDA | $ | 186,268 | $ | 160,382 | $ | 25,886 | 16.1 | % | ||||||||
Trex Commercial EBITDA | $ | 6,868 | $ | (1,272 | ) | $ | 8,140 | N/A |
Year Ended December 31 | 2018 Trex Residential | 2018 Trex Commercial | 2018 Trex Consolidated | |||||||||
Net income | $ | 131,823 | $ | 2,749 | $ | 134,572 | ||||||
Interest income, net | (192 | ) | — | (192 | ) | |||||||
Income tax expense | 41,421 | 868 | 42,289 | |||||||||
Depreciation and amortization | 13,216 | 3,251 | 16,467 | |||||||||
EBITDA | $ | 186,268 | $ | 6,868 | $ | 193,136 | ||||||
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 evaluates the performance of its reportable segments using 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 and, in relation to its competitors, it 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. |
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2019 | 2018 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Total EBITDA | $ | 202,230 | $ | 193,136 | $ | 9,094 | 4.7 | % | ||||||||
Trex Residential EBITDA | $ | 199,020 | $ | 186,268 | $ | 12,752 | 6.9 | % | ||||||||
Trex Commercial EBITDA | $ | 3,210 | $ | 6,868 | $ | (3,658 | ) | (53.3 | )% |
net sales.
Net Sales
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2017 | 2016 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Total net sales | $ | 565,153 | $ | 479,616 | $ | 85,537 | 17.8 | % | ||||||||
Trex Residential net sales | $ | 543,346 | $ | 479,616 | $ | 63,730 | 13.3 | % | ||||||||
Trex Commercial net sales | $ | 21,807 | $ | — | $ | 21,807 | — |
2017
Gross Profit
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2017 | 2016 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Cost of sales | $ | 321,780 | $ | 292,521 | $ | 29,259 | 10.0 | % | ||||||||
% of total net sales | 56.9 | % | 61.0 | % | ||||||||||||
Gross profit | $ | 243,373 | $ | 187,095 | $ | 56,278 | 30.1 | % | ||||||||
Gross margin | 43.1 | % | 39.0 | % |
Gross profit as a percentage of total net sales, gross margin, increased to 43.1% in the year ended 2017 from 39.0% in the year ended 2016, an improvement of 4.1%. Gross profit in the year ended 2016 included a $9.8 million increase to the warranty reserve related to surface flaking of our residential product. Excluding this charge, the gross margin for the year ended 2017 increased by 2.0%, reflecting cost reduction initiatives, lower cost raw materials, and increased capacity utilization at our Trex branded decking and railing plants.
Selling, General and Administrative Expenses
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2017 | 2016 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Selling, general and administrative expenses | $ | 100,993 | $ | 83,140 | $ | 17,853 | 21.5 | % | ||||||||
% of total net sales | 17.9 | % | 17.3 | % |
The $17.9 million increase in selling, general and administrative expenses in the year ended 2017 compared to the year ended 2016 resulted primarily from a $6.4 million increase in personnel related expenses resulting from the SC Company acquisition and an increase in incentive compensation, a $6.2 million increase in branding and advertising spend in support of our market growth strategies, and a $2.0 million increase in amortization expense related to the intangible assets of our commercial operation that was acquired during 2017. As a percentage of net sales, total selling, general and administrative expenses increased a minimal 0.6% in the year ended 2017 compared to the year ended 2016.
Provision for Income Taxes
Year Ended December 31, | $ Change | % Change | ||||||||||||||
2017 | 2016 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Provision for income taxes | $ | 46,791 | $ | 34,983 | $ | 11,808 | 33.8 | % | ||||||||
Effective tax rate | 33.0 | % | 34.0 | % |
We have recognized the tax effects of the Tax Cuts and Jobs Act in our financial statements and related notes as of andAnnual Report on Form 10-K for the year ended December 31, 2017. Deferred tax assets that existed as of2018 and filed with the enactment dateU.S. Securities and that are expected to reverse after the Act’s effective date of January 1, 2018 have been adjusted to reflect the new Federal statutory tax rate of 21%. The effect of the change in tax rateExchange Commission on the deferred tax assets and deferred tax liabilities resulted in a tax benefit of $1.9 million for the year ended December 31, 2017, which was allocated to continuing operations. We continue to analyze certain aspects of the Act and refine our calculation, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The effective tax rate for the year ended 2017 decreased by 1.0% compared to the effective tax rate for the year ended 2016 primarily due to enactment of the Tax cuts and Jobs Act and the resulting revaluation of deferred tax assets and liabilities. The Company expects its effective tax rate will decrease in future periods primarily due to the tax effects of the lower Federal statutory rate of 21%, which may be offset by and other changes in the Tax Cuts and Jobs Act, such as the elimination of the domestic manufacturing deduction.
Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)1 (in thousands)
Reconciliation of net income (GAAP) to EBITDA(non-GAAP):
Year Ended December 31 | 2017 Trex Residential | 2017 Trex Commercial | 2017 Consolidated | 2016 Consolidated | ||||||||||||||||
Net income | $ | 97,412 | $ | (2,284 | ) | $ | 95,128 | $ | 67,847 | |||||||||||
Interest | 461 | — | 461 | 1,125 | ||||||||||||||||
Taxes | 47,911 | (1,120 | ) | 46,791 | 34,983 | |||||||||||||||
Depreciation and amortization | 14,598 | 2,132 | 16,730 | 14,181 | ||||||||||||||||
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EBITDA | $ | 160,382 | $ | (1,272 | ) | $ | 159,110 | $ | 118,136 | |||||||||||
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Year Ended December 31, | $ Change | % Change | ||||||||||||||
2017 | 2016 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Total EBITDA | $ | 159,110 | $ | 118,136 | $ | 40,974 | 34.7 | % | ||||||||
Trex Residential EBITDA | $ | 160,382 | $ | 118,136 | $ | 42,246 | 35.8 | % | ||||||||
Trex Commercial EBITDA | $ | (1,272 | ) | $ | — | $ | (1,272 | ) | — |
The Company uses EBITDA to assess performance as it believes EBITDA facilitates performance comparison between its reportable segments by eliminating interest, taxes, and depreciation and amortization charges to income. Total EBITDA increased 34.7% to $159.1 million for the year ended 2017 compared to $118.1 million for the year ended 2016. The increase in total EBITDA resulted primarily from the increase in Trex Residential EBITDA. The increase in Trex Residential EBITDA was driven by increased net sales resulting primarily from volume growth of our Trex branded decking and railing products. The slight decrease in total EBITDA resulted from Trex Commercial EBITDA, our recently acquired commercial products operation, for the period from the date of acquisition of July 31, 2017 through December 31, 2017, which resulted primarily from the effects of lower margins on certain legacy contracts and $0.5 million in acquisition related expenses.
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Net cash provided by operating activities | $ | 138,121 | $ | 101,865 | $ | 85,293 | ||||||
Net cash used in investing activities | (33,733 | ) | (86,789 | ) | (10,202 | ) | ||||||
Net cash used in financing activities | (29,203 | ) | (3,226 | ) | (62,422 | ) | ||||||
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Net increase in cash and cash equivalents | $ | 75,185 | $ | 11,850 | $ | 12,669 | ||||||
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Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Net cash provided by operating activities | $ | 156,352 | $ | 138,121 | $ | 101,865 | ||||||
Net cash used in investing activities | (67,244 | ) | (33,733 | ) | (86,789 | ) | ||||||
Net cash used in financing activities | (45,974 | ) | (29,203 | ) | (3,226 | ) | ||||||
Net increase in cash and cash equivalents | $ | 43,134 | $ | 75,185 | $ | 11,850 | ||||||
Net cash
Net cash provided by operating activities increased by $16.6 million in 2017 compared to 2016 primarily due to the $23.2 million, or 17.8%, increase in net sales during in 2017 coupled with the 4.1% increase in gross margin. The increase was primarilyvolume growth, offset by the increasea decrease in accounts receivable at December 31, 2017working capital investment of $10.5$2.9 million.
On July 31, 2017, through its newly-formed, wholly-owned subsidiary, Trex Commercial Products, Inc., the Company acquired certain assets and assumed certain liabilities of SC Company for $71.8 million in cash. The Company used cash on hand and $30 million of funding from its existing revolving credit facility to acquire the assets. Capital expenditures in 2017 were $15.0 million consisting primarily of $10.8$2.2 million for general plant cost reduction initiatives and $3.0 million for equipment and new product development.
support initiatives.
Net cash used in financing activities in 2017 decreased $59.2 million compared to 2016 primarily due to the $55.2 million in stock repurchase activity in 2016.
Stock Repurchase Programs.
On October 22, 2015, our Board2019 of Directors adopted a stock repurchase program of up to 3.15 million shares of our outstanding common stock (October 2015 Stock Repurchase Program). In 2016, we repurchased 1,578,952 shares for $53.3 million under the October 2015 $16.5 million.
On February 16, 2017, the Board of Directors authorized a common stock repurchase program of up to 2.961 million shares of our outstanding common stock (February 2017 Stock Repurchase Program). The Company made no repurchases under the February 2017 Stock Repurchase Program.
Product Warranty. We continue to receive and settle claims related to Trex Residential products manufactured at our Nevada facility prior to 2007 that exhibit surface flaking, which has had a material adverse effect on cash flow from operations, and regularly monitor the adequacy of the warranty reserve. In 2018 and 2017 we paid $4.2 million and $5.7 million, respectively, to settle surface flaking claims. We estimate that the number of claims received will continue to decline over time and that the average settlement cost per claim will increase slightly, primarily due to inflation. If the level of claims received or average settlement cost per claim differs materially from our expectations, it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flow in future periods.
Repayment of all then outstanding principal, interest, fees and costs is due on November 5, 2024.
The2016, the Company will reimburseentered into a Third Amended Credit Agreement with BOA for all amounts payable,as Lender, Administrative Agent, Swing Line Lender and Letter of Credit Issuer; and certain other lenders including interest, under a letterCiti, Capital One, and SunTrust (collectively, Lenders) arranged by Bank of credit at the earlier of (i) the date set forth in the application, or (ii) one business day after the payment under such letter of credit by BOA.
America Merrill Lynch as Sole Lead Arranger and Sole Bookrunner. The Third Amended Credit Agreement isamended and restated the Second Amended Credit Agreement.
At December 31, 2018, the Company had no outstanding borrowings under the Third Amended Credit Agreement and $200 million of available borrowing capacity.
Total | 1 year | 2-3 years | 4-5 years | After 5 years | ||||||||||||||||
Purchase commitments (1) | $ | 26,602 | $ | 18,971 | $ | 7,631 | $ | — | $ | — | ||||||||||
Operating leases | 61,824 | 10,998 | 18,269 | 13,477 | 19,080 | |||||||||||||||
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Total contractual cash obligations | $ | 88,426 | $ | 29,969 | $ | 25,900 | $ | 13,477 | $ | 19,080 | ||||||||||
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Total | 1 year | 2-3 years | 4-5 years | After 5 years | ||||||||||||||||
Purchase obligations (1) | $ | 33,051 | $ | 26,763 | $ | 6,274 | $ | 14 | $ | — | ||||||||||
Operating leases, including imputed interest (2) | 46,935 | 8,858 | 14,743 | 12,255 | 11,079 | |||||||||||||||
Total contractual obligations | $ | 79,986 | $ | 35,621 | $ | 21,017 | $ | 12,269 | $ | 11,079 | ||||||||||
(1) | Purchase |
arrangements. products and new market developments and opportunities. Our ability to meet our cash needs during the next 12 months and thereafter could be adversely affected by various circumstances, including increases in raw(2) Operating leases represent office space, storage warehouses, manufacturing facilities and certain office and plant equipment under various operating leases, and include operating leases accounted for under Financial Accounting Standards Board Accounting Standards Codification Topic 842 and short-term leases. arrangements other than operating leases.20192020 will be approximately $40$140 million to $45$160 million. Our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, acquisitions which fit our long-term outdoor products growth strategy as we continue to evaluate opportunities that would be a good strategic fit for Trex, and return of capital to shareholders.
asset and lease liability would have been in the range
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Item 8. | Financial Statements and Supplementary Data |
Item 9. | Changes in and Disagreements |
Item 9A. | Controls and Procedures |
TREX COMPANY, INC. | ||||
February 24, 2020 | By: | /s/ James E. Cline | ||
James E. Cline President and Chief Executive Officer (Principal Executive Officer) | ||||
February 24, 2020 | By: | /s/ Bryan H. Fairbanks | ||
Bryan H. Fairbanks Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
Item 9B. | Other Information |
Management’s Report on Internal Control Over Financial Reporting
We, as members
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
We assessed the Company’s internal control over financial reporting as of December 31, 2018, based on criteria for effective internal control over financial reporting established in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on this assessment, we concluded that, as of December 31, 2018, our internal control over financial reporting was effective, based on the COSO Framework.
The effectiveness of our internal control over financial reporting as of December 31, 2018, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which follows hereafter.
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Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation described above in “Management’s Report on Internal Control Over Financial Reporting” that occurred during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Trex Company, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Trex Company, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Trex Company, Inc., (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and schedule and our report dated February 14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Richmond, Virginia
February 14, 2019
Item 10. | Directors, Executive Officers and Corporate Governance |
Item 11. | Executive Compensation |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Item 14. | Principal Accounting Fees and Services |
Item 15. | Exhibits and Financial Statement Schedules |
F- 2 | |||||
Consolidated Financial Statements | |||||
F- 4 | |||||
F- 5 | |||||
F- 6 | |||||
F- 7 | |||||
F- 8 |
F- 34 |
Page | |||||
F- 2 | |||||
Consolidated Financial Statements | |||||
F- 4 | |||||
F- 5 | |||||
F- 6 | |||||
F- 7 | |||||
F- 8 |
Page | ||||
F- 34 |
Surface Flaking Warranty | ||
Description of the Matter | At December 31, 2019, the Company’s surface flaking warranty reserve was $19.0 million. As discussed in Note 19 of the consolidated financial statements, the Company continues to receive and settle claims for decking 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. The Company’s warranty reserve is based on an actuarial analysis of the number of claims to be settled and management’s estimate of the average cost to settle each claim. The actuarial analysis utilized determines a reasonably possible range of claims to be received and the percentage of those claims that will ultimately require payment. Auditing the surface flaking warranty reserve is complex and required the involvement of a specialist due to the highly judgmental nature of the actuarially determined number of claims. Auditing the reserve is also complex due to the judgmental nature of the significant assumptions made by management (e.g., the size of the affected decks, the availability and type of replacement material used, the cost of production of replacement material and the method of claim settlement) and used in the measurement process. These determinations, assumptions and judgments have a significant effect on the surface flaking reserve. | |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the Company’s measurement and valuation of the surface flaking warranty reserve. For example, we tested controls over the appropriateness of the assumptions used and the completeness and accuracy of the underlying data. To test the surface flaking warranty reserve, our audit procedures included, among others, evaluating the methodologies and the significant assumptions used. For example, we involved an actuarial specialist to assist us in independently calculating a range of the expected number of claims and compared that to the Company’s range. We also performed sensitivity analyses to evaluate changes in the liability that would result from changes in significant assumptions. In addition, we assessed the historical accuracy of management’s estimates to identify potential changes in the measurement and valuation of the surface flaking reserve. We performed audit procedures on the completeness and accuracy of the underlying data used by the Company in its analysis. |
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
(In thousands, except share and per share data) | ||||||||||||
Net sales | $ | 684,250 | $ | 565,153 | $ | 479,616 | ||||||
Cost of sales | 389,356 | 321,780 | 292,521 | |||||||||
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Gross profit | 294,894 | 243,373 | 187,095 | |||||||||
Selling, general and administrative expenses | 118,225 | 100,993 | 83,140 | |||||||||
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Income from operations | 176,669 | 142,380 | 103,955 | |||||||||
Interest (income) expense, net | (192 | ) | 461 | 1,125 | ||||||||
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Income before income taxes | 176,861 | 141,919 | 102,830 | |||||||||
Provision for income taxes | 42,289 | 46,791 | 34,983 | |||||||||
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Net income | $ | 134,572 | $ | 95,128 | $ | 67,847 | ||||||
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Basic earnings per common share | $ | 2.29 | $ | 1.62 | $ | 1.16 | ||||||
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Basic weighted average common shares outstanding | 58,739,670 | 58,785,118 | 58,789,118 | |||||||||
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Diluted earnings per common share | $ | 2.28 | $ | 1.61 | $ | 1.15 | ||||||
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Diluted weighted average common shares outstanding | 59,067,302 | 59,150,920 | 59,225,338 | |||||||||
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Comprehensive income | $ | 134,572 | $ | 95,128 | $ | 67,847 | ||||||
|
|
|
|
|
|
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(In thousands, except share and per share data) | ||||||||||||
Net sales | $ | 745,347 | $ | 684,250 | $ | 565,153 | ||||||
Cost of sales | 438,844 | 389,356 | 321,780 | |||||||||
Gross profit | 306,503 | 294,894 | 243,373 | |||||||||
Selling, general and administrative expenses | 118,304 | 118,225 | 100,993 | |||||||||
Income from operations | 188,199 | 176,669 | 142,380 | |||||||||
Interest (income) expense, net | (1,503 | ) | (192 | ) | 461 | |||||||
Income before income taxes | 189,702 | 176,861 | 141,919 | |||||||||
Provision for income taxes | 44,964 | 42,289 | 46,791 | |||||||||
Net income | $ | 144,738 | $ | 134,572 | $ | 95,128 | ||||||
Basic earnings per common share | $ | 2.48 | $ | 2.29 | $ | 1.62 | ||||||
Basic weighted average common shares outstanding | 58,430,597 | 58,739,670 | 58,785,118 | |||||||||
Diluted earnings per common share | $ | 2.47 | $ | 2.28 | $ | 1.61 | ||||||
Diluted weighted average common shares outstanding | 58,657,749 | 59,067,302 | 59,150,920 | |||||||||
Comprehensive income | $ | 144,738 | $ | 134,572 | $ | 95,128 | ||||||
December 31, | ||||||||
2018 | 2017 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 105,699 | $ | 30,514 | ||||
Accounts receivable, net | 91,163 | 66,882 | ||||||
Inventories | 57,801 | 34,524 | ||||||
Prepaid expenses and other assets | 15,562 | 16,878 | ||||||
|
|
|
| |||||
Total current assets | 270,225 | 148,798 | ||||||
Property, plant and equipment, net | 117,144 | 103,110 | ||||||
Goodwill and other intangibles | 74,503 | 71,319 | ||||||
Other assets | 3,250 | 3,000 | ||||||
|
|
|
| |||||
Total Assets | $ | 465,122 | $ | 326,227 | ||||
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 31,084 | $ | 9,953 | ||||
Accrued expenses and other liabilities | 56,291 | 46,266 | ||||||
Accrued warranty | 5,400 | 6,290 | ||||||
|
|
|
| |||||
Total current liabilities | 92,775 | 62,509 | ||||||
Deferred income taxes | 2,125 | 1,286 | ||||||
Non-current accrued warranty | 25,354 | 28,709 | ||||||
Other long-term liabilities | 1,905 | 2,473 | ||||||
|
|
|
| |||||
Total Liabilities | 122,159 | 94,977 | ||||||
|
|
|
| |||||
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; 69,998,336 and 69,844,222 shares issued and 58,551,653 and 58,856,860 shares outstanding at December 31, 2018 and 2017, respectively | 700 | 698 | ||||||
Additionalpaid-in capital | 124,224 | 121,694 | ||||||
Retained earnings | 416,942 | 282,370 | ||||||
Treasury stock, at cost, 11,446,683 and 10,987,362 shares at December 31, 2018 and 2017, respectively | (198,903 | ) | (173,512 | ) | ||||
|
|
|
| |||||
Total Stockholders’ Equity | 342,963 | 231,250 | ||||||
|
|
|
| |||||
Total Liabilities and Stockholders’ Equity | $ | 465,122 | $ | 326,227 | ||||
|
|
|
|
December 31, | ||||||||
2019 | 2018 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 148,833 | $ | 105,699 | ||||
Accounts receivable, net | 78,462 | 91,163 | ||||||
Inventories | 56,106 | 57,801 | ||||||
Prepaid expenses and other assets | 19,803 | 15,562 | ||||||
Total current assets | 303,204 | 270,225 | ||||||
Property, plant and equipment, net | 171,300 | 117,144 | ||||||
Goodwill and other intangible assets, net | 74,084 | 74,503 | ||||||
Operating lease assets | 40,049 | — | ||||||
Other assets | 3,602 | 3,250 | ||||||
Total Assets | $ | 592,239 | $ | 465,122 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 15,227 | $ | 31,084 | ||||
Accrued expenses and other liabilities | 58,265 | 56,291 | ||||||
Accrued warranty | 5,178 | 5,400 | ||||||
Total current liabilities | 78,670 | 92,775 | ||||||
Operating lease liabilities | 34,242 | — | ||||||
Deferred income taxes | 9,831 | 2,125 | ||||||
Non-current accrued warranty | 20,317 | 25,354 | ||||||
Other long-term liabilities | 4 | 1,905 | ||||||
Total Liabilities | 143,064 | 122,159 | ||||||
Commitments and contingencies | — | — | ||||||
Stockholders’ Equity: | ||||||||
Preferred stock, $0.01 par value, 3,000,000 shares authorized; 0ne issued and outstanding | — | — | ||||||
Common stock, $0.01 par value, 120,000,000 shares authorized; 70,187,463 and 69,998,336 shares issued and 58,240,721 and 58,551,653 shares outstanding at December 31, 2019 and 2018, respectively | 702 | 700 | ||||||
Additional paid-in capital | 123,996 | 124,224 | ||||||
Retained earnings | 561,680 | 416,942 | ||||||
Treasury stock, at cost, 11,946,742 and 11,446,683 shares at December 31, 2019 and 2018, respectively | (237,203 | ) | (198,903 | ) | ||||
Total Stockholders’ Equity | 449,175 | 342,963 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 592,239 | $ | 465,122 | ||||
Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance, December 31, 2015 | 61,809,060 | $ | 696 | $ | 116,598 | $ | 119,395 | 7,829,458 | $ | (120,227 | ) | $ | 116,462 | |||||||||||||||
Net income | — | — | — | 67,847 | — | — | 67,847 | |||||||||||||||||||||
Employee stock purchase and option plans | 158,350 | 2 | 279 | — | — | — | 281 | |||||||||||||||||||||
Shares withheld for taxes on share-based payment awards | (26,386 | ) | (2 | ) | (1,932 | ) | — | — | — | (1,934 | ) | |||||||||||||||||
Stock-based compensation | 17,984 | 2 | 4,788 | — | — | — | 4,790 | |||||||||||||||||||||
Shares repurchased under our publicly announced share repurchase programs | (3,157,904 | ) | — | — | — | 3,157,904 | (53,285 | ) | (53,285 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance, December 31, 2016 | 58,801,104 | 698 | 119,733 | 187,242 | 10,987,362 | (173,512 | ) | 134,161 | ||||||||||||||||||||
Net income | — | — | — | 95,128 | — | — | 95,128 | |||||||||||||||||||||
Employee stock purchase and option plans | 33,228 | 2 | 391 | — | — | — | 393 | |||||||||||||||||||||
Shares withheld for taxes on share-based payment awards | (58,470 | ) | (2 | ) | (3,617 | ) | — | — | — | (3,619 | ) | |||||||||||||||||
Stock-based compensation | 80,998 | — | 5,187 | — | — | — | 5,187 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance, December 31, 2017 | 58,856,860 | 698 | 121,694 | 282,370 | 10,987,362 | (173,512 | ) | 231,250 | ||||||||||||||||||||
Net income | — | — | — | 134,572 | — | — | 134,572 | |||||||||||||||||||||
Employee stock purchase and option plans | 63,448 | 1 | 881 | — | — | — | 882 | |||||||||||||||||||||
Shares withheld for taxes on share-based payment awards | (13,028 | ) | — | (4,695 | ) | — | — | — | (4,695 | ) | ||||||||||||||||||
Stock-based compensation | 103,694 | 1 | 6,344 | — | — | — | 6,345 | |||||||||||||||||||||
Shares repurchased under our publicly announced share repurchase programs | (459,321 | ) | — | — | — | 459,321 | (25,391 | ) | (25,391 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance, December 31, 2018 | 58,551,653 | $ | 700 | $ | 124,224 | $ | 416,942 | 11,446,683 | $ | (198,903 | ) | $ | 342,963 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance, December 31, 2016 | 58,801,104 | $ | 698 | $ | 119,733 | $ | 187,242 | 10,987,362 | $ | (173,512 | ) | $ | 134,161 | |||||||||||||||
Net income | — | — | — | 95,128 | — | — | 95,128 | |||||||||||||||||||||
Employee stock plans | 33,228 | 2 | 391 | — | — | — | 393 | |||||||||||||||||||||
Shares withheld for taxes on awards | (58,470 | ) | (2 | ) | (3,617 | ) | — | — | — | (3,619 | ) | |||||||||||||||||
Stock-based compensation | 80,998 | — | 5,187 | — | — | — | 5,187 | |||||||||||||||||||||
Balance, December 31, 2017 | 58,856,860 | 698 | 121,694 | 282,370 | 10,987,362 | (173,512 | ) | 231,250 | ||||||||||||||||||||
Net income | — | — | — | 134,572 | — | — | 134,572 | |||||||||||||||||||||
Employee stock plans | 63,448 | 1 | 881 | — | — | — | 882 | |||||||||||||||||||||
Shares withheld for taxes on awards | (13,028 | ) | — | (4,695 | ) | — | — | — | (4,695 | ) | ||||||||||||||||||
Stock-based compensation | 103,694 | 1 | 6,344 | — | — | — | 6,345 | |||||||||||||||||||||
Repurchases of common stock | (459,321 | ) | — | — | — | 459,321 | (25,391 | ) | (25,391 | ) | ||||||||||||||||||
Balance, December 31, 2018 | 58,551,653 | 700 | 124,224 | 416,942 | 11,446,683 | (198,903 | ) | 342,963 | ||||||||||||||||||||
Net income | — | — | — | 144,738 | — | — | 144,738 | |||||||||||||||||||||
Employee stock plans | 77,141 | 1 | 1,088 | — | — | — | 1,089 | |||||||||||||||||||||
Shares withheld for taxes on awards | (108,378 | ) | — | (8,245 | ) | — | — | — | (8,245 | ) | ||||||||||||||||||
Stock-based compensation | 220,364 | 1 | 6,929 | — | — | — | 6,930 | |||||||||||||||||||||
Repurchases of common stock | (500,059 | ) | — | — | — | 500,059 | (38,300 | ) | (38,300 | ) | ||||||||||||||||||
Balance, December 31, 2019 | 58,240,721 | $ | 702 | $ | 123,996 | $ | 561,680 | 11,946,742 | $ | (237,203 | ) | $ | 449,175 | |||||||||||||||
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
(In thousands) | ||||||||||||
Operating Activities | ||||||||||||
Net income | $ | 134,572 | $ | 95,128 | $ | 67,847 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 16,597 | 16,860 | 14,498 | |||||||||
Deferred income taxes | 1,037 | 194 | 5,433 | |||||||||
Stock-based compensation | 6,344 | 5,187 | 4,788 | |||||||||
Loss (Gain) on disposal of property, plant and equipment | 47 | 1,738 | (185 | ) | ||||||||
Othernon-cash adjustments | (406 | ) | (406 | ) | (284 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (24,281 | ) | (10,486 | ) | (653 | ) | ||||||
Inventories | (23,276 | ) | (3,635 | ) | (5,442 | ) | ||||||
Prepaid expenses and other assets | (613 | ) | (2,194 | ) | (4,256 | ) | ||||||
Accounts payable | 21,131 | (4,804 | ) | (6,966 | ) | |||||||
Accrued expenses and other liabilities | 5,040 | 2,488 | 9,403 | |||||||||
Income taxes receivable/payable | 1,929 | 1,795 | 1,110 | |||||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 138,121 | 101,865 | 85,293 | |||||||||
|
|
|
|
|
| |||||||
Investing Activities | ||||||||||||
Expenditures for property, plant and equipment and intangibles | (33,816 | ) | (15,040 | ) | (14,551 | ) | ||||||
Proceeds from sales of property, plant and equipment | 83 | 55 | 4,349 | |||||||||
Acquisition of business, net of cash acquired | — | (71,804 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (33,733 | ) | (86,789 | ) | (10,202 | ) | ||||||
|
|
|
|
|
| |||||||
Financing Activities | ||||||||||||
Financing costs | — | — | (485 | ) | ||||||||
Borrowings under line of credit | 172,250 | 201,000 | 242,700 | |||||||||
Principal payments under line of credit | (172,250 | ) | (201,000 | ) | (249,700 | ) | ||||||
Repurchases of common stock | (30,085 | ) | (3,617 | ) | (55,216 | ) | ||||||
Proceeds from employee stock purchase and option plans | 882 | 391 | 279 | |||||||||
|
|
|
|
|
| |||||||
Net cash used in financing activities | (29,203 | ) | (3,226 | ) | (62,422 | ) | ||||||
|
|
|
|
|
| |||||||
Net increase in cash and cash equivalents | 75,185 | 11,850 | 12,669 | |||||||||
Cash and cash equivalents at beginning of year | 30,514 | 18,664 | 5,995 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents at end of year | $ | 105,699 | $ | 30,514 | $ | 18,664 | ||||||
|
|
|
|
|
| |||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for interest | $ | 662 | $ | 418 | $ | 852 | ||||||
Cash paid for income taxes, net | $ | 48,238 | $ | 44,802 | $ | 28,626 |
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(In thousands) | ||||||||||||
Operating Activities | ||||||||||||
Net income | $ | 144,738 | $ | 134,572 | $ | 95,128 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 14,031 | 16,597 | 16,860 | |||||||||
Deferred income taxes | 7,706 | 1,037 | 194 | |||||||||
Stock-based compensation | 6,930 | 6,344 | 5,187 | |||||||||
Loss on disposal of property, plant and equipment | 285 | 47 | 1,738 | |||||||||
Other non-cash adjustments | (218 | ) | (406 | ) | (406 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 12,701 | (24,281 | ) | (10,486 | ) | |||||||
Inventories | 1,695 | (23,276 | ) | (3,635 | ) | |||||||
Prepaid expenses and other assets | (1,652 | ) | (613 | ) | (2,194 | ) | ||||||
Accounts payable | (16,666 | ) | 21,131 | (4,804 | ) | |||||||
Accrued expenses and other liabilities | (10,823 | ) | 5,040 | 2,488 | ||||||||
Income taxes receivable/payable | (2,375 | ) | 1,929 | 1,795 | ||||||||
Net cash provided by operating activities | 156,352 | 138,121 | 101,865 | |||||||||
Investing Activities | ||||||||||||
Expenditures for property, plant and equipment and intangibles | (67,265 | ) | (33,816 | ) | (15,040 | ) | ||||||
Proceeds from sales of property, plant and equipment | 21 | 83 | 55 | |||||||||
Acquisition of business, net of cash acquired | — | — | (71,804 | ) | ||||||||
Net cash used in investing activities | (67,244 | ) | (33,733 | ) | (86,789 | ) | ||||||
Financing Activities | ||||||||||||
Borrowings under line of credit | 89,500 | 172,250 | 201,000 | |||||||||
Principal payments under line of credit | (89,500 | ) | (172,250 | ) | (201,000 | ) | ||||||
Repurchases of common stock | (46,545 | ) | (30,085 | ) | (3,617 | ) | ||||||
Proceeds from employee stock purchase and option plans | 1,089 | 882 | 391 | |||||||||
Financing costs | (518 | ) | — | — | ||||||||
Net cash used in financing activities | (45,974 | ) | (29,203 | ) | (3,226 | ) | ||||||
Net increase in cash and cash equivalents | 43,134 | 75,185 | 11,850 | |||||||||
Cash and cash equivalents at beginning of year | 105,699 | 30,514 | 18,664 | |||||||||
Cash and cash equivalents at end of year | $ | 148,833 | $ | 105,699 | $ | 30,514 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for interest | $ | 321 | $ | 662 | $ | 418 | ||||||
Cash paid for income taxes, net | $ | 39,612 | $ | 48,238 | $ | 44,802 |
1. | BUSINESS AND ORGANIZATION |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
deposits in excess of insurance limits of the Federal Deposit Insurance Corporation. As of December 31, Wood-Polymer Espana, S.L. (TWPE) for all years presented, and its wholly-owned subsidiary, Trex Commercial Products, Inc. (Trex Commercial Products), from date of acquisition of July 31, 2017. Intercompany accounts and transactions have been eliminated in consolidation.TWPE was formed to hold the Company’s 35% equity interest in Denplax, S.A. (Denplax), a venture with a Spanish company responsible for public environmental programs in southern Spain and with an Italian equipment manufacturer. The venture was formed to recycle polyethylene at a facility in El Ejido, Spain. The Company’s investment in Denplax is accounted for using the equity method. During 2010, the Company determined that its investment in Denplax and a related note receivable were no longer recoverable and recorded a $2.4 million charge to earnings to fully reserve the equity investment and note. Both the equity investment and note remain fully reserved as of December 31, 2018.2018,2019, substantially all deposits are maintained in one1 financial institution. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to its cash and cash equivalents.
2018.
Buildings | 40 years | |||
Machinery and equipment | 3-11 years | |||
Furniture and equipment | 10 years | |||
Forklifts and tractors | 5 years | |||
Computer equipment and software | 5 years |
management, at a level below the Company’s chief operating decision maker, regularly reviews the operating results of the reporting unit. The Company assigned goodwill to the reporting units based on the excess of the fair values acquired over the fair value of the sum of the individual assets acquired and liabilities assumed that were assigned to the reporting units. If the Company proceeds with the
The Company determined the appropriate revenue recognition for its contracts with customers by analyzing the type, terms and conditions of the contracts with customers. Topic 606 provides a single, comprehensive model for revenue recognition arising from contracts with customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when or as the Company satisfies the performance obligation. Revenue is recognized at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring control of the goods or services to a customer. Adoption of Topic 606 did not have an impact on the Company’s financial condition or results of operations. The following provides additional information about the Company’s contracts with customers.
based on management’s judgment of the ultimate award that is probable to be paid out based on the achievement of predetermined performance measures. Stock-based compensation expense is included in “Selling, general and administrative expenses” in the accompanying Consolidated Statements of Comprehensive Income.
2018.
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)No. 2017-09, “Compensation—Stock Compensation (Topic 718), Scope Modification Accounting.” The guidance clarified when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value (or calculated intrinsic value, if those amounts are being used to measure the award under ASC 718), the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance was effective prospectively for annual periods beginning on or after December 15, 2017. Adoption of the new standard did not have a material impact on the Company’s financial condition or results of operations.
In January 2017, the FASB issued ASUNo. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets: if so, the set of transferred assets and activities is not a business. The guidance was effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Adoption of the new standard did not have a material impact on the Company’s financial condition or results of operations.
In August 2016, the FASB issued ASUNo. 2016-15, “Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The guidance is intended to reduce diversity in practice across all industries in how certain transactions are classified in the statement of cash flows. The guidance was effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers (Topic 606),” and issued subsequent amendments to the initial guidance in August 2015 within ASUNo. 2015-14, in March 2016 within ASUNo. 2016-08, in April 2016 within ASUNo. 2016-10, in May 2016 within ASUNo. 2016-12, and in December 2016 within ASUNo. 2016-20 (collectively, Topic 606). The Company adopted Topic 606 on January 1, 2018 and applied Topic 606 under the full retrospective method. The Company determined the appropriate revenue recognition for its contracts with customers by analyzing the type, terms and conditions of its contracts with its customers. The Company has consistently applied the accounting policies to all periods presented in these Consolidated Financial Statements. Adoption of Topic 606 did not have an impact on the Company’s financial condition or results of operations other than increased disclosures. Refer to Note 12, “Revenue from Contracts with Customers,” for a discussion of the Company’s accounting policy related to revenue from contracts with customers
New Accounting Standards Not Yet Adopted
In June 2018, the FASB issued ASUNo. “Compensation – “Equity—iswas effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted the guidance on January 1, 2019. Adoption did not have an impact on the Company’s financial condition or results of operations.
In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842),” and issued subsequent amendments to the initial guidance in January 2018 within ASUNo. 2018-01 and in July 2018 within ASU Nos.2018-10 and2018-11. The standard requires lessees to recognize leases on the balance sheet as aright-of-use asset and a lease liability, other than leases that meet the definition
equal to the present value of the lease payments. The asset will be based on the liability, subject to adjustment. Currently, under existing U.S. generally accepted accounting principles, the Company does not recognize on the balance sheet aright-of-use asset or lease liability related to its operating leases. For income statement purposes, the leases will continue to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) and finance leases will result in a front-loaded expense pattern (similar to current capital leases). The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The standard allows an entity to elect to have a date of initial application as of the beginning of the period of adoption. The standard provides for the option to elect a package of practical expedients upon adoption. The Company intends to adopt the standard on January 1, 2019 and is currently planning on electing the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and is evaluating the other practical expedients available under the guidance. The Company expects expanded financial statement note disclosure in addition to recognizing aright-of-use asset and lease liability for its operating leases on the balance sheet. Based on leases outstanding at December 31, 2018, the Company estimates the operating lease right of use asset and lease liability would have been in the range of $45 million to $50 million The Company continues to evaluate the impacts of the pending adoption. As such, the Company’s preliminary assessments are subject to change.
3. | ACQUISITION |
Based on the Company’s valuation, total consideration of $71.8 million was allocated to the assets acquired and liabilities assumed, as follows (in thousands):
Accounts receivable, net | $ | 8,357 | ||
Contract retainage | 1,948 | |||
Inventories, net | 2,344 | |||
Prepaid expenses and other assets | 1,223 | |||
Revenues in excess of billings | 3,463 | |||
Fixed assets, net | 1,264 | |||
Intangible assets | 4,900 | |||
Goodwill | 57,938 | |||
Accounts payable | (3,990 | ) | ||
Accrued liabilities and other expenses | (2,329 | ) | ||
Billings in excess of revenues | (1,752 | ) | ||
Customer deposits | (1,562 | ) | ||
|
| |||
Total consideration | $ | 71,804 | ||
|
|
During the year ended December 31, 2018, Trex Commercial generated $71.0 million of net sales and $2.7 million of net income, which included amortization expense of $2.9 million. From July 31, 2017, through December 31, 2017, Trex Commercial generated $21.8 million in net sales and incurred a net loss of $2.3 million, and which included $0.5 million of acquisition-related expenses and $2.0 million of amortization expense during the year ended December 31, 2017, which are included in selling, general and administrative expense.
4. | INVENTORIES |
2018 | 2017 | |||||||
Finished goods | $ | 46,638 | $ | 32,986 | ||||
Raw materials | 27,321 | 19,432 | ||||||
|
|
|
| |||||
Total FIFO(first-in, first out) inventories | 73,959 | 52,418 | ||||||
Reserve to adjust inventories to LIFO value | (18,442 | ) | (20,070 | ) | ||||
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|
|
| |||||
Total LIFO inventories | $ | 55,517 | $ | 32,348 | ||||
|
|
|
|
2019 | 2018 | |||||||
Finished goods | $ | 42,281 | $ | 46,638 | ||||
Raw materials | 31,686 | 27,321 | ||||||
Total FIFO inventories | 73,967 | 73,959 | ||||||
Reserve to adjust inventories to LIFO value | (19,062 | ) | (18,442 | ) | ||||
Total LIFO inventories | $ | 54,905 | $ | 55,517 | ||||
2019 or 2018.
5. | PREPAID EXPENSES AND OTHER ASSETS |
2018 | 2017 | |||||||
Revenues in excess of billings | $ | 7,987 | $ | 4,841 | ||||
Prepaid expenses | 3,390 | 7,494 | ||||||
Contract retainage | 2,469 | 1,449 | ||||||
Income tax receivable | 471 | 2,230 | ||||||
Other | 1,245 | 864 | ||||||
|
|
|
| |||||
Total prepaid expenses and other assets | $ | 15,562 | $ | 16,878 | ||||
|
|
|
|
2019 | 2018 | |||||||
Prepaid expenses | $ | 8,282 | $ | 3,390 | ||||
Revenues in excess of billings | 6,664 | 7,987 | ||||||
Contract retainage | 1,832 | 2,469 | ||||||
Income tax receivable | 2,675 | 471 | ||||||
Other | 350 | 1,245 | ||||||
Total prepaid expenses and other assets | $ | 19,803 | $ | 15,562 | ||||
6. | GOODWILL AND OTHER INTANGIBLE ASSETS, NET |
Intangible
December 31, 2018 | December 31, 2017 | |||||||
Intangible assets: | ||||||||
Customer backlog | $ | 4,000 | $ | 4,000 | ||||
Trade names and trademarks | 900 | 900 | ||||||
Domain names | 6,327 | — | ||||||
|
|
|
| |||||
Total intangible assets | 11,227 | 4,900 | ||||||
|
|
|
| |||||
Accumulated amortization: | ||||||||
Customer backlog | (4,000 | ) | (1,666 | ) | ||||
Trade name and trademarks | (900 | ) | (376 | ) | ||||
Domain names | (285 | ) | — | |||||
|
|
|
| |||||
Total accumulated amortization | (5,185 | ) | (2,042 | ) | ||||
|
|
|
| |||||
Intantible assets, net | $ | 6,042 | $ | 2,858 | ||||
|
|
|
|
domain names purchased in May 2018. At December 31, 2019 and 2018, intangible assets were $6.3 million, net of accumulated amortization of $0.7 million and $0.3 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 12 months for customer backlog and trade names and trademarks and 15 years, for domain names, which approximates the pattern in which the economic benefits are expected to be received. In May 2018, theThe Company purchased certain domain names for $6.3 million. We evaluateevaluates the recoverability of intangible assets periodically and considerconsiders events or circumstances that may warrant revised estimates of useful lives or that may indicate an impairment. Intangible asset amortization expense for the years ended December 31, 20182019 and December 31, 2017,2018, was $0.4 million and $3.1 million, respectively.
7. | PROPERTY, PLANT AND EQUIPMENT |
2018 | 2017 | |||||||
Building and improvements | $ | 50,240 | $ | 49,403 | ||||
Machinery and equipment | 233,464 | 228,107 | ||||||
Furniture and fixtures | 1,625 | 1,620 | ||||||
Forklifts and tractors | 10,872 | 9,799 | ||||||
Computer equipment | 10,142 | 9,680 | ||||||
Construction in process | 16,392 | 5,954 | ||||||
Land | 11,417 | 11,417 | ||||||
|
|
|
| |||||
Total property, plant and equipment | 334,152 | 315,980 | ||||||
Accumulated depreciation | (217,008 | ) | (212,870 | ) | ||||
|
|
|
| |||||
Total property, plant and equipment, net | $ | 117,144 | $ | 103,110 | ||||
|
|
|
|
2019 | 2018 | |||||||
Machinery and equipment | $ | 248,633 | $ | 233,464 | ||||
Building and improvements | 51,547 | 50,240 | ||||||
Forklifts and tractors | 10,870 | 10,872 | ||||||
Computer equipment | 10,647 | 10,142 | ||||||
Furniture and fixtures | 1,441 | 1,625 | ||||||
Construction in process | 59,257 | 16,392 | ||||||
Land | 11,417 | 11,417 | ||||||
Total property, plant and equipment | 393,812 | 334,152 | ||||||
Accumulated depreciation | (222,512 | ) | (217,008 | ) | ||||
Total property, plant and equipment, net | $ | 171,300 | $ | 117,144 | ||||
2021.
8. | ACCRUED EXPENSES AND OTHER LIABILITIES |
2018 | 2017 | |||||||
Sales and marketing costs | $ | 25,379 | $ | 21,964 | ||||
Compensation and benefits | 19,124 | 14,818 | ||||||
Manufacturing costs | 3,744 | 1,979 | ||||||
Customer deposits | 2,058 | 1,230 | ||||||
Rent obligations | 663 | 779 | ||||||
Billings in excess of revenues | 512 | 1,842 | ||||||
Other | 4,811 | 3,654 | ||||||
|
|
|
| |||||
Total accrued expenses | $ | 56,291 | $ | 46,266 | ||||
|
|
|
|
2019 | 2018 | |||||||
Sales and marketing | $ | 28,402 | $ | 25,379 | ||||
Compensation and benefits | 13,475 | 19,124 | ||||||
Operating lease liabilities | 7,079 | — | ||||||
Manufacturing costs | 2,564 | 3,744 | ||||||
Customer deposits | 2,905 | 2,058 | ||||||
Billings in excess of revenues | 816 | 512 | ||||||
Other | 3,024 | 5,474 | ||||||
Total accrued expenses | $ | 58,265 | $ | 56,291 | ||||
9. | DEBT |
Underterm, which ends November 5, 2024 (Term). Previously, under the Third Amended Credit Agreement, the Lenders agreeBOA, Citi, Capital One and SunTrust agreed to provide 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 endswould have ended on January 12, 2021 if not replaced by the Fourth Amended Credit Agreement.
The Company shall reimburse BOA for all amounts payable, including interest, under a letter of credit at the earlier of (i) the date set forth in the application, or (ii) one business day after the payment under such letter of credit by BOA.
The Company’s ability
10. | LEASES |
Supplemental cash flow information (in thousands) | ||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 8,479 | ||
Operating ROU assets obtained in exchange for lease liabilities | $ | 1,319 | ||
Supplemental balance sheet information (in thousands) | ||||
Operating lease right-of-use assets | $ | 40,049 | ||
Operating lease liabilities: | ||||
Accrued expenses and other current liabilities | $ | 7,079 | ||
Operating lease liabilities | 34,242 | |||
Total operating lease liabilities | $ | 41,321 | ||
Maturities of operating lease liabilities | ||||
2020 | $ | 8,472 | ||
2021 | 8,279 | |||
2022 | 6,464 | |||
2023 | 6,109 | |||
2024 | 6,146 | |||
Thereafter | 11,079 | |||
Total lease payments | 46,549 | |||
Less imputed interest | (5,228 | ) | ||
Total operating liabilities | $ | 41,321 | ||
Year Ending December 31, | ||||
2019 | $ | 10,998 | ||
2020 | 9,317 | |||
2021 | 8,952 | |||
2022 | 6,901 | |||
2023 | 6,576 | |||
Thereafter | 19,080 | |||
Total minimum lease payments | $ | 61,824 | ||
11. | FINANCIAL INSTRUMENTS |
STOCKHOLDERS’ EQUITY |
Amendment of Restated Certificate of Incorporation
The Company’s Board of Directors unanimously approved an amendment to the Company’s Restated Certificate of Incorporation (Amendment) on February 14, 2018, subject to stockholder approval. At the annual meeting of stockholders of the Company held on May 2, 2018, the Company’s stockholders approved the Amendment, effective as of May 2, 2018. The Amendment increased the number of shares of common stock, par value $.01 per share, that the Company is authorized to issue from 80,000,000 shares to 120,000,000 shares. The Amendment was filed with the Delaware Secretary of State on May 2, 2018.
two-for-one
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Numerator: | ||||||||||||
Net income | $ | 134,572 | $ | 95,128 | $ | 67,847 | ||||||
|
|
|
|
|
| |||||||
Denominator: | ||||||||||||
Basic weighted average shares outstanding | 58,739,670 | 58,785,118 | 58,789,118 | |||||||||
Effect of dilutive securities: | ||||||||||||
Stock appreciation rights | 176,700 | 198,642 | 250,238 | |||||||||
Restricted stock | 150,932 | 167,160 | 185,982 | |||||||||
|
|
|
|
|
| |||||||
Diluted weighted average shares outstanding | 59,067,302 | 59,150,920 | 59,225,338 | |||||||||
|
|
|
|
|
| |||||||
Basic earnings per share | $ | 2.29 | $ | 1.62 | $ | 1.16 | ||||||
|
|
|
|
|
| |||||||
Diluted earnings per share | $ | 2.28 | $ | 1.61 | $ | 1.15 | ||||||
|
|
|
|
|
|
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Numerator: | ||||||||||||
Net income | $ | 144,738 | $ | 134,572 | $ | 95,128 | ||||||
Denominator: | ||||||||||||
Basic weighted average shares outstanding | 58,430,597 | 58,739,670 | 58,785,118 | |||||||||
Effect of dilutive securities: | ||||||||||||
Stock appreciation rights | 124,425 | 176,700 | 198,642 | |||||||||
Restricted stock | 102,727 | 150,932 | 167,160 | |||||||||
Diluted weighted average shares outstanding | 58,657,749 | 59,067,302 | 59,150,920 | |||||||||
Basic earnings per share | $ | 2.48 | $ | 2.29 | $ | 1.62 | ||||||
Diluted earnings per share | $ | 2.47 | $ | 2.28 | $ | 1.61 | ||||||
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Restricted stock | 214 | 166 | 24 | |||||||||
Stock appreciation rights | 13,347 | 21,234 | 9,262 |
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Restricted stock | — | 214 | 166 | |||||||||
Stock appreciation rights | 20,770 | 13,347 | 21,234 |
On October 22, 2015, the Board of Directors adopted a stock repurchase program of up to 3.15 million shares of the Company’s outstanding common stock (October 2015 Stock Repurchase Program). This authorization terminated on December 31, 2016. During 2016, the Company repurchased 1,578,952 shares for $53.3 million under the October 2015 Stock Repurchase Program.
On February 16, 2017, the Board of Directors authorized a common stock repurchase program of up to 2.961 million shares of the Company’s outstanding common stock (February 2017 Stock Repurchase Program). The Company made no repurchases under the February 2017 Stock Repurchase Program.
REVENUE FROM CONTRACTS WITH CUSTOMERS |
obtaining a contract, such as individual performance, profitability of the entity, annual sales targets, etc. These costs are included in selling, general and administrative expenses as incurred. Trex Residential does not grant contractual product return rights to customers other than pursuant to its assurance product warranty (see related disclosure on product warranties in Note 19, “Commitments and Contingencies”). Trex Residential accounts for all shipping and handling fees invoiced to the customer in net sales and the related costs in cost of sales.
2019.
Year Ended December 31, 2018 | 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 | $ | 613.229 | $ | — | $ | 613,229 | ||||||
Products transferred over time and fixed price contracts | — | 71,021 | 71,021 | |||||||||
|
|
|
|
|
| |||||||
$ | 613,229 | $ | 71,021 | $ | 684,250 | |||||||
|
|
|
|
|
|
Year Ended December 31, 2017 | 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 | $ | 543,346 | $ | — | $ | 543,346 | ||||||
Products transferred over time and fixed price contracts | — | 21,807 | 21,807 | |||||||||
|
|
|
|
|
| |||||||
$ | 543,346 | $ | 21,807 | $ | 565,153 | |||||||
|
|
|
|
|
|
Year Ended December 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 | $ | 694,267 | $ | — | $ | 694,267 | ||||||
Products transferred over time and fixed price contracts | — | 51,080 | 51,080 | |||||||||
$ | 694,267 | $ | 51,080 | $ | 745,347 | |||||||
Year Ended December 31, 2018 | 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 | $ | 613,229 | $ | — | $ | 613,229 | ||||||
Products transferred over time and fixed price contracts | — | 71,021 | 71,021 | |||||||||
$ | 613,229 | $ | 71,021 | $ | 684,250 | |||||||
Year Ended December 31, 2017 | 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 | $ | 543,346 | $ | — | $ | 543,346 | ||||||
Products transferred over time and fixed price contracts | — | 21,807 | 21,807 | |||||||||
$ | 543,346 | $ | 21,807 | $ | 565,153 | |||||||
14. | STOCK-BASED COMPENSATION |
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Time-based restricted stock and time-based restricted stock units | $ | 2,687 | $ | 1,992 | $ | 2,281 | ||||||
Performance-based restricted stock and performance-based restricted stock units | 3,144 | 2,805 | 2,210 | |||||||||
Stock appreciation rights | 370 | 251 | 184 | |||||||||
Employee stock purchase plan | 143 | 139 | 113 | |||||||||
|
|
|
|
|
| |||||||
Total stock-based compensation | $ | 6,344 | $ | 5,187 | $ | 4,788 | ||||||
|
|
|
|
|
|
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Time-based restricted stock and restricted stock units | $ | 3,676 | $ | 2,687 | $ | 1,992 | ||||||
Performance-based restricted stock and restricted stock units | 2,399 | 3,144 | 2,805 | |||||||||
Stock appreciation rights | 662 | 370 | 251 | |||||||||
Employee stock purchase plan | 193 | 143 | 139 | |||||||||
Total stock-based compensation | $ | 6,930 | $ | 6,344 | $ | 5,187 | ||||||
Time-based Restricted Stock and Restricted Stock Unit | Weighted-Average Grant Price Per Share | |||||||
Nonvested at December 31, 2015 | 215,814 | $ | 14.72 | |||||
Granted | 115,748 | $ | 18.82 | |||||
Vested | (87,696 | ) | $ | 21.17 | ||||
Forfeited | (266 | ) | $ | 21.95 | ||||
|
| |||||||
Nonvested at December 31, 2016 | 243,600 | $ | 15.80 | |||||
Granted | 72,402 | $ | 36.27 | |||||
Vested | (162,372 | ) | $ | 14.45 | ||||
Forfeited | (512 | ) | $ | 18.68 | ||||
|
| |||||||
Nonvested at December 31, 2017 | 153,118 | $ | 26.90 | |||||
Granted | 87,264 | $ | 54.72 | |||||
Vested | (84,550 | ) | $ | 26.65 | ||||
Forfeited | (284 | ) | $ | 35.05 | ||||
|
| |||||||
Nonvested at December 31, 2018 | 155,548 | $ | 42.68 | |||||
|
|
Time-based Restricted Stock and Restricted Stock Unit | Weighted-Average Grant Price Per Share | |||||||
Nonvested at December 31, 2016 | 243,600 | $ | 15.80 | |||||
Granted | 72,402 | $ | 36.27 | |||||
Vested | (162,372 | ) | $ | 14.45 | ||||
Forfeited | (512 | ) | $ | 18.68 | ||||
Nonvested at December 31, 2017 | 153,118 | $ | 26.90 | |||||
Granted | 87,264 | $ | 54.72 | |||||
Vested | (84,550 | ) | $ | 26.65 | ||||
Forfeited | (284 | ) | $ | 35.05 | ||||
Nonvested at December 31, 2018 | 155,548 | $ | 42.68 | |||||
Granted | 35,650 | $ | 76.23 | |||||
Vested | (81,325 | ) | $ | 37.34 | ||||
Forfeited | (640 | ) | $ | 62.33 | ||||
Nonvested at December 31, 2019 | 109,233 | $ | 57.49 | |||||
Performance-based Restricted Stock and Performance-based Restricted Stock Units | Weighted-Average Grant Price Per Share | |||||||
Nonvested at December 31, 2015 | 58,194 | $ | 19.69 | |||||
Granted | 89,850 | $ | 17.92 | |||||
Vested | (29,898 | ) | $ | 17.86 | ||||
Forfeited | (1,314 | ) | $ | 16.85 | ||||
|
| |||||||
Nonvested at December 31, 2016 | 116,832 | $ | 18.32 | |||||
Granted | 86,614 | $ | 28.77 | |||||
Vested | (86,788 | ) | $ | 18.64 | ||||
Forfeited | — | $ | — | |||||
|
| |||||||
Nonvested at December 31, 2017 | 116,658 | $ | 25.85 | |||||
Granted | 80,570 | $ | 35.26 | |||||
Vested | (106,022 | ) | $ | 23.52 | ||||
Forfeited | — | $ | — | |||||
|
| |||||||
Nonvested at December 31, 2018 | 91,206 | $ | 36.86 | |||||
|
|
Performance-based Restricted Stock and Performance-based Restricted Stock Units | Weighted-Average Grant Price Per Share | |||||||
Nonvested at December 31, 2016 | 116,832 | $ | 18.32 | |||||
Granted | 86,614 | $ | 28.77 | |||||
Vested | (86,788 | ) | $ | 18.64 | ||||
Forfeited | — | $ | — | |||||
Nonvested at December 31, 2017 | 116,658 | $ | 25.85 | |||||
Granted | 80,570 | $ | 35.26 | |||||
Vested | (106,022 | ) | $ | 23.52 | ||||
Forfeited | — | $ | — | |||||
Nonvested at December 31, 2018 | 91,206 | $ | 36.86 | |||||
Granted | 82,135 | $ | 47.64 | |||||
Vested | (111,002 | ) | $ | 31.10 | ||||
Forfeited | (511 | ) | $ | 58.45 | ||||
Nonvested at December 31, 2019 | 61,828 | $ | 61.34 | |||||
December 31, | ||||||||
2018 | 2017 | |||||||
Dividend yield | 0 | % | 0 | % | ||||
Average risk-free interest rate | 2.7 | % | 2.0 | % | ||||
Expected term (years) | 5 | 5 | ||||||
Expected volatility | 40.5 | % | 42.3 | % |
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Dividend yield | 0 | % | 0 | % | 0 | % | ||||||
Average risk-free interest rate | 2.5 | % | 2.7 | % | 2.0 | % | ||||||
Expected term (years) | 5 | 5 | 5 | |||||||||
Expected volatility | 39.1 | % | 40.5 | % | 42.3 | % |
The Company recognizes forfeitures as they occur.
SARs | Weighted-Average Grant Price Per Share | Weighted- Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value as of December 31, 2018 | |||||||||||||
Outstanding at December 31, 2015 | 524,154 | $ | 6.57 | |||||||||||||
Granted | — | $ | — | |||||||||||||
Exercised | (248,704 | ) | $ | 5.55 | ||||||||||||
Canceled | — | $ | — | |||||||||||||
|
| |||||||||||||||
Outstanding at December 31, 2016 | 275,450 | $ | 9.79 | |||||||||||||
Granted | 37,478 | $ | 35.38 | |||||||||||||
Exercised | (34,812 | ) | $ | 8.07 | ||||||||||||
Canceled | — | $ | — | |||||||||||||
|
| |||||||||||||||
Outstanding at December 31, 2017 | 278,116 | $ | 13.45 | |||||||||||||
Granted | 21,260 | $ | 56.59 | |||||||||||||
Exercised | (60,900 | ) | $ | 5.27 | ||||||||||||
Canceled | — | $ | — | |||||||||||||
|
| |||||||||||||||
Outstanding at December 31, 2018 | 238,476 | $ | 19.26 | 5.3 | $ | 9,562,603 | ||||||||||
Vested at December 31, 2018 | 192,232 | $ | 13.08 | 4.5 | $ | 8,896,335 | ||||||||||
Exercisable at December 31, 2018 | 192,232 | $ | 13.08 | 4.5 | $ | 8,896,335 |
SARs | Weighted-Average Grant Price Per Share | Weighted- Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value as of December 31, 2019 | |||||||||||||
Outstanding at December 31, 2016 | 275,450 | $ | 9.79 | |||||||||||||
Granted | 37,478 | $ | 35.38 | |||||||||||||
Exercised | (34,812 | ) | $ | 8.07 | ||||||||||||
Canceled | — | $ | — | |||||||||||||
Outstanding at December 31, 2017 | 278,116 | $ | 13.45 | |||||||||||||
Granted | 21,260 | $ | 56.59 | |||||||||||||
Exercised | (60,900 | ) | $ | 5.27 | ||||||||||||
Canceled | — | $ | — | |||||||||||||
Outstanding at December 31, 2018 | 238,476 | $ | 19.26 | |||||||||||||
Granted | 24,536 | $ | 77.70 | |||||||||||||
Exercised | (108,764 | ) | $ | 13.89 | ||||||||||||
Canceled | (2,229 | ) | $ | 77.70 | ||||||||||||
Outstanding at December 31, 2019 | 152,019 | $ | 31.58 | 5.5 | $ | 8,862,501 | ||||||||||
Vested at December 31, 2019 | 103,094 | $ | 18.14 | 4.1 | $ | 7,396,470 | ||||||||||
Exercisable at December 31, 2019 | 103,094 | $ | 18.14 | 4.1 | $ | 7,396,470 |
|
The Company leases office space, storage warehouses and certain office and plant equipment under various operating leases. Minimum annual payments under thesenon-cancelable leases as of December 31, 2018 were as follows (in thousands):
Year Ending December 31, | ||||
2019 | $ | 10,998 | ||
2020 | 9,317 | |||
2021 | 8,952 | |||
2022 | 6,901 | |||
2023 | 6,576 | |||
Thereafter | 19,080 | |||
|
| |||
Total minimum lease payments | $ | 61,824 | ||
|
|
For the years ended December 31, 2018, 2017 and 2016, the Company recognized rental expenses of approximately $10.0 million, $9.1 million, and $9.9 million, respectively.
15. | EMPLOYEE BENEFIT PLANS |
contributions. The Company’s contributions to the plans totaled $4.6 million, $4.2 million, $3.0 million, and $2.5$3.0 million for the years ended December 31, 2019, 2018 and 2017, and 2016, respectively.
16. | INCOME TAXES |
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Current income tax provision: | ||||||||||||
Federal | $ | 33,578 | $ | 41,177 | $ | 26,752 | ||||||
State | 7,674 | 5,420 | 2,798 | |||||||||
|
|
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|
|
| |||||||
41,252 | 46,597 | 29,550 | ||||||||||
|
|
|
|
|
| |||||||
Deferred income tax provision: | ||||||||||||
Federal | 988 | 1,177 | 5,217 | |||||||||
State | 49 | (983 | ) | 216 | ||||||||
|
|
|
|
|
| |||||||
1,037 | 194 | 5,433 | ||||||||||
|
|
|
|
|
| |||||||
Total income tax provision | $ | 42,289 | $ | 46,791 | $ | 34,983 | ||||||
|
|
|
|
|
|
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Current income tax provision: | ||||||||||||
Federal | $ | 30,306 | $ | 33,578 | $ | 41,177 | ||||||
State | 6,952 | 7,674 | 5,420 | |||||||||
37,258 | 41,252 | 46,597 | ||||||||||
Deferred income tax provision: | ||||||||||||
Federal | 6,928 | 988 | 1,177 | |||||||||
State | 778 | 49 | (983 | ) | ||||||||
7,706 | 1,037 | 194 | ||||||||||
Total income tax provision | $ | 44,964 | $ | 42,289 | $ | 46,791 | ||||||
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
U.S. Federal statutory taxes | $ | 37,141 | $ | 49,671 | $ | 35,990 | ||||||
State and local taxes, net of U.S. Federal benefit | 7,716 | 5,110 | 3,747 | |||||||||
Permanent items | 470 | 576 | 396 | |||||||||
Excess tax benefits from vesting or settlement of stock compensation awards | (2,368 | ) | (1,454 | ) | (1,749 | ) | ||||||
Domestic production activities deduction | — | (4,376 | ) | (2,740 | ) | |||||||
Federal credits | (662 | ) | (534 | ) | (488 | ) | ||||||
Other | (8 | ) | (2,202 | ) | (173 | ) | ||||||
|
|
|
|
|
| |||||||
Total income tax provision | $ | 42,289 | $ | 46,791 | $ | 34,983 | ||||||
|
|
|
|
|
|
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
U.S. Federal statutory taxes | $ | 39,838 | $ | 37,141 | $ | 49,671 | ||||||
State and local taxes, net of U.S. Federal benefit | 8,412 | 7,716 | 5,110 | |||||||||
Permanent items | 1,266 | 470 | 576 | |||||||||
Excess tax benefits from vesting or settlement of stock compensation awards | (3,540 | ) | (2,368 | ) | (1,454 | ) | ||||||
Domestic production activities deduction | — | — | (4,376 | ) | ||||||||
Federal credits | (654 | ) | (662 | ) | (534 | ) | ||||||
Other | (358 | ) | (8 | ) | (2,202 | ) | ||||||
Total income tax provision | $ | 44,964 | $ | 42,289 | $ | 46,791 | ||||||
As of December 31, | ||||||||
2018 | 2017 | |||||||
Deferred tax assets: | ||||||||
Net operating losses | $ | 79 | $ | 123 | ||||
Residential product warranty reserve | 7,804 | 8,876 | ||||||
Stock-based compensation | 1,725 | 1,823 | ||||||
Accruals not currently deductible and other | 3,928 | 1,838 | ||||||
Inventories | 4,682 | 3,783 | ||||||
State tax credit carryforwards | 3,400 | 3,619 | ||||||
|
|
|
| |||||
Gross deferred tax assets, before valuation allowance | 21,618 | 20,062 | ||||||
Valuation allowance | (3,015 | ) | (3,096 | ) | ||||
|
|
|
| |||||
Gross deferred tax assets, after valuation allowance | 18,603 | 16,966 | ||||||
|
|
|
| |||||
Deferred tax liabilities: | ||||||||
Depreciation | (13,893 | ) | (12,046 | ) | ||||
Goodwill amortization | (3,774 | ) | (2,781 | ) | ||||
Inventories and other | (3,061 | ) | (3,228 | ) | ||||
|
|
|
| |||||
Gross deferred tax liabilities | (20,728 | ) | (18,055 | ) | ||||
|
|
|
| |||||
Net deferred tax liability | $ | (2,125 | ) | $ | (1,089 | ) | ||
|
|
|
|
As of December 31, | ||||||||
2019 | 2018 | |||||||
Deferred tax assets: | ||||||||
Net operating losses | $ | 88 | $ | 79 | ||||
Residential product warranty reserve | 6,486 | 7,804 | ||||||
Stock-based compensation | 1,055 | 1,725 | ||||||
Accruals not currently deductible and other | 2,245 | 3,928 | ||||||
Inventories | 5,780 | 4,682 | ||||||
Operat ing le ase liability | 10,618 | — | ||||||
State tax credit carryforwards | 3,461 | 3,400 | ||||||
Gross deferred tax assets, before valuation allowance | 29,733 | 21,618 | ||||||
Valuation allowance | (2,988 | ) | (3,015 | ) | ||||
Gross deferred tax assets, after valuation allowance | 26,745 | 18,603 | ||||||
Deferred tax liabilities: | ||||||||
Depreciation | (17,267 | ) | (13,893 | ) | ||||
Operating lease right-of-use asset | (10,162 | ) | — | |||||
Goodwill amortization | (4,782 | ) | (3,774 | ) | ||||
Inventories and other | (4,365 | ) | (3,061 | ) | ||||
Gross deferred tax liabilities | (36,576 | ) | (20,728 | ) | ||||
Net deferred tax liability | $ | (9,831 | ) | $ | (2,125 | ) | ||
The Company has recognized the tax effects of the Tax Cuts and Jobs Act (Act) in its consolidated financial statements and related notes as of and for the year ended December 31, 2017. Deferred tax assets and deferred tax liabilities that existed as of the enactment date and that reversed after the Act’s effective date of January 1, 2018 were adjusted to reflect the new Federal statutory tax rate of 21%. The effect of the change in tax rate on the deferred tax assets and deferred tax liabilities resulted in a tax benefit of $1.9 million for the year ended
December 31, 2017, which is included in “Other” in the above tax rate reconciliation. The Company finalized its analysis of the Act and completed its calculation, which did not affect the measurement of these balances nor give rise to new deferred tax amounts. As of December 31, 2018,2019, the Company had a valuation allowance of $3.0 million against deferred tax assets it estimates will not be realized. The Company will analyze its position in subsequent reporting periods, considering all available positive and negative evidence, in determining the expected realization of its deferred tax assets.
17. | SEGMENT INFORMATION |
|
below segment data includes data for Trex Residential for the years ended December 31, 2019, December 31, 2018 and December 31, 2017, and data for Trex Commercial for the yearyears ended December 31, 2018,2019 and for the year ended December 31, 20172018, and from the date of the acquisition of SC Company through December 31, 2017, for the year ended December 31, 2017 (in thousands):
Year ended December 31, 2018 | ||||||||||||
Trex Residential | Trex Commercial | Total | ||||||||||
Net sales | $ | 613,229 | $ | 71,021 | $ | 684,250 | ||||||
Net income | $ | 131,823 | $ | 2,749 | $ | 134,572 | ||||||
EBITDA | $ | 186,268 | $ | 6,868 | $ | 193,136 | ||||||
Depreciation and amortization | $ | 13,216 | $ | 3,251 | $ | 16,467 | ||||||
Income tax expense | $ | 41,421 | $ | 868 | $ | 42,289 | ||||||
Capital expenditures | $ | 31,392 | $ | 2,424 | $ | 33,816 | ||||||
Total assets | $ | 380,682 | $ | 84,440 | $ | 465,122 |
Net Sales | Net Income (Loss) | EBITDA | Depreciation and Amortization | Income Tax Expense (Benefit) | Capital Expenditures | Total Assets | ||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||
Trex Residential | $ | 694,267 | $ | 142,811 | $ | 199,020 | $ | 13,413 | $ | 44,292 | $ | 65,399 | $ | 503,883 | ||||||||||||||
Trex Commercial | 51,080 | 1,927 | 3,210 | 618 | 672 | 1,866 | 88,356 | |||||||||||||||||||||
Total | $ | 745,347 | $ | 144,738 | $ | 202,230 | $ | 14,031 | $ | 44,964 | $ | 67,265 | $ | 592,239 | ||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||
Trex Residential | $ | 613,229 | $ | 131,823 | $ | 186,268 | $ | 13,216 | $ | 41,421 | $ | 31,392 | $ | 380,682 | ||||||||||||||
Trex Commercial | 71,021 | 2,749 | 6,868 | 3,251 | 868 | 2,424 | 84,440 | |||||||||||||||||||||
Total | $ | 684,250 | $ | 134,572 | $ | 193,136 | $ | 16,467 | $ | 42,289 | $ | 33,816 | $ | 465,122 | ||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||
Trex Residential | $ | 543,346 | $ | 97,412 | $ | 160,382 | $ | 14,598 | $ | 47,911 | $ | 14,989 | $ | 247,817 | ||||||||||||||
Trex Commercial | 21,807 | (2,284 | ) | (1,272 | ) | 2,132 | (1,120 | ) | 51 | 78,410 | ||||||||||||||||||
Total | $ | 565,153 | $ | 95,128 | $ | 159,110 | $ | 16,730 | $ | 46,791 | $ | 15,040 | $ | 326,227 | ||||||||||||||
Year Ended December 31, 2018 | ||||||||||||
Trex Residential | Trex Commercial | Total | ||||||||||
Net income | $ | 131,823 | $ | 2,749 | $ | 134,572 | ||||||
Interest (income) expense, net | (192 | ) | — | (192 | ) | |||||||
Taxes | 41,421 | 868 | 42,289 | |||||||||
Depreciation and amortization | 13,216 | 3,251 | 16,467 | |||||||||
|
|
|
|
|
| |||||||
EBITDA | $ | 186,268 | $ | 6,868 | $ | 193,136 | ||||||
|
|
|
|
|
|
Year ended December 31, 2017 | ||||||||||||
Trex Residential | Trex Commercial | Total | ||||||||||
Net sales | $ | 543,346 | $ | 21,807 | $ | 565,153 | ||||||
Net income (loss) | $ | 97,412 | $ | (2,284 | ) | $ | 95,128 | |||||
EBITDA | $ | 160,382 | $ | (1,272 | ) | $ | 159,110 | |||||
Depreciation and amortization | $ | 14,598 | $ | 2,132 | $ | 16,730 | ||||||
Income tax expense (benefit) | $ | 47,911 | $ | (1,120 | ) | $ | 46,791 | |||||
Capital expenditures | $ | 14,989 | $ | 51 | $ | 15,040 | ||||||
Total assets | $ | 247,817 | $ | 78,410 | $ | 326,227 |
Reconciliation of net income to EBITDA:
Year Ended December 31, 2017 | ||||||||||||
Trex Residential | Trex Commercial | Total | ||||||||||
Net income (loss) | $ | 97,412 | $ | (2,284 | ) | $ | 95,128 | |||||
Interest | 461 | — | 461 | |||||||||
Taxes | 47,911 | (1,120 | ) | 46,791 | ||||||||
Depreciation and amortization | 14,598 | 2,132 | 16,730 | |||||||||
|
|
|
|
|
| |||||||
EBITDA | $ | 160,382 | $ | (1,272 | ) | $ | 159,110 | |||||
|
|
|
|
|
|
Net Income (Loss) | Interest (Income) Expense, Net | Income Tax Expense (Benefit) | Depreciation and Amortization | EBITDA | ||||||||||||||||
December 31, 2019 | ||||||||||||||||||||
Trex Residential | $ | 142,811 | $ | (1,496 | ) | $ | 44,292 | $ | 13,413 | $ | 199,020 | |||||||||
Trex Commercial | 1,927 | (7 | ) | 672 | 618 | 3,210 | ||||||||||||||
Total | $ | 144,738 | $ | (1,503 | ) | $ | 44,964 | $ | 14,031 | $ | 202,230 | |||||||||
December 31, 2018 | ||||||||||||||||||||
Trex Residential | $ | 131,823 | $ | (192 | ) | $ | 41,421 | $ | 13,216 | $ | 186,268 | |||||||||
Trex Commercial | 2,749 | — | 868 | 3,251 | 6,868 | |||||||||||||||
Total | $ | 134,572 | $ | (192 | ) | $ | 42,289 | $ | 16,467 | $ | 193,136 | |||||||||
December 31, 2017 | ||||||||||||||||||||
Trex Residential | $ | 97,412 | $ | 461 | $ | 47,911 | $ | 14,598 | $ | 160,382 | ||||||||||
Trex Commercial | (2,284 | ) | — | (1,120 | ) | 2,132 | (1,272 | ) | ||||||||||||
Total | $ | 95,128 | $ | 461 | $ | 46,791 | $ | 16,730 | $ | 159,110 | ||||||||||
18. | SEASONALITY |
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
19. | COMMITMENTS AND CONTINGENCIES |
respectively, and a total of $0.1 million for the years ending December 31, 2022 and 2023.
years
to record a related liability. The number of claims received has declined each year since peaking in 2009, although the rate of decline has decelerated in recent years. 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.
Year Ended December 31, 2019 | ||||||||||||
Surface Flaking | Other Residential | Total | ||||||||||
Beginning balance, January 1 | $ | 23,951 | $ | 6,803 | $ | 30,754 | ||||||
Provisions and changes in estimates | — | 979 | 979 | |||||||||
Settlements made during the period | (4,927 | ) | (1,312 | ) | (6,239 | ) | ||||||
Ending balance, December 31 | $ | 19,024 | $ | 6,470 | $ | 25,494 | ||||||
Year Ended December 31, 2018 | ||||||||||||
Surface Flaking | Other Residential | Total | ||||||||||
Beginning balance, January 1 | $ | 28,158 | $ | 6,841 | $ | 34,999 | ||||||
Provisions and changes in estimates | — | 1,104 | 1,104 | |||||||||
Settlements made during the period | (4,207 | ) | (1,142 | ) | (5,349 | ) | ||||||
Ending balance, December 31 | $ | 23,951 | $ | 6,803 | $ | 30,754 | ||||||
Year Ended December 31, 2017 | ||||||||||||
Surface Flaking | Other Residential | Total | ||||||||||
Beginning balance, January 1 | $ | 33,847 | $ | 3,845 | $ | 37,692 | ||||||
Provisions and changes in estimates | — | 4,268 | 4,268 | |||||||||
Settlements made during the period | (5,689 | ) | (1,272 | ) | (6,961 | ) | ||||||
|
|
|
|
|
| |||||||
Ending balance, December 31 | $ | 28,158 | $ | 6,841 | $ | 34,999 | ||||||
|
|
|
|
|
|
20. | INTERIM FINANCIAL DATA (Unaudited) |
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | September 30, 2017 | June 30, 2017 | March 31, 2017 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands, except share and per share data) | (In thousands, except share and per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 139,971 | $ | 166,380 | $ | 206,692 | $ | 171,207 | $ | 122,212 | $ | 140,194 | $ | 157,941 | $ | 144,806 | $ | 164,772 | $ | 194,551 | $ | 206,453 | $ | 179,571 | $ | 139,971 | $ | 166,380 | $ | 206,692 | $ | 171,207 | ||||||||||||||||||||||||||||||||
Gross profit | $ | 59,856 | $ | 67,210 | $ | 91,115 | $ | 76,713 | $ | 50,906 | $ | 55,284 | $ | 72,014 | $ | 65,169 | $ | 71,263 | $ | 82,431 | $ | 83,444 | $ | 69,365 | $ | 59,856 | $ | 67,210 | $ | 91,115 | $ | 76,713 | ||||||||||||||||||||||||||||||||
Net income | $ | 25,171 | $ | 29,471 | $ | 42,820 | $ | 37,110 | $ | 18,299 | $ | 20,098 | $ | 28,782 | $ | 27,949 | $ | 35,497 | $ | 41,976 | $ | 35,710 | $ | 31,555 | $ | 25,171 | $ | 29,471 | $ | 42,820 | $ | 37,110 | ||||||||||||||||||||||||||||||||
Basic net income per share | $ | 0.43 | $ | 0.50 | $ | 0.73 | $ | 0.63 | $ | 0.31 | $ | 0.34 | $ | 0.49 | $ | 0.48 | ||||||||||||||||||||||||||||||||||||||||||||||||
Basic earnings per common share | $ | 0.61 | $ | 0.72 | $ | 0.61 | $ | 0.54 | $ | 0.43 | $ | 0.50 | $ | 0.73 | $ | 0.63 | ||||||||||||||||||||||||||||||||||||||||||||||||
Basic weighted average common shares outstanding | 58,603,537 | 58,741,973 | 58,760,753 | 58,855,156 | 58,825,696 | 58,808,098 | 58,778,916 | 58,726,420 | 58,295,717 | 58,400,060 | 58,486,192 | 58,543,478 | 58,603,537 | 58,741,973 | 58,760,753 | 58,855,156 | ||||||||||||||||||||||||||||||||||||||||||||||||
Diluted net income per share | $ | 0.43 | $ | 0.50 | $ | 0.73 | $ | 0.63 | $ | 0.31 | $ | 0.34 | $ | 0.49 | $ | 0.48 | ||||||||||||||||||||||||||||||||||||||||||||||||
Diluted earnings per common share | $ | 0.61 | $ | 0.72 | $ | 0.61 | $ | 0.54 | $ | 0.43 | $ | 0.50 | $ | 0.73 | $ | 0.63 | ||||||||||||||||||||||||||||||||||||||||||||||||
Diluted weighted average common shares outstanding | 58,936,795 | 59,084,117 | 59,051,413 | 59,199,622 | 59,222,258 | 59,156,432 | 59,100,836 | 59,122,812 | 58,512,733 | 58,604,603 | 58,687,540 | 58,829,177 | 58,936,795 | 59,084,117 | 59,051,413 | 59,199,622 |
The Tax Cuts and Jobs Act (Act) was enacted on December 22, 2017. Accordingly, the Company has recognized the tax effects of the Act in its consolidated financial statements and related notes as of and for the year ended December 31, 2017. Deferred tax assets that existed as of the enactment date and that are expected to reverse after the Act’s effective date of January 1, 2018 have been adjusted to reflect the new Federal statutory tax rate of 21%. The effect of the change in tax rate on the deferred tax assets and deferred tax liabilities resulted in a tax benefit of $1.9 million for the year ended December 31, 2017.
Descriptions | Balance at Beginning of Period | Additions (Reductions) Charged to Cost and Expenses | Deductions | Balance at End of Period | ||||||||||||
Year ended December 31, 2018: | ||||||||||||||||
Trex Residential product warranty reserve | $ | 34,999 | $ | 1,104 | $ | (5,349 | ) | $ | 30,754 | |||||||
|
|
|
|
|
|
|
| |||||||||
Income tax valuation allowance | $ | 3,096 | $ | — | $ | (81 | ) | $ | 3,015 | |||||||
|
|
|
|
|
|
|
| |||||||||
Year ended December 31, 2017: | ||||||||||||||||
Trex Residential product warranty reserve | $ | 37,692 | $ | 4,268 | $ | (6,961 | ) | $ | 34,999 | |||||||
|
|
|
|
|
|
|
| |||||||||
Income tax valuation allowance | $ | 4,061 | $ | — | $ | (965 | ) | $ | 3,096 | |||||||
|
|
|
|
|
|
|
| |||||||||
Year ended December 31, 2016: | ||||||||||||||||
Trex Residential product warranty reserve | $ | 33,522 | $ | 10,852 | $ | (6,682 | ) | $ | 37,692 | |||||||
|
|
|
|
|
|
|
| |||||||||
Income tax valuation allowance | $ | 4,582 | $ | — | $ | (521 | ) | $ | 4,061 | |||||||
|
|
|
|
|
|
|
|
Descriptions | Balance at Beginning of Period | Additions Charged to Cost and Expenses | Deductions | Balance at End of Period | ||||||||||||
Year ended December 31, 2019: | ||||||||||||||||
Trex Residential product warranty reserve | $ | 30,754 | $ | 979 | $ | (6,239 | ) | $ | 25,494 | |||||||
Income tax valuation allowance | $ | 3,015 | $ | — | $ | (27 | ) | $ | 2,988 | |||||||
Year ended December 31, 2018: | ||||||||||||||||
Trex Residential product warranty reserve | $ | 34,999 | $ | 1,104 | $ | (5,349 | ) | $ | 30,754 | |||||||
Income tax valuation allowance | $ | 3,096 | $ | — | $ | (81 | ) | $ | 3,015 | |||||||
Year ended December 31, 2017: | ||||||||||||||||
Trex Residential product warranty reserve | $ | 37,692 | $ | 4,268 | $ | (6,961 | ) | $ | 34,999 | |||||||
Income tax valuation allowance | $ | 4,061 | $ | — | $ | (965 | ) | $ | 3,096 | |||||||
Trex Company, Inc. | ||||||||
Date: February 24, 2020 | By: | /s/ James E. Cline | ||||||
| ||||||||
James E. Cline President and Chief Executive Officer (Duly Authorized Officer) |
|
| |
Signature | Title | |
/ s/ James E. Cline James E. Cline | President and Chief Executive Officer (Principal Executive Officer); Director | |
/ s/ Bryan H. Fairbanks Bryan H. Fairbanks | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
/s/ Ronald W. Kaplan Ronald W. Kaplan | Chairman | |
/s/ Michael F. Golden Michael F. Golden | Director | |
/s/ Jay M. Gratz Jay M. Gratz | Director | |
/s/ Kristine L. Juster Kristine L. Juster | Director | |
/s/ Richard E. Posey Richard E. Posey | Director | |
/s/ Patricia B. Robinson Patricia B. Robinson | Director | |
/s/ Gerald Volas Gerald Volas | Director |
Incorporated by reference | ||||||||||||
Exhibit Number | Description | Form | Exhibit | Filing Date | File No. | |||||||
2.1 | 8-K | 2.1 | July 31, 2017 | 001-14649 | ||||||||
3.1 | S-1/A | 3.1 | March 24, 1999 | 333-63287 | ||||||||
3.2 | 10-Q | 3.2 | May 5, 2014 | 001-14649 | ||||||||
3.3 | 10-Q | 3.3 | May 7, 2018 | 001-14649 | ||||||||
3.4 | 8-K | 3.1 | May 1, 2019 | 001-14649 | ||||||||
3.5 | 8-K | 3.2 | May 1, 2019 | 001-14649 | ||||||||
�� | ||||||||||||
4.1 | S-1/A | 4.1 | March 24, 1999 | 333-63287 | ||||||||
4.2 | 8-K | 4.1 | January 14, 2016 | 001-14649 | ||||||||
4.3 | 8-K | 4.2 | January 14, 2016 | 001-14649 | ||||||||
4.4 | 8-K | 4.3 | January 14, 2016 | 001-14649 | ||||||||
4.5 | 8-K | 4.4 | January 14, 2016 | 001-14649 |
Incorporated by reference | ||||||||||||
Exhibit Number | Description | Form | Exhibit | Filing Date | File No. | |||||||
4.6 | 8-K | 4.5 | January 14, 2016 | 001-14649 | ||||||||
4.7 | 8-K | 4.6 | January 14, 2016 | 001-14649 | ||||||||
4.8 | 8-K | 4.7 | January 14, 2016 | 001-14649 | ||||||||
4.9 | 8-K | 4.8 | January 14, 2016 | 001-14649 | ||||||||
4.10 | 8-K | 4.1 | November 6, 2019 | 001-14649 | ||||||||
4.11 | 8-K | 4.2 | November 6, 2019 | 001-14649 |
Incorporated by reference | ||||||||||||
Exhibit Number | Description | Form | Exhibit | Filing Date | File No. | |||||||
4.12 | 8-K | 4.3 | November 6, 2019 | 001-14649 | ||||||||
4.13 | 8-K | 4.4 | November 6, 2019 | 001-14649 | ||||||||
4.14 | 8-K | 4.5 | November 6, 2019 | 001-14649 | ||||||||
4.15 | 8-K | 4.6 | November 6, 2019 | 001-14649 | ||||||||
4.16* | ||||||||||||
10.1 | 10-K | 10.1 | February 14, 2019 | 001-14649 | ||||||||
10.2 | 10-Q | 10.1 | May 7, 2018 | 001-14649 | ||||||||
10.3 | 10-Q | 10.1 | October 29, 2018 | 001-14649 | ||||||||
10.4 | 10-Q | 10.1 | July 29, 2019 | 001-14649 | ||||||||
10.5 | 10-Q | 10.2 | July 29, 2019 | 001-14649 | ||||||||
10.6 | 10-Q | 10.3 | July 29, 2019 | 001-14649 | ||||||||
10.7 | 10-Q | 10.2 | August 3, 2015 | 001-14649 |
Incorporated by reference | ||||||||||||
Exhibit Number | Description | Form | Exhibit | Filing Date | File No. | |||||||
10.8 | 8-K | 10.1 | May 8, 2015 | 001-14649 | ||||||||
10.9 | 8-K | 10.2 | May 8, 2015 | 001-14649 | ||||||||
10.10 | 10-K | 10.16 | February 21, 2017 | 001-14649 | ||||||||
10.11 | 10-Q | 10.1 | May 8, 2015 | 001-14649 | ||||||||
10.12 | 10-Q | 10.4 | November 1, 2012 | 001-14649 | ||||||||
10.13 | 10-Q | 10.2 | May 7, 2018 | 001-14649 | ||||||||
10.14 | 10-K | 10.19 | March 12, 2009 | 001-14649 | ||||||||
10.15 | 10-K | 10.20 | March 12, 2009 | 001-14649 | ||||||||
10.16 | 10-K | 10.21 | March 12, 2009 | 001.14649 | ||||||||
10.17 | 10-K | 10.23 | March 12, 2009 | 001-14649 | ||||||||
10.18 | 10-Q | 10.4 | November 9, 2006 | 001-14649 | ||||||||
21* | ||||||||||||
23* | ||||||||||||
31.1* | ||||||||||||
31.2* | ||||||||||||
32*** | ||||||||||||
101.INS* | �� | Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
| |||||||||||
|
Incorporated by reference | |||||||||||
Exhibit Number |
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Description |
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Form |
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Exhibit |
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EXHIBIT INDEX
* | Filed herewith. |
** | Management contract or compensatory plan or agreement. |
*** | Furnished herewith. |