HW 5 ASAP

You are presentedwith the Financial Statements for Trex Company, Inc. Look to “Item 15” (beginning on page F-1) toanswer the following questions. Acct 3030
Homework Assignment #5 – Inventory Valuation
1. This assignment is due at 11:59pm Tuesday, November 7, 2023. The assignment must be
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Page 1 of 2
You are presented with the Financial Statements for Trex Company, Inc. Look to “Item
15” (beginning on page F-1) to answer the following questions.
1. What is the balance of Inventory on December 31, 2011? What were Cost of Goods
Sold for 2011?
2. Which method does Trex use to value inventory on their balance sheet? What are
the advantages and disadvantages of using this method?
3. What would inventory and total assets have been if Trex used FIFO costs?
4. What would Costs of Goods Sold have been if Trex used FIFO costs?
5. Calculate Pretax Income for Trex using FIFO costs.
6. Do you think Trex should use FIFO or LIFO to value inventories going forward?
Why?
7. In 2009, Trex had a liquidation of inventories. What does this mean? Did Trex
recognize a loss or a benefit from this and for what amount was the loss/benefit?
Page 2 of 2
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2011
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
to
Commission file number: 001-14649
Trex Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware
54-1910453
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
160 Exeter Drive, Winchester, Virginia
22603-8605
(Address of principal executive offices)
(Zip Code)
(540) 542-6300
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of each exchange on which registered:
Common Stock, par value $0.01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨
No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨
No 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required
to be submitted and posed pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes  No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-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 Form 10-K or any amendment to this
Form 10-K. 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting Company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange
Act. Large accelerated filer ¨
Accelerated filer 
Non-accelerated filer ¨ (Do not check if a smaller reporting Company)
Smaller reporting Company ¨
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No 
The aggregate market value of the registrant’s common equity held by non-affiliates of the registrant at June 30, 2011, which was the last business day of
the registrant’s most recently completed second fiscal quarter, was approximately $372.8 million based on the closing price of the common stock as reported
on the New York Stock Exchange on such date and assuming, for purposes of this computation only, that the registrant’s directors, executive officers and
beneficial owners of 10% or more of the registrant’s common stock are affiliates.
The number of shares of the registrant’s common stock outstanding on February 20, 2012 was 15,635,777.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this Form 10-K as indicated herein:
Document
Part of 10-K into which incorporated
Proxy Statement relating to
Part III
Registrant’s 2012
Annual Meeting of Stockholders
Table of Contents
TABLE OF CONTENTS
PART I
Page
Item 1.
Business
Item 1A.
Risk Factors
1
9
Item 2.
Properties
13
Item 3.
Legal Proceedings
14
PART II
15
17
19
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
30
Item 8.
Financial Statements and Supplementary Data
31
Item 9A.
Controls and Procedures
31
Item 10.
Directors, Executive Officers and Corporate Governance
34
Item 11.
Executive Compensation
34
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
34
Item 13.
Certain Relationships and Related Transactions, and Director Independence
34
Item 14.
Principal Accounting Fees and Services
34
PART III
PART IV
Item 15.
Exhibits and Financial Statement Schedules
35
Index to Consolidated Financial Statements
F-1
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NOTE ON FORWARD-LOOKING STATEMENTS
This report, including the information it incorporates by reference, contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend our forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business
strategy, our financing plans, forecasted demographic and economic trends relating to our industry and similar matters are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such as “believe,” “may,” “will,” “anticipate,” “estimate,” “expect” or “intend.”
We cannot promise you that our expectations in such forward-looking statements will turn out to be correct. Our actual results could be materially different
from our expectations because of various factors, including the factors discussed under “Risk Factors” in this report.
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PART I
Some of the information contained in this report concerning the markets and industry in which we operate is derived from publicly available
information and from industry sources. Although we believe that this publicly available information and the information provided by these industry sources
are reliable, we have not independently verified the accuracy of any of this information.
Item 1.
Business
General
Trex Company, Inc. (the “Company”), founded as a Delaware corporation in 1998, is the largest manufacturer of wood-alternative decking and railing
products, which are marketed under the brand name Trex ®. Our principal executive offices are located at 160 Exeter Drive, Winchester, Virginia 22603, and
our telephone number at that address is (540) 542-6300.
Products
We offer a comprehensive set of aesthetically durable, low maintenance product offerings in the decking, railing, porch, fencing and trim categories. We
believe that the range and variety of our product offerings allow consumers to design much of their outdoor living space using Trex brand products. The
majority of our products are made in a proprietary process that combines waste wood fibers and reclaimed polyethylene. Our products are provided in a wide
selection of popular sizes and lengths and are available with several finishes and/or numerous colors.
Decking. We market our decking products under a number of brand names. Our principal brand names for decking are:
•
Trex Transcend®, which features a protective shell for enhanced protection against fading, staining and scratching;
•
Trex Accents ®, which offers a smooth surface on one side and subtle wood grain on the other; and
•
Trex Escapes®, which is an ultra-low maintenance cellular PVC deck board.
In October 2011, we announced the introduction of Trex Enhance ™ decking, which like Transcend, features a protective shell for enhanced protection
against fading, staining and scratching.
We also have Trex Hideaway®, which is a hidden fastening system for specially grooved boards.
Railing. Our two railing products are Trex Transcend Railing and Trex Designer Series Railing ®. Trex Transcend Railing 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 will
enhance the sales prospects of our railing business. This railing product is manufactured with Fibrex ® material, which is a patented technology that we license
from Andersen Corporation. Our Designer Series Railing system consists of a decorative top and bottom rail, refined balusters, our Trex RailPost ™, and post
caps and skirts. In addition to its styling benefits for consumers, this railing is fast and easy to construct for contractors that use our TrexExpress ™ assembly
tool and system. The Designer railing is available in finishes and colors that compliment our decking products.
Porch. In 2011, we introduced Trex Transcend Porch Flooring and Railing System, which is an integrated system of porch components and
accessories.
Fencing. During 2011, we offered two fencing products. Each product consists of structural posts, bottom rail, pickets, top rail and decorative post
caps. The Trex Seclusions® fencing product uses interlocking pickets for privacy, and the Trex Surroundings ® fencing uses traditional pickets.
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Trim. Our TrexTrim™ product is a low maintenance cellular PVC residential exterior trim product that offers exceptional workability, durability, visual
appeal and a low level of required maintenance.
Miscellaneous. In 2011, we acquired substantially all of the assets of Iron Deck Corporation, a manufacturer of steel deck framing systems. This
product is now manufactured and sold by us under the trademark Trex Elevations ™. In 2011, we introduced Trex DeckLighting ™, 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.
We are a licensor in a number of licensing agreements with third parties to manufacture and sell products under the Trex trademark. Our principal
licensing products are:
•
Trex Outdoor Furniture ™, which is a line of outdoor furniture products manufactured and sold by Poly-Wood, Inc.;
•
Trex RainEscape®, which is an above joist deck drainage system manufactured and sold by Dri-Deck Enterprises, LLC;
•
Trex CustomCurve®, which is an on-site system that allows contractors to heat and bend Trex products manufactured and sold by CurveIt,
LLC; and
•
Trex Pergolas™, which are marketed by Home and Leisure, Inc. dba Backyard America and are made from TrexTrim ™, our low maintenance
cellular PVC trim product.
Trex products offer a number of significant aesthetic advantages over wood while eliminating many of wood’s major functional disadvantages, which
include warping, splitting and other damage from moisture. Our products require no staining, are resistant to moisture damage, provide a splinter-free surface
and need no chemical treatment against rot or insect infestation. These features eliminate most of the on-going maintenance requirements for a wood deck and
make Trex products less costly than wood over the life of the deck. Like wood, Trex products are slip-resistant (even when wet) and are less vulnerable to
damage from ultraviolet rays. Trex Accents can be painted and stained. Special characteristics (including resistance to splitting, the ability to bend, and ease
and consistency of machining and finishing) facilitate deck, railing, fencing and trim installation, reduce contractor call-backs and afford customers a wide
range of design options. Trex decking products do not have the tensile strength of wood and, as a result, are not used as primary structural members in posts,
beams or columns used in a deck’s substructure.
We have received product building code listings from the major U.S. and Canadian building code listing agencies for both our decking and railing
systems. Our listings facilitate the acquisition of building permits by deck builders and promote consumer and industry acceptance of our products as an
alternative to wood in decking. In addition, Trex Seclusions privacy fencing has passed the Miami/Dade County wind load testing, a widely regarded
standard for assessing a fencing product’s performance under extreme environmental conditions.
Growth Strategies
Our long-term goal is to perpetuate our position as the leading producer of branded superior wood-alternative outdoor living products by increasing our
market share and expanding into new product categories and geographic markets. To attain this goal, we intend to employ the following long-term strategies:
•
Innovation : Bring to the market new products that address unmet consumer and trade professional needs. Provide a compelling value proposition
through ease of installation, low maintenance, long-term durability and superior aesthetics.
•
Brand: Continue to build preference and commitment for the Trex brand with both the consumer and trade professional. Deliver on the brand’s
promise of superior quality, functionality, aesthetics and overall performance in the outdoor living space.
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•
Channels: Achieve comprehensive market segment and geographic coverage for Trex products by increasing the number of stocking dealers and
retailers, thereby making our products available wherever our customers choose to purchase their decking, railing, porch and trim products.
•
Quality: Continuously advance the quality of all operational and business processes, with the goal of achieving superior product quality and
service levels, thereby giving our Company a sustainable competitive advantage.
•
Cost: Through capital investments and process engineering, continuously seek to lower the cost to manufacture Trex products. Investments in
plastic recycling capabilities will allow us to expand our ability to use a wider breadth of waste streams and, as a result, lower our raw material
costs. We plan to concentrate on improving the productivity of our production process, from raw materials preparation through extrusion into
finishing and packaging.
Customers and Distribution
We distribute and/or sell our products through wholesale distribution, retail lumber dealers, Home Depot and Lowe’s.
Wholesale Distributors . In 2011, we generated most of our sales through our wholesale distribution network by selling Trex products to wholesale
companies. Our distributors, in turn, marketed our products to retail lumber outlets. Although our dealers sell to both homeowners and contractors, they
primarily direct their sales at professional contractors, remodelers and homebuilders.
We believe that attracting wholesale distributors, who are committed to our products and marketing approach and can effectively sell higher value
products to contractor-oriented lumber yards and other retail outlets, is important to our future growth. Our distributors are able to provide value-added service
in marketing our products because they sell premium wood decking products and other innovative building materials that typically require product training
and personal selling efforts. We typically appoint a distributor on a non-exclusive basis to distribute Trex products within a specified area. The distributor
generally purchases our products at prices in effect at the time we ship the product to the distributor.
Based on our 2011 net sales, sales to one of our distributors, Boise Cascade, exceeded 10% of our net sales.
Retail Lumber Dealers . Our products are sold in independent lumber yards and building material specialty dealers that emphasize sales to contractors
and builders. Although there is demand for our products from both the “do-it-yourself” homeowner and contractor, our sales efforts historically have
emphasized the contractor-installed market. Contractor-installed decks generally are larger installations with professional craftsmanship. Our retail dealers
generally provide sales personnel trained in Trex products, contractor training, inventory commitment and point-of-sale display support.
Home Depot and Lowe’s. We sell our products through Home Depot and Lowe’s stores. Home Depot and Lowe’s purchase products directly from us
for stocking on their shelves. They also purchase product through our wholesale distributors for special orders placed by consumers. Although Home Depot
and Lowe’s serve the contractor market, the largest part of their sales are to “do-it-yourself” homeowner customers that shop for their materials at Home Depot
and Lowe’s stores rather than at retail lumber dealers. We believe that brand exposure through Home Depot and Lowe’s distribution promotes consumer
acceptance and generates sales to contractors that purchase from independent dealers.
Manufacturing Process
We have manufacturing facilities in Winchester, Virginia and Fernley, Nevada, which had floor space of approximately 265,000 square feet and
250,000 square feet, respectively, at December 31, 2011. In
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September 2007, we suspended operations at our Olive Branch, Mississippi facility and consolidated all of our manufacturing operations into our Winchester
and Fernley sites. Our manufacturing capacity utilization rate was 30%, excluding the Olive Branch facility, during the year ended December 31, 2011.
Trex products are primarily manufactured from waste wood fiber and reclaimed polyethylene, which we sometimes refer to as “PE material” in this
report. Our primary manufacturing process involves mixing wood particles with plastic, heating and finally extruding, or forcing, the highly viscous and
abrasive material through a profile die. We have many proprietary and skill-based advantages in this process.
Production of a non-wood decking alternative such as ours requires significant capital investment, special process expertise and time to develop. We
have continuously invested the capital necessary to expand our manufacturing capacity and improve our manufacturing processes. We have also broadened
the range of raw materials that we can use to produce a consistent and high-quality finished product. We maintain research and development operations in the
Trex Technical Center adjacent to our Winchester, Virginia manufacturing facilities. In connection with our building code listings, we maintain a quality
control testing program that is monitored by an independent inspection agency.
We utilize Six Sigma practices and Standard Lean Manufacturing methodology within our plant operations. We are incorporating the use of these tools
throughout our Company in the planning and execution of those projects that are the most important to our success.
Suppliers
The production of most of our products requires the supply of waste wood fiber and PE material.
We fulfill requirements for raw materials under both purchase orders and supply contracts. In the year ended December 31, 2011, we purchased
substantially all of our waste wood fiber requirements under purchase orders, which do not involve long-term supply commitments. Substantially all of our
PE material purchases are under short-term supply contracts that average approximately two years, for which pricing is negotiated as needed. The PE material
supply contracts have not had a material adverse effect on our business.
Waste Wood Fiber. Woodworking plants or mills are our preferred suppliers of waste wood fiber because the waste wood fiber produced by these
operations contains little contamination and is low in moisture. These facilities generate waste wood fiber as a byproduct of their manufacturing operations.
If the waste wood fiber meets our specifications, our waste wood fiber supply contracts generally require us to purchase at least a specified minimum
and at most a specified maximum amount of waste wood fiber each year. Depending on our needs, the amount of waste wood fiber that we actually purchase
within the specified range under any supply contract may vary significantly from year to year.
PE Material . The PE material we consumed in 2011 was primarily composed of recovered plastic film and plastic bags. Approximately two billion
pounds of polyethylene resin are used in the manufacture of stretch film and plastic bags in the United States each year. We will continue to seek to meet our
future needs for plastic from the expansion of our existing supply sources and the development of new sources, including post-industrial waste and plastic
coatings. We believe our use of multiple sources provides us with a cost advantage and facilitates an environmentally responsible approach to our procurement
of PE material.
Our ability to source and use a wide variety of PE material is important to our cost strategy. We maintain this ability through the continued expansion of
our plastic reprocessing operations in combination with the advancement of our proprietary material preparation and extrusion processes.
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Third-Party Manufacturing . We outsource the production of certain products to third-party manufacturers under supply contracts that commit us to
purchase minimum levels for each year extending through 2012. We have purchase commitments under the third-party manufacturing contracts of $5.4
million for the year ending December 31, 2012.
Competition
In decking, we compete with wood and other manufacturers of wood alternative decking 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. In railing, we compete with wood and other
manufacturers of composite, non-wood and plastic products, as well as with railings using metal, glass, vinyl and other materials. In privacy fencing, we
compete with wood, vinyl and other manufacturers of composites. In trim, we compete against wood, engineered wood, fiber cement, and other manufacturers
of cellular PVC and similar plastic products.
Our primary competition consists of wood products, which constituted a substantial majority of 2011 decking and railing sales, as measured by linear
feet of lumber. A majority of the lumber used in wooden decks is pressure-treated lumber. Southern yellow pine and fir have a porosity that readily allows the
chemicals used in the pressure treating process to be absorbed. The same porosity makes southern yellow pine susceptible to absorbing moisture, which
causes the lumber to warp, crack, splinter and expel fasteners. In addition to pine and fir, other segments of wood material for decking include redwood, cedar
and tropical hardwoods, such as ipe, teak and mahogany. These products are often significantly more expensive than pressure-treated lumber, but do not
eliminate many of the disadvantages of other wood products.
Industry studies indicate that we have the leading market share of the wood/plastic composite segment of the decking and railing market. Our principal
competitors in the wood/plastic composite decking and railing market include Advanced Environmental Recycling Technologies, Inc., Fiber Composites, LLC
and Timbertech Limited. We also compete with decking products made from 100% plastic lumber that utilizes polyethylene, fiberglass and PVC as raw
materials. Although there are several companies in the United States that manufacture 100% plastic lumber, this segment accounted for only a small percentage
of 2011 decking sales. We believe a number of factors have limited the success of 100% plastic lumber manufacturers, including poor product aesthetics and
physical properties not considered suitable for decking, such as higher thermal expansion and contraction and poor slip resistance. Our principal competitor
in this market is Azek Building Products, Inc.
Our ability to compete depends, in part, on a number of factors outside our control, including the ability of our competitors to develop new non-wood
decking and railing alternatives that are competitive with our products. We believe that the principal competitive factors in the decking and railing market
include product quality, price, aesthetics, maintenance cost, distribution and brand strength. We believe we compete favorably with respect to these factors.
We believe that our products offer aesthetic and cost advantages over the life of a deck when compared to other types of decking and railing materials.
Although a contractor-installed deck built with Trex products in 2011 using a pressure-treated wood substructure generally costs more than a deck made
entirely from pressure-treated wood, Trex products eliminate most of the on-going maintenance required for a pressure-treated deck and are, therefore, less
costly over the life of the deck. We believe that our manufacturing process and utilization of relatively low-cost raw material sources provide us with a
competitive cost advantage relative to other wood/plastic composite and 100% plastic decking products. The scale of our operations also confers cost
efficiencies in manufacturing, sales and marketing.
Government Regulation
We are subject to federal, state and local environmental regulation. The emissions of particulates and other substances from our manufacturing facilities
must meet federal and state air quality standards implemented through air permits issued to us by the Department of Environmental Quality of the
Commonwealth of Virginia,
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the Division of Environmental Protection of Nevada’s Department of Conservation and Natural Resources and the Mississippi Department of Environmental
Quality. Our facilities are regulated by federal and state laws governing the disposal of solid waste and by state and local permits and requirements with
respect to wastewater and storm water discharge. Compliance with environmental laws and regulations has not had a material adverse effect on our business,
operating results or financial condition.
Our operations also are subject to work place safety regulation by the U.S. Occupational Safety and Health Administration, the Commonwealth of
Virginia, the State of Nevada and the State of Mississippi. Our compliance efforts include safety awareness and training programs for our production and
maintenance employees.
Intellectual Property
Our success depends, in part, upon our intellectual property rights relating to our products, production processes and other operations. We rely upon a
combination of trade secret, nondisclosure and other contractual arrangements, and patent, copyright and trademark laws, to protect our proprietary rights.
We have made substantial investments in manufacturing process improvements that have enabled us to increase manufacturing line production rates,
facilitated our development of new products, and produced improvements in our existing products’ dimensional consistency, surface texture and color
uniformity.
Intellectual property rights may be challenged by third parties and may not exclude competitors from using the same or similar technologies, brands or
works. We seek to secure effective rights for our intellectual property, but cannot provide assurance that third parties will not successfully challenge, or avoid
infringing, our intellectual property rights.
We have obtained two patents for complementary methods of preparing the raw materials for the manufacturing phase of production, one patent on an
apparatus for implementing one of the methods, and one patent on a tool for use with the installation of the decking board. We intend to maintain our existing
patents in effect until they expire, beginning in 2015, as well as to seek additional patents as we consider appropriate.
We consider our trademarks to be of material importance to our business plans. The U.S. Patent and Trademark Office has granted us federal
registrations for many of our trademarks. Federal registration of trademarks is effective for as long as we continue to use the trademarks and renew their
registrations. We do not generally register any of our copyrights with the U.S. Copyright Office, but rely on the protection afforded to such copyrights by the
U.S. Copyright Act. This law provides protection to authors of original works, whether published or unpublished, and whether registered or unregistered. We
enter into confidentiality agreements with our employees and limit access to and distribution of our proprietary information. If it is necessary to disclose
proprietary information to third parties for business reasons, we require that such third parties sign a confidentiality agreement prior to any disclosure.
Employees
At December 31, 2011, we had approximately 550 full-time employees, approximately 400 of whom were employed in our manufacturing operations.
Our employees are not covered by collective bargaining agreements. We believe that our relationships with our employees are favorable.
Web Sites and Additional Information
The SEC maintains an Internet web site at www.sec.gov that contains reports, proxy statements, and other information regarding our Company. In
addition, we maintain an Internet corporate web site at www.trex.com. We make available through our web site our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after we electronically file or
furnish such material with or to the SEC. We do not charge any fees to view, print or access these reports on our web site. The contents of our web site are not
a part of this report.
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Executive Officers and Directors
The table below sets forth information concerning our executive officers and directors as of February 29, 2012.
Name
Age
Positions with Company
Ronald W. Kaplan
James E. Cline
J. Mitchell Cox
William R. Gupp
F. Timothy Reese
Adam D. Zambanini
William F. Andrews
Paul A. Brunner
Jay M. Gratz
Frank H. Merlotti, Jr.
Richard E. Posey
Patricia B. Robinson
60
60
53
52
59
35
Chairman, President and Chief Executive Officer; Director
Vice President and Chief Financial Officer
Vice President, Sales
Chief Administrative Officer, General Counsel and Secretary
Vice President, Operations
Vice President, Marketing
Director
Director
Director, Lead Independent Director
Director
Director
Director
80
76
59
61
65
59
Ronald W. Kaplan has served as Chairman, President and Chief Executive Officer of the Company since May 2010. From January 2008 to May 2010,
Mr. Kaplan served as a director and President and Chief Executive Officer of the Company. From February 2006 through December 2007, Mr. Kaplan served
as Chief Executive Officer of Continental Global Group, Inc., a manufacturer of bulk material handling systems. For 26 years prior to this, Mr. Kaplan was
employed by Harsco Corporation, an international industrial services and products company, at which he served in a number of capacities, including as
Senior Vice President-Operations, and, from 1994 through 2005, as President of Harsco’s Gas Technologies Group, which manufactures containment and
control equipment for the global gas industry. Mr. Kaplan received a B.A. degree in economics from Alfred University and an M.B.A. degree from the
Wharton School of Business, University of Pennsylvania.
James E. Cline has served as Vice President and Chief Financial Officer of the Company since March 2008. Mr. Cline served from July 2005 through
December 2007 as the President of Harsco GasServ, a subsidiary of Harsco Corporation and a manufacturer of containment and control equipment for the
global gas industry. From January 2008 through February 2008, in connection with the purchase of Harsco GasServ by Taylor-Wharton International LLC,
which is owned by Windpoint Partners Company, Mr. Cline served as a consultant to the buyers by providing transition management and financial services.
From April 1994 through June 2005, Mr. Cline served as the Vice President and Controller of Harsco GasServ. Mr. Cline served in various capacities with
Huffy Corporation from June 1976 to February 1994, including as the Director of Finance of its True Temper Hardware subsidiary, a manufacturer of lawn
care and construction products with nine manufacturing locations in the United States, Canada and Ireland. Mr. Cline received a B.S.B.A. degree in
accounting from Bowling Green State University.
J. Mitchell Cox has served as Vice President, Sales of the Company since September 2005. From 1981 to August 2005, Mr. Cox was employed by
Kraft Foods Inc., an international manufacturer of packaged food and beverage products, at which he served in a number of capacities, including Region Vice
President from 1996 to August 2005; Director of Category Management from 1994 to 1996; and Division Sales Manager Metro New York/New Jersey from
1992 to 1994. Mr. Cox received a B.A. degree in English from the University of North Carolina at Chapel Hill.
William R. Gupp has served as Chief Administrative Officer, General Counsel and Secretary of the Company since October 2009. From May 2001 to
October 2009, Mr. Gupp served as Vice President and General Counsel of the Company. From March 1993 to May 2001, Mr. Gupp was employed by Harsco
Corporation, an international industrial services and products Company, most recently as Senior Counsel and Director-Corporate
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Development. From August 1985 to March 1993, Mr. Gupp was employed by the law firm of Harter, Secrest & Emery. Mr. Gupp received a B.S. degree in
accounting from Syracuse University and a J.D. from the University of Pennsylvania Law School.
F. Timothy Reese has served as Vice President, Operations of the Company since February 2008. From March 2007 through January 2008, Mr. Reese
served as Operations Director for the Americas Region of DuPont Teijin Films, a DuPont Teijin Films U.S. Limited Partnership and producer of polyester
films. From 1979 to March 2007, Mr. Reese served in various positions with DuPont, including Global Director, Business and Integrated Operations, DuPont
High Performance Films, from November 1995 through November 1998; Director/Plant Manager, Global Operations, Cyrel ® Packaging Graphics Products,
from December 1998 through May 2000; Director, Global Operations and Six Sigma Champion, Cyrel ® Packaging Graphics Products, from June 2000
through February 2001; and Director/Plant Manager in multiple assignments from March 2001 through February 2007, including in Corporate Operations,
Human Resources and DuPont Chemical Solutions Enterprise. Mr. Reese served in the U.S. Navy and received a B.S. in ocean engineering with an emphasis
on mechanical engineering from the U.S. Naval Academy.
Adam D. Zambanini has served as Vice President, Marketing of the Company since January 2011. From September 2005 through December 2010,
Mr. Zambanini served in a number of capacities at the Company, most recently as Director, Marketing. From January 2000 through September 2005,
Mr. Zambanini was employed by Rubbermaid Commercial Products, most recently as Product Manager. Mr. Zambanini received a B.S. in mechanical
engineering from Penn State University, and a M.B.A. degree from Averett University.
William F. Andrews has served as a director of the Company since April 1999. Mr. Andrews has served as Chairman of Katy Industries, Inc., a
manufacturer of maintenance and electrical products, since October 2001. Mr. Andrews served as Chairman of Corrections Corporation of America from
August 2000 to July 2008 and has served as Chairman of the Executive Committee of the Board since July 2008. Mr. Andrews served as Chairman of the
Singer Sewing Company, a manufacturer of sewing machines, from 2004 to 2010, and continues to serve on the Board. Mr. Andrews has been a Principal of
Kohlberg & Company, a venture capital firm, since 1994, and served as Chairman of Allied Aerospace Company from 2000 to 2006. Prior to 2002, he
served in various positions, including Chairman of Scovill Fasteners Inc.; Chairman of Northwestern Steel and Wire Company; Chairman of SchraderBridgeport International, Inc.; Chairman, President and Chief Executive Officer of Scovill Manufacturing Co., where he worked for over 28 years; Chairman
and Chief Executive Officer of Amdura Corporation; Chairman of Utica Corporation; and Chairman, President and Chief Executive Officer of Singer Sewing
Company. Mr. Andrews also serves as a director of Black Box Corporation, O’Charley’s Restaurants and Thomas Nelson Publishing Co. Mr. Andrews
received a B.S. degree in business administration from the University of Maryland and an M.B.A. degree in marketing from Seton Hall University.
Paul A. Brunner has served as a director of the Company since February 2003. Mr. Brunner is President and Chief Executive Officer of Spring Capital
Inc., a merchant bank, which he founded in 1985. From 1982 to 1985, Mr. Brunner served as President and Chief Executive Officer of U.S. Operations of
Asea-Brown Boveri, a multi-national Swiss manufacturer of high technology products. In 1967, he joined Crouse Hinds Company, a manufacturer of
electronics and electronic equipment, and through 1982 held various positions with that company, including President and Chief Operating Officer, Executive
Vice President of Operations, Vice President of Finance and Treasurer, and Director of Mergers and Acquisitions. Mr. Brunner served as a director of Johnson
Controls, Inc. from 1983 through 2007, and as Chairman of its Audit Committee from 1989 to 2005. From 1959 to 1967, he worked for Coopers &
Lybrand, an international accounting firm, as an audit supervisor. Mr. Brunner is a Certified Public Accountant. He received a B.S. degree in accounting from
the University of Buenos Aires and an M.B.A. degree in management from Syracuse University.
Jay M. Gratz has served as a director of the Company since February 2007, and Lead Independent Director since May 2010. Mr. Gratz has served as
the Chief Financial Officer of VisTracks, Inc., an application enabling platform service provider, since March 2010, and a director of such company since
April 2010. Mr. Gratz was a
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partner in Tatum LLC, a national executive services and consulting firm that focuses on the needs of the Office of the CFO between February 2010 and March
2010. From October 2007 through February 2010, Mr. Gratz was an independent consultant. From 1999 through October 2007, Mr. Gratz served as
Executive Vice President and Chief Financial Officer of Ryerson Inc., a metals processor and distributor, and as President of Ryerson Coil Processing
Division from November 2001 until October 2007. Mr. Gratz served as Vice President and Chief Financial Officer of Inland Steel Industries from 1994
through 1998, and served in various other positions, including Vice President of Finance, within that company since 1975. Mr. Gratz is a Certified Public
Accountant. He received a B.A. degree in economics from State University of New York in Buffalo and an M.B.A. degree from Northwestern University
Kellogg Graduate School of Management.
Frank H. Merlotti, Jr. has served as a director of the Company since February 2006. Mr. Merlotti has served as President of the Coalesse business unit
of Steelcase, Inc., a manufacturer of office furniture and furniture systems, since October 2006, and served as President of Steelcase North America from
September 2002 through September 2006. Mr. Merlotti served as President and Chief Executive Officer of G&T Industries, a manufacturer and distributor of
fabricated foam and soft-surface materials for the marine, office furniture and commercial building industries, from August 1999 to September 2002. From
1991 through 1999, Mr. Merlotti served as President and Chief Executive Officer of Metropolitan Furniture Company, a Steelcase Design Partnership
company. From 1985 through 1999, Mr. Merlotti served as General Manager of the Business Furniture Division of G&T Industries.
Richard E. Posey has served as a director of the company since May 2009. He served as President and Chief Executive Officer of Moen Incorporated, a
leading manufacturer in the global faucet market, for six years before retiring in 2007. Prior to joining Moen, Mr. Posey was President and Chief Executive
Officer of Hamilton Beach / Proctor Silex, Inc. for five years. Mr. Posey began his career at S.C. Johnson & Son, where for 22 years he served in a series of
increasingly responsible management positions, both overseas and in the U.S., culminating with Executive Vice President, Consumer Products, North
America. Mr. Posey is a Founding Trustee, Virginia Commonwealth University School of Engineering Foundation. He received a B.A. degree in English from
The University of Southern California and an M.B.A. degree from The University of Michigan.
Patricia B. Robinson has served as a director of the Company since November 2000. Ms. Robinson has been an independent consultant since 1999.
From 1977 to 1998, Ms. Robinson served in a variety of positions with Mead Corporation, a forest products company, including President of Mead School
and Office Products, Vice President of Corporate Strategy and Planning, President of Gilbert Paper, Plant Manager of a specialty machinery facility and
Product Manager for new packaging product introductions. Ms. Robinson received a B.A. degree in economics from Duke University and an M.B.A. degree
from the Darden School at the University of Virginia.
Item 1A.
Risk Factors
Our business is subject to a number of risks, including the following:
We may not be able to grow unless we increase market acceptance of our products, compete effectively and develop new products and
applications.
Our primary competition consists of wood products, which constitute a substantial majority of decking, railing, porches, fencing and trim sales. Since
wood/plastic composite products were introduced to the market in the early 1990’s, their market acceptance has increased, but during the last few years, the
rate of conversion from purchasing wood products to purchasing wood/plastic composite products has slowed. Our ability to grow will depend largely on our
success in continuing to convert demand for wood in decking, railing, fencing, and trim applications into a demand for Trex products. To increase our
market share, we must overcome:
•
the consumer lack of awareness of the enhanced value of non-wood decking, railing, fencing and trim alternatives in general and Trex brand
products in particular;
•
the resistance of many consumers and contractors to change from well-established wood products;
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•
the consumer lack of awareness that the greater initial expense of Trex decking, railing, fencing and trim compared to wood is a one-time cost that
is realized over time as Trex products have a longer life span than wood;
•
the established relationships existing between suppliers of wood decking, railing, fencing and trim products and contractors and homebuilders;
•
actual and perceived quality issues with first generation wood/plastic composite products; and
•
the competition from other wood-alternative manufacturers.
We must also compete with a number of companies in the wood/plastic composites segment of the decking, railing, fencing and trim markets and with
wood producers that currently have more production capacity than is required to meet the demand for such products. Our failure to compete successfully in
such markets could have a material adverse effect on our ability to replace wood or increase the market share of wood/plastic composites compared to wood.
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 non-wood
alternatives that are more competitive with Trex products.
In addition to the above, substantially all of our revenues are derived from sales of our proprietary wood/plastic 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 product
quality or acceptance of the Trex wood/polyethylene composite material, our lack of product diversification could have a significant adverse impact on our net
sales levels.
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.
We will be able to expand our net sales and to sustain and enhance profitable operations only if we succeed in maintaining the quality and performance
of our products. If we should not be able to produce high-quality products at standard manufacturing rates and yields, unit costs may be higher. A lack of
product performance would negatively affect our profitability by impeding acceptance of our products in the marketplace and by leading to higher product
replacement and consumer relations expenses. In recent periods, we have experienced significant warranty expenses related to a small portion of our production
manufactured at our Fernley, Nevada facility prior to 2007 and have increased our warranty reserve accordingly. We have limited our financial exposure by
agreeing to settle a nationwide class action lawsuit which fixes our obligation in each claim to provide replacement product and provide a partial labor
reimbursement. However, because the establishment of reserves is an inherently uncertain process involving estimates of the number of future claims, our
ultimate losses may exceed our warranty reserve. Increases we have made to the warranty reserve and payments for related claims in recent years have had a
material adverse effect on our profitability and cash flows in those periods. Future increases to the warranty reserve could have a material adverse effect on our
profitability and cash flows in the periods in which we make such increases and pay such claims.
In addition, our products are used outdoors and are sometimes subject to heavy use and harsh exposure to the environment. Although our Limited
Warranty excludes any conditions attributable to “any act of God (such as flooding, hurricane, earthquake, lightning, etc., ), environmental condition (such
as air pollution, mold, mildew, etc.), staining from foreign substances (such as dirt, grease, oil, etc.), or normal weathering (defined as exposure to sunlight,
weather and atmosphere which may cause any colored surface to gradually fade, chalk, or accumulate dirt or stains”), to the extent that our products are
affected in any way, this may lead to an increased risk of product liability claims or litigation.
We are currently defending a number of class action lawsuits based upon mold growth on our products. These claims, as well as other potential claims,
are a potential financial exposure to us and could cause adverse
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publicity, which in turn could result in a loss of consumer confidence in our products and also reduce our sales. Product quality claims could increase our
expenses and have a material adverse effect on demand for our products and, consequently, reduce our net sales, net income and liquidity.
Our business is subject to risks in obtaining the raw materials we use at acceptable prices.
The production of our product requires substantial amounts of wood fiber and PE material. Our business strategy is to create a substantial cost
advantage over our competitors by using recycled plastic and reclaimed wood. Our business could suffer from the termination of significant sources of raw
materials, the payment of higher prices for raw materials or from the failure to obtain sufficient additional raw materials to meet planned increases in
production. Our ability to obtain adequate supplies of PE material 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 distribution centers and off-shore
sources.
We sell to certain customers that 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 customers account for a significant percentage of our sales. Specifically, sales through our 15 largest customers accounted for
approximately 89% of gross sales during fiscal year 2011, 92% during fiscal year 2010 and 89% during fiscal year 2009.
We expect that a significant portion of our 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 negative impact on our business, financial condition and results
of operations.
We have limited ability to control or project inventory build-ups in our distribution channel that can negatively affect our sales in
subsequent periods.
The dynamic nature of our industry can result in substantial fluctuations in inventory levels of Trex products carried in our two-step distribution
channel. We have limited ability to control or precisely project inventory build-ups, which can adversely affect our net sales levels in subsequent periods. We
make the substantial majority of our sales to wholesale distributors, who, in turn, sell our products to local lumber yards. Because of the seasonal nature of
the demand for decking, railing, fencing and trim, 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 our late first through third fiscal quarters.
Accordingly, our results for the second and third fiscal 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 resulting from escalating raw materials costs,
increases in the number of competitive producers and in the production capacity of those competitors, the rapid pace of product introduction and innovation,
changes in the levels of home-building and remodeling expenditures, and the cost and availability of credit. Weather-related demand fluctuations can also affect
inventory levels. Unexpected cool weather or extraordinary rainfall can result in inventory build-ups, which adversely affects sales of our products.
The demand for our products is influenced by general economic conditions and could be adversely affected by economic downturns.
The demand for our products is correlated to changes in the health of the economy in general, and the level of activity in home improvements and, to a
much lesser extent, new home construction. These activity levels, in turn, are affected by such factors as home equity values, consumer spending habits,
employment, interest rates and inflation. Market conditions in the housing industry slowed significantly in 2008 and subsequent periods thereafter,
particularly in new home construction. Home equity values in many markets that decreased significantly during those time periods have not recovered or have
only begun to recover. This devaluation in home equity values has adversely affected the availability of home equity withdrawals, which have resulted in
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decreased home improvement spending. Beginning in 2008, the economy has suffered an unprecedented downturn. We cannot predict when the economy will
recover and whether the home remodeling and new home construction environment will stabilize or worsen. Any continued economic downturn could reduce
consumer income or equity capital available for spending on discretionary items such as decking, railing, porches, fencing and trim, which could adversely
affect the demand for our products.
We have significant capital invested in property, plant and equipment that may become obsolete or impaired and result in a charge to our
earnings.
At December 31, 2011, we had $115.2 million of net property, plant and equipment. The improvement we seek to make to our manufacturing
processes sometimes involves the implementation of new technology and replacement of equipment at our manufacturing facilities, which may result in
charges to our earnings if the existing equipment is not fully depreciated. In September 2007, we suspended operations at our Olive Branch facility and
consolidated all of our manufacturing operations into our Winchester and Fernley sites. In September 2009, we recorded a pre-tax impairment charge of $23.3
million related to the long-lived assets held at the facility. Of our net property, plant and equipment at December 31, 2011, approximately $9.9 million is
located at our Olive Branch, Mississippi manufacturing facility. We do not currently anticipate further impairments on the remaining assets. However,
changes in the expected cash flows related to the facility could result in additional impairment charges and reduced earnings in future periods.
Our level of indebtedness, and ability to continue to obtain financing on favorable terms, could adversely affect our financial health and
ability to compete.
As of December 31, 2011, we had $91.9 million of total indebtedness. Our level of indebtedness could have important consequences. For example, it
may:
•
increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations;
•
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of
our cash flow to fund working capital, capital expenditures and other general corporate purposes;
•
limit our ability to borrow additional funds to alleviate liquidity constraints, as a result of financial and other restrictive covenants in our
indebtedness;
•
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•
place us at a competitive disadvantage relative to companies that have less indebtedness; and
•
limit our ability to refinance our principal secured indebtedness.
In addition, our senior secured credit facility imposes operating and financial restrictions that 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. These restrictions may
limit our ability to:
•
incur additional indebtedness and additional liens on our assets;
•
engage in mergers or acquisitions or dispose of assets;
•
enter into sale-leaseback transactions;
•
pay dividends or make other distributions;
•
voluntarily prepay other indebtedness;
•
enter into transactions with affiliated persons;
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•
make investments; and
•
change the nature of our business.
We may incur indebtedness in addition to our current indebtedness. Any additional indebtedness we may incur in the future could subject us to similar
or even more restrictive conditions.
Our ability to refinance our indebtedness will depend on our ability in the future to generate cash flows from operations and to raise additional funds,
including through the offering of equity or debt securities. We may not be able to generate sufficient cash flows from operations or to raise additional funds in
amounts necessary for us to repay our indebtedness when such indebtedness becomes due and to meet our other cash needs.
Our ability to make scheduled principal and interest payments on our convertible notes, borrow and repay amounts under our revolving 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 credit facility, which may be declared payable immediately
based on a default and which could result in a cross-default under our $91.9 million principal amount of outstanding convertible notes. Our ability to borrow
under our revolving credit facility is tied to a borrowing base that consists of specified receivables and inventory. To remain in compliance with our credit
facility, we must maintain specified financial ratios based on our levels of debt, capital, net worth, fixed charges, and earnings (excluding extraordinary gains
and extraordinary non-cash losses) before interest, taxes, depreciation and amortization, all of which are subject to the risks of our business.
Item 2.
Properties
We lease our corporate headquarters in Winchester, Virginia, which consists of approximately 32,000 square feet of office space, under a lease that
expires in March 2020. In 2005, in anticipation of relocating our corporate headquarters, we entered into an agreement to lease approximately 55,000 square
feet of office space in Dulles, Virginia. The lease expires in mid-2019. Subsequently, we reconsidered our decision to relocate our corporate headquarters and
decided not to move. We have executed subleases for the entire space we currently lease. The terms of the existing subleases expire in years 2012 to 2015. For a
description of our financial reporting in connection with the Dulles lease agreement, see Note 13 to our consolidated financial statements appearing elsewhere in
this report.
We own approximately 74 contiguous acres of land in Winchester, Virginia and the buildings on this land. The site includes our original manufacturing
facility, which contains approximately 115,000 square feet of space, our research and development technical facility, which contains approximately 30,000
square feet of space, a mixed-use building, which contains approximately 173,000 square feet of space, and an additional manufacturing facility, which
contains approximately 150,000 square feet of space. We own the land and the manufacturing facility on the Fernley, Nevada site, which contains
approximately 250,000 square feet of manufacturing space. Our Fernley site is located on approximately 37 acres, which includes outside open storage. We
own approximately 102 acres of land in Olive Branch, Mississippi and the buildings on this land. The site contains four buildings with approximately
200,000 square feet for manufacturing and raw material handling operations. In September 2007, we suspended operations at our Olive Branch facility and
consolidated all of our manufacturing operations into our Winchester and Fernley sites.
We lease a total of approximately 1.0 million square feet of storage warehouse space under leases with expiration dates ranging from 2012 to 2015. For
information about these leases, see Note 10 to our consolidated financial statements appearing elsewhere in this report.
The equipment and machinery we use in our operations consist principally of plastic and wood conveying and processing equipment. We own all of our
manufacturing equipment. We lease forklift equipment at our facilities under operating leases.
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We regularly evaluate our various facilities and equipment and make capital investments where necessary. In 2011, we spent a total of $7.4 million on
capital expenditures, primarily to make process and productivity improvements. We estimate that our capital expenditures in 2012 will be in approximately
$10 to $15 million. We expect to use these expenditures principally to make process and productivity improvements and upgrade systems.
Item 3.
Legal Proceedings
On January 19, 2009, a purported class action case was commenced against the Company in the Superior Court of California, Santa Cruz County, by
the lead law firm of Lieff, Cabraser, Heimann & Bernstein, LLP and certain other law firms (the “Lieff Cabraser Group”) on behalf of Eric Ross and Bradley
S. Hureth and similarly situated plaintiffs. These plaintiffs generally allege certain defects in the Company’s products, and that the Company has failed to
provide adequate remedies for defective products. On February 13, 2009, the Company removed this case to the United States District Court, Northern
District of California. On January 21, 2009, a purported class action case was commenced against the Company in the United States District Court, Western
District of Washington by the law firm of Hagens Berman Sobol Shapiro LLP (the “Hagens Berman Firm”) on behalf of Mark Okano and similarly situated
plaintiffs, generally alleging certain product defects in the Company’s products, and that the Company has failed to provide adequate remedies for defective
products. This case was transferred by the Washington Court to the California Court as a related case to the Lieff Cabraser Group’s case.
On July 30, 2009, the U.S. District Court for the Northern District of California preliminarily approved a settlement of the claims of the lawsuit
commenced by the Lieff Cabraser Group involving surface flaking of the Company’s product, and on March 15, 2010, it granted final approval of the
settlement. On April 14, 2010, the Hagens Berman Firm filed a notice to appeal the District Court’s ruling to the United States Court of Appeals for the Ninth
Circuit. On July 9, 2010, the Hagens Berman Firm dismissed their appeal, effectively making the settlement final.
On March 25, 2010, the Lieff Cabraser Group amended its complaint to add claims relating to alleged defects in the Company’s products and alleged
misrepresentations relating to mold growth. The Hagens Berman firm has alleged similar claims in its original complaint. In its Final Order approving the
surface flaking settlement, the District Court consolidated the two pending actions relating to the mold claims, and appointed the Hagens Berman Firm as lead
counsel in this case. The Company believes that these claims are without merit, and will vigorously defend this lawsuit.
On December 15, 2010, a purported class action case was commenced against the Company in the United States District Court, Western District of
Kentucky, by the lead law firm of Cohen & Malad, LLP (“Cohen & Malad”) on behalf of Richard Levin and similarly situated plaintiffs, and on June 13,
2011, a purported class action was commenced against the Company in the Marion Circuit/Superior Court of Indiana by Cohen & Malad on behalf of Ellen
Kopetsky and similarly situated plaintiffs. On June 28, 2011, the Company removed the Kopetsky case to the United States District Court, Southern District
of Indiana. On August 11, 2011, a purported class action was commenced against the Company in the 50 th Circuit Court for the County of Chippewa,
Michigan on behalf of Joel and Lori Peffers and similarly situated plaintiffs. On August 26, 2011, the Company removed the Peffers case to the United States
District Court, Western District of Michigan. The plaintiffs in these purported class actions generally allege certain defects in the Company’s products and
alleged misrepresentations relating to mold growth. The Company believes that these claims are without merit, and will vigorously defend these lawsuits.
The Company has other lawsuits, as well as other claims, pending against it which are ordinary routine litigation and claims incidental to the
business. Management has evaluated the merits of these other lawsuits and claims, and believes that their ultimate resolution will not have a material effect on
the Company’s consolidated financial condition, results of operations, liquidity or competitive position.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Common Stock
Our common stock has been listed on the New York Stock Exchange, or NYSE, since April 8, 1999. Between April 8, 1999 and November 22,
2009, it was listed under the symbol “TWP”. Effective November 23, 2009, the symbol changed to “TREX”. The table below shows the reported high and
low sale prices of our common stock for each quarter during 2011 and 2010 as reported by the New York Stock Exchange:
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 33.39
$22.68
34.00
23.24
15.40
14.53
25.97
23.78
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 22.00
26.51
$15.39
18.94
18.42
16.38
23.01
24.67
Dividend Policy
We have never paid cash dividends on our common stock. We intend to retain future earnings, if any, to finance the development and expansion of our
business and, therefore, do not anticipate paying any cash dividends on the common stock in the foreseeable future. Under the terms of our credit agreement,
there are restrictions on our ability to pay dividends.
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Stockholder Return Performance Graph
The following graph and table show the cumulative total stockholder return on Trex Company’s common stock for the last five fiscal years compared to
the Russell 2000 Index and the Standard and Poor’s 600 Building Products Index. The graph assumes $100 was invested on December 31, 2006 in (1) Trex
Company common stock, (2) the Russell 2000 Index and (3) the S&P 600 Building Products Index, and assumes reinvestment of dividends and market
capitalization weighting as of December 31, 2007, 2008, 2009, 2010 and 2011.
Trex Company
Russell 2000
S&P 600 BPI
December 31,
2006
December 31,
2007
December 31,
2008
December 31,
2009
December 31,
2010
2011
$ 100.00
$ 100.00
$ 100.00
$
$
$
$ 71.91
$ 65.17
$ 65.26
$
$
$
$ 104.67
$ 105.13
$ 92.99
$ 100.09
$ 100.74
$ 87.38
37.18
98.43
85.84
85.63
82.88
81.87
December 31,
Other Stockholder Matters
As of February 20, 2012, there were approximately 220 holders of record of our common stock.
In 2011, we submitted to the NYSE in a timely manner the annual certification that our Chief Executive Officer was not aware of any violation by us of
the NYSE corporate governance listing standards.
16
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Item 6.
Selected Financial Data
The following table presents selected financial data as of December 31, 2011, 2010, 2009, 2008 and 2007 and for each of the years in the five-year
period ended December 31, 2011.
The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and related notes thereto appearing elsewhere in this report.
2011 (1)
2010 (2)
Statement of Operations Data:
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Impairment of long-lived assets
Income (loss) from operations
Interest expense, net
Income (loss) before income taxes
Benefit for income taxes
Net income (loss)
Basic earnings (loss) per share
Basic weighted average shares outstanding
Diluted earnings (loss) per share
Diluted weighted average shares outstanding
$
266,789
203,998
62,791
60,620
—
2,171
16,364
(14,193)
(2,605)
$
(11,588)
$
(0.75)
15,388,456
$
(0.75)
15,388,456
$
$
Year Ended December 31,
2009 (3)
(In thousands, except share and per share data)
317,690
244,875
72,815
67,764
—
5,051
15,288
2007 (4)
$
329,194
242,349
86,845
66,958
—
19,887
15,282
4,605
(750)
$
5,355
$
0.36
14,956,927
$
0.35
15,113,083
$
(10,066)
(0.66)
15,187,028
$
(0.66)
15,187,028
272,286
191,759
80,527
65,257
23,251
(7,981)
14,699
(22,680)
(5,811)
$ (16,869)
$
(1.12)
15,061,603
$
(1.12)
15,061,603
$
18,994
(9,773)
(1,465)
$
35,063
(6,638)
(32,100)
$
$
(10,237)
(171)
$
$
$
2008
328,952
302,311
26,641
119,439
—
(92,798)
11,503
(104,301)
(26,105)
$ (78,196)
$
(5.25)
14,884,174
$
(5.25)
14,884,174
Cash Flow Data:
Cash provided by (used in) operating activities
Cash used in investing activities
Cash provided by (used in) financing activities
Other Data (unaudited):
EBITDA (5)
Balance Sheet Data:
Cash and cash equivalents and restricted cash
Working capital
Total assets
Total debt (including derivatives)
Total stockholder’s equity
(1)
33,847
(9,367)
(47,224)
33,042
(8,594)
(1,325)
(1,163)
(24,035)
24,592
$
20,589
$
24,666
$
38,172
$
44,763
$
(70,307)
$
41,526
(18,574)
228,090
86,425
92,499
$
27,270
66,057
247,815
85,095
102,922
$
19,514
49,214
$
23,189
54,086
296,085
103,563
122,868
$
66
37,923
310,067
98,002
115,603
$
$
244,543
$
77,571
110,198
$
$
Year ended December 31, 2011 was materially affected by a pre-tax increase of $10.0 million to the warranty reserve and a $2.6 million income tax
benefit as a result of the settlement of uncertain tax positions.
17
Table of Contents
(2)
(3)
(4)
(5)
Year ended December 31, 2010 was materially affected by a pre-tax increase of $15.0 million to the warranty reserve and $3.9 million for minimum
purchase penalties.
Year ended December 31, 2009 was materially affected by pre-tax impairment of long-lived assets at idle Olive Branch facility of $23.3 million.
Year ended December 31, 2007 was materially affected by pre-tax increases to the warranty reserve of $46.7 million and tax valuation allowance of
$19.4 million as disclosed in the Company’s previous filings.
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, or 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 non-cash and non-operating charges to net income or loss. For these reasons, management
believes that EBITDA provides important supplemental information to investors regarding the operating performance of the Company and facilitates
comparisons by investors between the operating performance of the Company and the operating performance of its competitors. Management believes
that consideration of EBITDA should be supplemental, because EBITDA has limitations as an analytical financial measure. These limitations include
the following:
•
EBITDA does not reflect the Company’s cash expenditures, or future requirements for capital expenditures, or contractual commitments;
•
EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s
indebtedness;
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the
future, and EBITDA does not reflect any cash requirements for such replacements;
•
EBITDA does not reflect the effect of earnings or charges resulting from matters the Company considers not to be indicative of its ongoing
operations; and
•
not all of the companies in the Company’s industry may calculate EBITDA in the same manner in which the Company calculates EBITDA,
which limits its usefulness as a comparative measure.
The Company compensates for these limitations by relying primarily on its GAAP results to evaluate its operating performance and by considering
independently the economic effects of the foregoing items that are not reflected in EBITDA. As a result of these limitations, EBITDA should not be considered
as an alternative to net income (loss), as calculated in accordance with GAAP, as a measure of operating performance, nor should it be considered as an
alternative to cash flows as a measure of liquidity. The following table sets forth, for the years indicated, a reconciliation of EBITDA to net income (loss):
Net income (loss)
Plus interest expense, net
Plus income tax provision (benefit)
Plus depreciation and amortization
Plus impairment of long-lived assets
EBITDA
18
2011
2010
$(11,588)
16,364
(2,605)
18,418
—
$ 20,589
$(10,066)
15,288
(171)
19,615
—
$ 24,666
Year Ended December 31,
2009
(In thousands)
$(16,869)
14,699
(5,811)
22,902
23,251
$ 38,172
2008
2007
$ 5,355
15,282
(750)
24,876
—
$ 44,763
$(78,196)
11,503
(26,105)
22,491
—
$ (70,307)
Table of Contents
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. All statements regarding our expected financial position and operating results, our business
strategy, our financing plans, forecasted demographic and economic trends relating to our industry and similar matters are forward-looking
statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,”
“expect,” “intend” or similar expressions. We cannot promise you that our expectations in such forward-looking statements will turn out to be
correct. Our actual results could be materially different from our expectations because of various factors, including the factors discussed under “Item
1A. Risk Factors.” These statements are also subject to risks and uncertainties that could cause the Company’s actual operating results to differ
materially. Such risks and uncertainties include the extent of market acceptance of the Company’s products; the costs associated with the development
and launch of new products and the market acceptance of such new products; the sensitivity of the Company’s business to general economic
conditions; the Company’s ability to obtain raw materials at acceptable prices; the Company’s ability to maintain product quality and product
performance at an acceptable cost; the level of expenses associated with product replacement and consumer relations expenses related to product
quality; and the highly competitive markets in which the Company operates.
Overview
General. Trex Company, Inc. (the “Company”), is the largest manufacturer of wood-alternative decking and railing products, which are marketed
under the brand name Trex ®. We offer a comprehensive set of aesthetically durable, low maintenance product offerings in the decking, railing, porch, fencing
and trim categories. We believe that the range and variety of our product offerings allow consumers to design much of their outdoor living space using Trex
brand products.
We have three principal decking products: Trex Transcend®, Trex Accents®, and Trex Escapes®; two railing products: Trex Designer Series Railing ®
and Trex Transcend Railing; two fencing products: Trex Seclusions ® and Trex Surroundings®; and a cellular PVC outdoor trim product, TrexTrim ™. In
addition, we offer Trex Hideaway ®, which is a hidden fastening system for specially grooved boards. In 2011, we introduced Trex Enhance ™ decking, which
like Transcend features a protective shell for enhanced protection against fading, staining, and scratching; Trex Transcend Porch Flooring and Railing
System; Trex DeckLighting ™; and Trex Elevations™, our newest product offering of steel deck framing.
Highlights related to the fourth quarter and full year 2011 include:
•
Net sales decreased 16% in 2011 due to poor weather conditions in the deck building season in certain regions of the United States, reduced
consumer spending due to lower consumer confidence in an unfavorable macroeconomic environment and a shift of Transcend sales from early
2011 into late 2010 as customers purchased Transcend ahead of the announced 2011 price increase.
•
We generated positive cash flow from operations, reduced our debt by $8.1 million and ended the year with $41.5 million in cash, $37 million of
which is restricted and will be used to pay down our convertible debt in 2012. We had no borrowings on our credit facility during 2011.
•
We recorded a $10 million increase to the warranty reserve to support future warranty claim obligations related to product produced at our Fernley,
Nevada facility prior to 2007.
•
We recorded a $2.6 million tax benefit due to the resolution of uncertain tax positions and continue to maintain a valuation allowance on our net
deferred tax assets.
Following the end of our 2011 fiscal year, on January 6, 2012, we entered into a new credit facility that increases our borrowing capacity to $100
million and affords more favorable interest rates.
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Net Sales. Net sales consist of sales and freight, net of returns and discounts. The level of net sales is principally affected by sales volume and the
prices paid for Trex products. Our branding and product differentiation strategy enables us to command premium prices over wood products.
Sales Incentives / Early Buy Program: As part of our normal business practice and consistent with industry practices, we have historically provided
our distributors and dealers incentives to build inventory levels before the start of the prime deck-building season to ensure adequate availability of product to
meet anticipated seasonal consumer demand and to enable production planning. These incentives, which together we reference as our “early buy program,”
include prompt payment discounts and favorable payment terms. In addition, from time to time we may offer price discounts or volume rebates on specified
products and other incentives based on increases in distributor purchases as part of specific promotional programs.
We launched our early buy program for the 2012 decking season in December 2011. The timing and terms of the 2012 program are generally consistent
with the timing and terms of the 2011 program launched in December 2010. To qualify for early buy program incentives, customers must commit to the terms
of the program which specify eligible products and quantities, order deadlines and available terms, discounts and rebates. There are no product return rights
granted to our distributors except those granted pursuant to the warranty provisions of our agreements with distributors. We generally do not extend the
payment terms beyond those offered in the program. In addition, our products are not susceptible to rapid changes in technology that may cause them to
become obsolete. The early buy program can have a significant impact on our sales, receivables and inventory levels. We have provided further discussion of
our receivables and inventory in the liquidity and capital resources section.
Gross Profit. Gross profit represents the difference between net sales and cost of sales. Cost of sales consists of raw materials costs, direct labor costs,
manufacturing costs and freight. Raw materials costs generally include the costs to purchase and transport waste wood fiber, reclaimed polyethylene, or “PE
material,” and pigmentation for coloring Trex products. Direct labor costs include wages and benefits of personnel engaged in the manufacturing process.
Manufacturing costs consist of costs of depreciation, utilities, maintenance supplies and repairs, indirect labor, including wages and benefits, and warehouse
and equipment rental activities.
Selling, General and Administrative Expenses. The largest components of selling, general and administrative expenses are branding and other sales
and marketing costs, which we use to build brand awareness of Trex in the decking, railing, porch, fencing and trim markets. Sales and marketing costs
consist primarily of salaries, commissions and benefits paid to sales and marketing personnel, consumer relations, advertising expenses and other
promotional costs. General and administrative expenses include salaries and benefits of personnel engaged in research and development, procurement,
accounting and other business functions, office occupancy costs attributable to these functions, and professional fees. 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.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2 to our consolidated financial statements appearing elsewhere in this report. Our critical
accounting estimates include the areas where we have made what we consider to be particularly difficult, subjective or complex judgments in making
estimates, and where these estimates can significantly affect our financial results under different assumptions and conditions. We prepare our financial
statements in conformity with accounting principles generally accepted in the United States. As a result, we are required to make estimates, judgments and
assumptions that we believe are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could
be different from these estimates.
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Table of Contents
Inventories . We account for inventories at the lower of cost (last-in, first-out, or “LIFO”) or market 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. At December 31, 2011, the excess of the replacement cost of inventory over the LIFO value of inventory was approximately $28.2
million. We cannot estimate at this time the effect of future reductions, if any, in inventory levels on future operating results.
Product Warranty. We warrant that our products will be free from material defects in workmanship and material and will not check, split, splinter, rot
or suffer structural damage from termites or fungal decay. This warranty extends for a period of 25 years for residential use and 10 years for commercial use.
With respect to our Transcend and Enhance product, we further warrant that the product will not fade in color more than a certain amount and will be
resistant to permanent staining from food substances or mold (provided the stain is cleaned within seven days of appearance). This warranty extends for a
period of 25 years for residential use of our Transcend product, 20 years for residential use of our Enhance product, and 10 years for commercial use of either
product. If there is a breach of such warranties, we have an obligation either to replace the defective product or refund the purchase price. We establish
warranty reserves to provide for estimated future expenses as a result of product defects that result in claims. Reserve estimates are based on management’s
judgment, considering such factors as cost per claim, historical experience, anticipated rates of claims, and other available information. We review and adjust
these estimates, if necessary, on a quarterly basis based on the differences between actual experience and historical estimates.
We continue to receive and settle claims related to material produced at our Nevada facility prior to 2007 that exhibit surface flaking and, during 2011,
recorded an increase of $10.0 million to the warranty reserve for this material. The increase in the reserve was primarily driven by a change in estimate
regarding the number of future claims to be received, and to a lesser extent, an increase in the estimated future cost per claim. In the prior year, we anticipated
that the effects of the settlement of a class action lawsuit related to surface flaking would subside and the number of claims received would substantially
diminish. The number of claims received related to the surface flaking material has declined significantly since 2007 and has continued to decline during
2011. Cash payments for surface flaking claims have decreased from $28 million in 2007 to $8 million in 2011. The rate of decline of claims received in
2011, however, fell short of previous projections. The effect of the shortfall in the rate of decline on claims projections caused the estimated number of future
claims to increase. We have revised our estimates accordingly. The increase in the estimated future cost per claim is a result of an increase in recent actual costs
to settle claims, which management uses to estimate future costs. The cost per claim may vary due to a number of factors, including the average size of
affected decks, the type of replacement material used and the method of claim settlement. As a result of these developments, we recorded an increase to the
warranty reserve of $10.0 million in 2011.
Our analysis is based on currently known facts and a number of assumptions. However, projecting future events such as new claims to be filed each
year and the average cost of resolving each claim 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 flow. We estimate that the number of claims received will continue to decline over time. If the level
of claims does not diminish consistent with our expectations, it could result in additional increases to the warranty reserve and reduced earnings in future
periods. We estimate that a 10% change in the expected number of remaining claims or the expected cost to settle claims may result in approximately a $1.6
million change in the warranty reserve. For additional information about product warranties, see Notes 2 and 13 to the consolidated financial statements
appearing elsewhere in this report.
Contract Termination Costs. In anticipation of relocating our corporate headquarters, we entered into a lease agreement in 2005. We reconsidered and
decided not to move our headquarters. The lease, which began on January 1, 2006 and extends through June 30, 2019, obligates us to lease 55,047 square
feet. We have executed subleases for the entire 55,047 square feet we currently lease. The terms of the existing subleases expire in years 2012 to 2015. We
estimate that the present value of the estimated future sublease rental receipts, net of
21
Table of Contents
transaction costs, will be less than our remaining minimum lease payment obligations under our lease for the office space. Accordingly, we account for the
expected shortfall as contract termination costs and have recorded a liability in accordance with FASB ASC Topic 420, “Exit or Disposal Cost Obligations.
”
To estimate future sublease receipts for the periods beyond the term of the existing subleases, we have assumed that the existing subleases will be
renewed or new subleases will be executed at rates consistent with rental rates in the current subleases. However, management cannot be certain that the timing
of future subleases or the rental rates contained in future subleases will not differ from current estimates. Factors such as the delivery of a significant amount
of new office space or poor economic conditions could have a negative effect on vacancy rates and rental rates in the area. The inability to sublet the office
space in the future or unfavorable changes to key management assumptions used in the estimate of the future sublease receipts may result in material charges
to selling, general and administrative expenses in future periods.
Valuation of Deferred Tax Assets. We account for income taxes and the related accounts in accordance with FASB ASC Topic 740, “Income Taxes.”
Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted
rates expected to be in effect during the year in which the differences reverse. We periodically assess the likelihood that we will be able to recover our deferred
tax assets and reflect any changes in estimates in the valuation allowance. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. At December 31, 2011, we had a valuation
allowance of $24.2 million primarily attributable to the uncertainty related to the realizability of our excess deferred tax assets. We considered all available
evidence, both positive and negative, in determining the need for a valuation allowance. Based upon this analysis, including a consideration of our cumulative
loss history in the three-year period ended December 31, 2011, we determined that it is not more likely than not that our excess deferred tax assets will be
realized.
Stock-Based Compensation. Under the provisions of FASB ASC Topic 718, “Stock Compensation ,” we calculate the grant date fair value of sharebased awards using the Black-Scholes valuation model for grants subsequent to the adoption of ASC 718. Determining the fair value of share-based awards is
judgmental in nature and involves the use of significant estimates and assumptions, including the term of the share-based awards, risk-free interest rates over
the vesting period, expected dividend rates, the price volatility of our shares and forfeiture rates of the awards. Prior to adopting ASC 718, we recognized
forfeitures only as they occurred. We base our fair value estimates on assumptions we believe to be reasonable but that are inherently uncertain. Actual future
results may differ from those estimates.
Results of Operations
The following table shows, for the last three years, selected statement of operations data as a percentage of net sales:
Year Ended December 31,
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Impairment of long-lived assets
Income (loss) from operations
Interest expense, net
Income (loss) before taxes and extraordinary item
Provision (benefit) for income taxes
Net income (loss)
2011
2010
2009
100.0%
100.0%
76.5
23.5
22.7
—
77.1
22.9
21.3
—
1.6
100.0%
70.4
0.8
6.1
22
(5.3)
4.8
(3.2)
(1.0)
—
(4.3%)
(3.2%)
29.6
24.0
8.5
(2.9)
5.4
(8.3)
(2.1)
(6.2%)
Table of Contents
2011 Compared to 2010
Net Sales. Net sales in 2011 decreased 16.0% to $266.8 million from $317.7 million in 2010. The decrease in net sales was attributable to a 22%
decrease in sales volume which was partially offset by an 8% increase in the average price per unit in 2011 compared to 2010. The increase in average price
per unit was driven by a 2011 price increase for Transcend decking products and a shift in sales mix toward higher priced products. We believe the decrease
in sales volume was a result of poor weather conditions in the deck building season in certain regions of the United States, reduced consumer spending due to
lower consumer confidence in an unfavorable macroeconomic environment and a shift of Transcend sales from early 2011 into late 2010 as customers
purchased Transcend ahead of the announced 2011 price increase.
Gross Profit. Gross profit decreased to $62.8 million in 2011 from $72.8 million in 2010. Gross profit as a percentage of net sales increased to 23.5%
in 2011 from 22.9% in 2010. Gross profit in 2011 was adversely affected by a $10.0 million increase to the warranty reserve. Gross profit in 2010 was
adversely affected by $18.9 million of charges including a $15.0 million increase to the warranty reserve and $3.9 million for minimum purchase penalties.
Excluding the aforementioned charges, gross profit in 2011 was $72.8 million, an $18.9 million decrease compared to 2010. Underlying gross margin in
2011 was 27.3%, a 1.6% decrease compared to 2010. The Company recognized a combined 8.5% margin improvement from the following two categories in
2011: the elimination of the 2010 Transcend startup earnings drag and improved manufacturing efficiencies. The aforementioned 8.5% margin improvement
was fully offset by sales related and other items, which decreased margins by 5% and operating at lower levels of capacity utilization, which resulted in 3.6%
of margin deterioration.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $7.2 million, 10.6% to $60.6 million in 2011
from $67.8 million in 2010. Of the $7.2 million decrease, $2.4 million is attributable to the effects of a non-cash charge taken in 2010 that related to our
investment in Denplax, a partially-owned Spanish joint venture. The remaining $4.8 million decrease in 2011 was primarily related to lower branding, claims
servicing, facility expenses, and incentive compensation. As a percentage of net sales, total selling, general and administrative expenses increased to 22.7% in
2011 from 21.3% in 2010.
Interest Expense. Net interest expense increased 7.2% to $16.4 million in 2011 compared to $15.3 million in 2010. The increase in 2011 was due to an
increase in non-cash charges incurred as a result of the debt discount related to the Company’s convertible bonds offset, in part, by a decrease in interest
expense as a result of lower average debt levels in 2011 compared to 2010.
Provision for Income Taxes. We recorded a benefit for income taxes of $2.6 million in 2011 compared to a benefit for income taxes of $0.2 million in
2010. The related effective tax rates were 18.35% in 2011 and 1.7% in 2010. The higher benefit and related effective tax rate for 2011 resulted, primarily, from
the net effects of favorably settling uncertain federal tax positions which had been reserved under the provisions of ASC 740.
2010 Compared to 2009
Net Sales. Net sales in 2010 increased 16.6% to $317.7 million from $272.3 million in 2009. The increase in net sales was primarily the result of an
11% increase in sales volume and a 6% increase in average price per unit in 2010 compared to 2009.
The increase in sales volume primarily reflected a strong demand for our products, particularly its new Transcend decking and railing product
offerings, which we launched in early 2010 and supported with a robust marketing campaign. The sales volumes in late 2010 were favorably influenced by
customers purchasing ahead of the announced 2011 Transcend price increase; however, we cannot quantify the effects of this factor. The increase in average
price per unit in 2010 resulted primarily from a shift in sales mix toward higher priced products, specifically the new Transcend products. The increase in
railing sales reflects a concerted effort by us to improve our railing offerings and capture more of the railing market.
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Table of Contents
Gross Profit. Gross profit decreased 9.6% to $72.8 million in 2010 from $80.5 million in 2009. Gross profit as a percentage of net sales decreased to
22.9% in 2010 from 29.6% in 2009. Gross profit in 2010 was adversely affected by $18.9 million of charges including a $15.0 million increase to the
warranty reserve and $3.9 million for minimum purchase penalties we expected to incur under supply contracts. Excluding the aforementioned charges, gross
profit in 2010 was $91.7 million, an $11.2 million increase compared to 2009 and gross margin was 28.9%. We recognized a combined 480 basis points of
margin improvement from the following three categories in 2010: increased capacity utilization, which contributed 270 basis points of margin improvement;
sales of PE materials, which resulted in 105 basis points of margin improvement as the global plastics market stabilized; and improved manufacturing
efficiencies. This combined 480 basis point margin improvement was fully offset by the start-up costs associated with our 2010 introduction of Transcend,
which resulted in 550 basis points of margin deterioration.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 3.8% to $67.8 million in 2010 from $65.3
million in 2009. The increase in selling, general and administrative expenses in 2010 was primarily related to higher branding expenses and the write-off of the
investment in Denplax, partially offset by a decrease in research and development expenses and lower costs related to the idled Olive Branch facility. Branding
expenses increased $4.3 million in 2010. The increased branding costs in 2010 were principally driven by costs incurred to support the release of Trex
Transcend, a new product line released during the year. During 2010 the company took a $2.4 million charge against its investment in and note receivable
from Denplax, a foreign owned subsidiary. Research and development expenses decreased $1.4 million in 2010 due to higher 2009 costs related to developing
Trex Transcend. Expenses r…