Trex Company, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone quarterly filing; fourth-quarter results are included in the annual and interim data. Trex manufactures recycled wood-plastic composite decking and railing and, following its July 2017 acquisition, provides commercial railing, staging, acoustical and seating products.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $565.2 million | $479.6 million | +17.8% |
| Gross profit | $243.4 million | $187.1 million | +30.1% |
| Gross margin | 43.1% | 39.0% | +4.1 percentage points |
| Income from operations | $142.4 million | $104.0 million | +36.9% |
| Net income | $95.1 million | $67.8 million | +40.2% |
| Diluted EPS | $3.22 | $2.29 | +40.6% |
| Cash from operating activities | $101.9 million | $85.3 million | +19.4% |
| EBITDA, non-GAAP | $159.1 million | $118.1 million | +34.7% |
- Operating margin was approximately 25.2%; net margin was approximately 16.8%; EBITDA margin was approximately 28.2%.
- Residential net sales increased 13.3% to $543.3 million. Commercial net sales contributed $21.8 million from the acquisition date through year-end.
- Cash and cash equivalents were $30.5 million at year-end, compared with $18.7 million in 2016. Working capital was $86.3 million.
- The company had no outstanding debt at December 31, 2017 and had $200 million of available revolving credit capacity. It was in compliance with all debt covenants.
- Capital expenditures were $15.0 million in 2017. Management estimated 2018 capital expenditures of approximately $20 million to $25 million.
- Cash used in investing activities was $86.8 million, primarily reflecting the $71.8 million commercial acquisition and $15.0 million of capital expenditures. Cash used in financing activities was $3.2 million.
Material changes versus the prior comparable period
- Sales growth reflected continued remodeling demand, market-share initiatives against wood products, and broad demand for decking and railing products.
- Gross margin benefited from cost-reduction initiatives, lower raw-material costs and higher capacity utilization. The 2016 comparison included a $9.8 million increase in the legacy surface-flaking warranty reserve; excluding that charge, 2017 gross-margin improvement was approximately 2.0 percentage points.
- SG&A increased 21.5% to $101.0 million, driven by acquisition-related personnel costs, higher incentive compensation, $6.2 million of additional branding and advertising spending, and amortization of acquired intangibles.
- Trex acquired certain assets and liabilities of Staging Concepts Acquisition, LLC for $71.8 million in cash on July 31, 2017. The acquisition added $57.9 million of goodwill and generated a $2.3 million commercial-segment net loss, including $0.5 million of acquisition-related expenses.
- The 2017 effective tax rate was 33.0%, versus 34.0% in 2016. The Tax Cuts and Jobs Act generated a $1.9 million tax benefit from revaluing deferred tax balances, although the company continued to refine its calculation.
- No shares were repurchased under the 2017 repurchase authorization. The company does not pay cash dividends and has no current intention to do so.
Outlook, risks and unusual items
- Management expects to fund planned capital expenditures, warranty obligations and other needs through cash on hand, operating cash flow and the revolving facility for at least the next 12 months.
- The company’s strategy emphasizes innovation, brand expansion, broader distribution, manufacturing productivity, recycling capabilities and expansion into adjacent outdoor-living and commercial product categories.
- Results are seasonal and sensitive to weather, home-improvement activity, construction levels, channel inventory and the timing of distributor incentive programs.
- Legacy surface-flaking claims remain a material contingency. The related warranty reserve was $35.0 million at year-end, including $28.2 million for surface-flaking claims; 2017 settlements totaled $6.96 million, including $5.69 million for surface flaking. A 10% change in estimated remaining claims or settlement cost could change the reserve by approximately $2.8 million.
- Customer concentration is significant: two customers represented approximately 41% of 2017 net sales, and the 15 largest customers represented approximately 90% of gross sales. Two distributors each exceeded 10% of gross sales.
- Raw-material availability and pricing, transportation costs, product quality, competitive pressure from wood and other composite products, economic conditions and possible impairment of acquired goodwill are key risks.
- Contractual cash obligations totaled $115.4 million at year-end, comprising $62.6 million of purchase commitments and $52.8 million of operating lease commitments.
- The company planned to adopt the new revenue-recognition standard in the first quarter of 2018. Management expected no significant impact on the Residential segment but was still evaluating the Commercial segment.
Investor verification points
- Verify the sustainability of residential volume growth, pricing and the 43.1% gross margin after the 2016 warranty-reserve comparison benefit.
- Assess the commercial acquisition’s ability to move from a 2017 net loss and negative EBITDA to profitable growth, including the impact of legacy contracts and acquired goodwill.
- Review future surface-flaking claims, reserve adequacy and cash settlements.
- Monitor customer and distributor concentration, channel inventory levels and seasonal demand.
- Confirm the effect of the Tax Cuts and Jobs Act and subsequent accounting-standard adoptions on future tax rates, revenue presentation and lease liabilities.
- Reconcile non-GAAP EBITDA with GAAP earnings and cash flow when evaluating performance and liquidity.