Trex Company, Inc. — 2021 Q3 Form 10-Q Summary
Business Context and Reporting Period
Trex manufactures wood-alternative composite decking, residential railing and outdoor living products, primarily through Trex Residential, and engineered railing and staging systems through Trex Commercial. The filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $335.9 million | $231.5 million | $893.0 million | $652.5 million |
| Gross profit | $128.3 million | $85.0 million | $342.3 million | $267.1 million |
| Gross margin | 38.2% | 36.7% | 38.3% | 40.9% |
| Income from operations | $98.1 million | $56.9 million | $244.9 million | $175.5 million |
| Net income | $73.8 million | $42.7 million | $183.7 million | $132.3 million |
| Diluted EPS | $0.64 | $0.37 | $1.59 | $1.14 |
| EBITDA | $108.0 million | $61.5 million | $270.5 million | $187.9 million |
Q3 net sales increased 45.1%, gross profit increased 50.9%, net income increased 72.8%, and EBITDA increased 75.7%. For the nine-month period, net sales increased 36.8%, net income increased 38.9%, and EBITDA increased 44.0%.
Trex Residential generated Q3 sales of $319.2 million, up 46.1%, while Trex Commercial generated $16.7 million, up 27.5%. Nine-month sales were $850.9 million for Trex Residential, up 38.5%, and $42.1 million for Trex Commercial, up 9.7%.
Q3 gross margin benefited from operating leverage and volume growth, although management noted that underlying margin excluding a $6.5 million legacy warranty provision recorded in Q3 2020 declined from 39.5% to 38.2%. Nine-month gross margin declined primarily because of inflation in raw materials and transportation, capacity-expansion start-up costs, higher depreciation, labor shortages and reduced overhead absorption related to the Virginia facility fire.
For the nine months, cash provided by operating activities was $113.1 million versus $12.5 million in 2020. Capital expenditures were $124.5 million versus $99.7 million, including $56.7 million for residential capacity expansion. Cash used in financing was $57.6 million, primarily reflecting $58.9 million of share repurchases. Cash declined to $54.0 million from $121.7 million at December 31, 2020.
Debt and Liquidity
The company had no borrowings under its revolving credit facilities at September 30, 2021 and reported $300 million of available borrowing capacity. The credit agreement expires November 5, 2024, and the company was in compliance with all debt covenants. Management expects cash on hand, operating cash flow and available revolver capacity to fund planned capital expenditures, warranty payments and other cash requirements.
Material Changes Versus the Prior Comparable Period
- Strong residential volume growth reflected sustained outdoor-living demand, market-share gains from wood, and additional capacity coming online.
- September price increases on selected residential products were implemented to address raw-material and transportation inflation.
- Labor shortages constrained production growth and contributed to higher costs.
- Gross margin faced pressure from inflation, capacity-expansion costs, higher depreciation and the Virginia facility fire, despite higher sales and production efficiencies.
- Trex Commercial nine-month EBITDA declined 49.8% to $2.4 million, despite a 9.7% increase in sales, reflecting lower segment profitability.
- Accounts receivable increased to $265.6 million from $106.7 million at year-end, contributing to working-capital use; management expected most of the increase to be collected in the fourth quarter.
Guidance, Outlook, Risks and Unusual Items
Management provided 2021 capital expenditure guidance of $135 million to $155 million. On October 26, 2021, the company announced a planned third U.S. residential manufacturing campus in Little Rock, Arkansas. Construction is expected to begin in early 2022, with initial production anticipated in 2024 and estimated investment of approximately $400 million over five years, funded primarily through ongoing cash generation.
The COVID-19 pandemic had not materially disrupted operations, production or supply chains as of the filing date. Residential demand remained strong, while pandemic-related measures affected new commercial project commitments and could adversely affect future commercial results.
An electrical fire at a Virginia manufacturing building on March 13, 2021 temporarily reduced capacity. The company received $4.7 million of insurance settlements through September 30, including $3.7 million in the third quarter, recorded as a reduction of selling, general and administrative expense.
The legacy surface-flaking warranty reserve was $19.0 million at September 30, 2021, within a total residential warranty reserve of $29.4 million. Claims received declined to 788 from 1,263 in the comparable nine-month period, but average cost per claim increased to $3,492 from $3,396. A 10% change in estimated remaining claims or settlement cost could change the reserve by approximately $1.9 million.
Key risks include commodity and transportation costs, availability of reclaimed polyethylene and wood fiber, labor shortages and wage inflation, capacity execution, seasonality and weather, channel inventory levels, commercial project timing, product warranty claims, competition, cybersecurity, public-health disruptions and future demand conditions.
Important Facts for Investors to Verify
- Whether residential demand and market-share gains remain strong after the capacity expansion and September price increases.
- Whether inflation, labor shortages, transportation costs and start-up expenses continue to pressure gross margin.
- Collection of the elevated accounts receivable balance and the sustainability of operating cash flow relative to capital spending.
- Execution, timing and total cost of the planned $400 million Arkansas manufacturing campus.
- Future Trex Commercial project commitments and profitability, given the nine-month EBITDA decline.
- Adequacy of the surface-flaking and other warranty reserves as claim costs rise.
- Cash requirements for capacity investments, share repurchases and other capital-allocation initiatives.