Trex(TREX) - 2022 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Condensed Consolidated Financial Statements This section presents Trex Company's unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2022 and 2021, along with accompanying notes Condensed Consolidated Statements of Comprehensive Income (Unaudited) | Indicator | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $188,472 | $335,872 | $913,950 | $892,991 | | Gross profit | $46,208 | $128,250 | $338,498 | $342,323 | | Income from operations | $19,351 | $98,096 | $232,111 | $244,940 | | Net income | $14,423 | $73,795 | $174,549 | $183,705 | | Diluted EPS | $0.13 | $0.64 | $1.55 | $1.59 | Condensed Consolidated Balance Sheets Highlights (Unaudited) | Indicator | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total current assets | $245,400 | $401,054 | | Total assets | $841,898 | $920,321 | | Total current liabilities | $180,675 | $88,702 | | Total liabilities | $285,360 | $195,287 | | Total stockholders' equity | $556,538 | $725,034 | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Indicator | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $244,393 | $113,059 | | Net cash used in investing activities | ($108,118) | ($123,096) | | Net cash used in financing activities | ($271,443) | ($57,622) | | Net decrease in cash and cash equivalents | ($135,168) | ($67,659) | Business and Organization The company operates in two segments: Trex Residential, manufacturing wood-alternative decking, and Trex Commercial, providing custom railing systems - Trex operates through two main segments: Trex Residential, its principal business, which manufactures wood-alternative decking and railing, and Trex Commercial, which provides custom railing and staging systems[22] Basis of Presentation Financial statements are prepared under U.S. GAAP, noting reduced demand and inventory drawdown impacting Q3 and Q4 2022 sales - A reduction in demand from distribution partners began in late June 2022 due to concerns over rising interest rates and a slowing economy. This led to channel partners reducing their inventory levels, which negatively impacted Q3 2022 sales and is expected to affect Q4 2022 sales[24] Debt The company established a new $400 million revolving credit facility in May 2022, with $76 million outstanding and $324 million available as of September 30, 2022 - The company established a new $400 million revolving credit facility on May 18, 2022, which matures in 2027[35][36] - As of September 30, 2022, there was $76 million outstanding under the revolving credit facility, with $324 million of available borrowing capacity[43] Stockholders' Equity This section details EPS computation and the stock repurchase program, with 9.0 million shares repurchased out of 11.6 million authorized - Under its stock repurchase program, Trex has repurchased 9.0 million of the 11.6 million authorized shares as of September 30, 2022[51] Revenue from Contracts with Customers Trex Residential revenue is recognized upon shipment, while Trex Commercial revenue from fixed-price contracts is recognized over time, with a $42.5 million backlog - Trex Residential revenue is recognized at a point in time upon product shipment[52] - Trex Commercial had a backlog of $42.5 million in remaining performance obligations as of September 30, 2022, expected to be recognized over the next 24 months[53] Segment Information The company reports on two segments, Trex Residential and Trex Commercial, detailing their respective net sales and EBITDA performance Segment Performance - Nine Months Ended Sep 30, 2022 (In thousands) | Segment | Net Sales (in thousands) | Net Income (Loss) (in thousands) | EBITDA (in thousands) | | :--- | :--- | :--- | :--- | | Trex Residential | $878,892 | $176,939 | $267,725 | | Trex Commercial | $35,058 | ($2,390) | ($2,344) | | Total | $913,950 | $174,549 | $265,381 | Segment Performance - Three Months Ended Sep 30, 2022 (In thousands) | Segment | Net Sales (in thousands) | Net Income (Loss) (in thousands) | EBITDA (in thousands) | | :--- | :--- | :--- | :--- | | Trex Residential | $177,776 | $15,287 | $31,692 | | Trex Commercial | $10,696 | ($864) | ($876) | | Total | $188,472 | $14,423 | $30,816 | Commitments and Contingencies This section discusses product warranty obligations, particularly for pre-2007 products, and plans for a new $400 million manufacturing facility - The company continues to manage warranty claims for surface flaking on products made before 2007. In the first nine months of 2022, the number of claims received was lower than in 2021, but the average cost per claim was significantly higher[72][76] - A 10% change in the expected number or cost of remaining surface flaking claims could change the warranty reserve by approximately $1.6 million[77] - The company began construction on a new manufacturing facility in Little Rock, Arkansas in Q2 2022, with an anticipated cost of approximately $400 million[81] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a significant Q3 2022 downturn, with net sales down 43.9% due to channel inventory reduction, while year-to-date sales increased 2.3% Overview The company operates in two segments and began construction on a new $400 million manufacturing facility in Arkansas in Q2 2022 - Construction began in Q2 2022 on a new Trex Residential manufacturing facility in Arkansas, with an anticipated total investment of approximately $400 million[90] - In August 2022, the company launched the NexTrex Grassroots Movement, a new initiative to expand its plastic film recycling program to communities and organizations[91] Results of Operations Q3 2022 net sales decreased 43.9% to $188.5 million, primarily due to channel inventory reduction, while year-to-date net sales increased 2.3% - Towards the end of June, Trex Residential experienced a reduction in demand from distribution partners due to concerns over rising interest rates and a slowing economy, leading to an inventory drawdown that negatively impacted Q3 and is expected to impact Q4 sales[98] Q3 2022 vs Q3 2021 Performance (in thousands) | Metric | Q3 2022 (in thousands) | Q3 2021 (in thousands) | $ Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $188,472 | $335,872 | $(147,400) | (43.9)% | | Trex Residential Sales | $177,776 | $319,207 | $(141,431) | (44.3)% | | Gross Profit | $46,208 | $128,250 | $(82,042) | (64.0)% | | Gross Margin | 24.5% | 38.2% | - | - | Nine Months 2022 vs 2021 Performance (in thousands) | Metric | YTD 2022 (in thousands) | YTD 2021 (in thousands) | $ Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $913,950 | $892,991 | $20,959 | 2.3% | | Trex Residential Sales | $878,892 | $850,909 | $27,983 | 3.3% | | Gross Profit | $338,498 | $342,323 | $(3,825) | (1.1)% | | Gross Margin | 37.0% | 38.3% | - | - | Liquidity and Capital Resources Cash from operations significantly increased to $244.4 million in the first nine months of 2022, with $348 million used for stock repurchases and $107.9 million for capital expenditures - Cash provided by operations increased to $244.4 million in the first nine months of 2022, up from $113.1 million in the same period of 2021[120][121] - During the first nine months of 2022, the company used $348 million to repurchase common stock and had net borrowings of $76 million[123] - Capital expenditure guidance for the full year 2022 is set at $170 million to $180 million[138] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk exposure during the nine months ended September 30, 2022 - There were no material changes to the Company's market risk exposure during the nine months ended September 30, 2022[147] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal controls - Management concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022[148] PART II OTHER INFORMATION Legal Proceedings The company is involved in routine litigation and claims not expected to materially affect its financial condition or operations - Pending lawsuits and claims are considered ordinary and are not expected to have a material effect on the Company's financial condition or operations[151] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's common stock repurchases during Q3 2022, totaling approximately 1.71 million shares Common Stock Purchases - Q3 2022 | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | July 2022 | 1,709,785 | $58.47 | | August 2022 | 891 | $64.51 | | September 2022 | 57 | $47.40 | | Total Q3 2022 | 1,710,733 | N/A | - As of September 30, 2022, there were 2,628,667 shares remaining for purchase under the authorized stock repurchase program[152] Other Information Trex Company was recognized as one of the 50 Best U.S. Manufacturers by Industry Week magazine in July 2022 - In July 2022, Trex was named one of the 50 Best U.S. Manufacturers by Industry Week magazine, ranking 6th on the list[153] Exhibits This section provides an index of exhibits filed with the Form 10-Q, including corporate governance documents and certifications