Trex Reports Record Quarter, Major Leadership Changes: Here's What You Need to Know

Alternative outdoor decking, railing, and lighting manufacturerTrexon Friday reported record financial results in its first quarter. The details:

Revenue of $121 million, up 20% from last year.
Earnings per share up 50% to $0.55.
Gross margin of 40%, up from 38% last year.

In short, a solid result by most measures. However, the earnings results were almost secondary, as the company also announced that Ron Kaplan, the CEO for the past eight years who has led the company's turnaround, and Tim Reese, senior vice president of operations, will both retire. The thing is, it's hard to quantify just how important Kaplan's leadership has been to the company's success in recent years, and in no small part to people like Reese, whom he brought to the company.

Let's take a closer look at both the earnings results and the details of the changes in management.

Tough leader to replaceWhen Kaplan took the top job at Trex in 2008, he was handed a very troubled company that was buried in debt, faced with lawsuits due to product quality issues, and experiencing the worst recession in 80 years. The company that he will be handing to his replacement is light-years beyond that, with essentially no debt, the highest-rated products in the industry, and a dominant market share position.

Here's a look at the change in a few key measures under Kaplan's term:

TREX Gross Profit Margin (TTM) data by YCharts.

As you can see, debt -- which had ballooned to almost half of annual sales -- has largely been eliminated, and sales have rebounded following the recession (in gray). Also, gross margin percent has really strengthened, and (not shown on this chart) improved to the 40% reported in the just-ended quarter.

The key drivers behind these improvements are numerous, but are largely due to focus on better capital management, which included shuttering some of the company's manufacturing capacity to reduce cost, while also investing in product development and manufacturing processes. These have been the core of what has led to the solid improvements to the company's bottom line, which has sharply increased its stock price:

TREX data by YCharts.

New leadership not exactly "new"The new CEO will be Jim Cline, Trex's current CFO, who was brought in by Kaplan in that role in 2008 as part of his rebuilding of the company. While just how well this workswill only be proven out by time, there's a lot to like about this succession. Cline and Kaplan have worked in lockstep on turning Trex into the company it is today, and by all accounts his ability to allocate capital, and his understanding of Trex and the industry, have been central to the company's success these past few years.

Cline will be replaced as CFO by another longtime insider, Bryan Fairbanks, who is currently senior director of supply chain and executive director of international business development. Fairbanks has actually been with Trex the longest, having worked with the company since 2004 in both operations and financial roles. While it wasn't announced who will replace Tim Reese, don't ignore the importance of his role. The reality is, much of Trex's current bottom-line success is due to the company's operational improvements, largely in better manufacturing efficiency.

Kaplan will remain chairman of the board of directors following his retirement in August, and this is undoubtedly a positive. Not only has he been the central driver behind the changes in the company's operations and culture, but his long-term relationship with the new CEO and CFO will add a measure of continuity for the business as it continues to grow.

Looking aheadTrex's guidance for the second quarter -- $136 million in sales -- would be a 12% increase, a record for the quarter and the largest since the housing boom was in full swing in 2006, before the 2009 collapse. It's looking like the company is continuing to drive costs -- as a percentage of revenue -- down as well, with sales, general, and administrative expense falling to 17% of sales last quarter, down from 18.1% in the year-ago quarter, and management indicating that this will remain the case going forward as they leverage their operational improvements. Net interest expense also fell 57% due to the significant reduction in long-term debt.

Lastly, Trex is continuing to take market share, and this has been a large driver behind sales growth as the home improvement market remains relatively slow to grow. Based on management's comments related to late-2013's major distribution expansions, those expansions have been the key driver behind sales growth in the past 18 months, and at some point that growth will slow. Looking ahead, that means much of the company's future growth will have to come from either improvement in the housing market or further expansion in its distribution network to increase its current 40% of total market share, or some combination of both.

Will the new management team be able to keep the momentum going? Only time will tell.

The article Trex Reports Record Quarter, Major Leadership Changes: Here's What You Need to Know originally appeared on Fool.com.

Jason Hall owns shares of Trex. The Motley Fool recommends and owns shares of Trex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.