What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-22 compared with 2020-02-24 · 165 added, 153 removed, 232 unchanged (58% of the section changed)

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cyber-attacks, security breaches or other security vulnerabilities;

and the impact of upcoming data privacy laws and the EU General Data Protection Regulation and the related actual or potential costs and consequences.

the impact of upcoming data privacy laws and the EU General Data Protection Regulation and the related actual or potential costs and consequences;

material adverse impacts from global public health pandemics, including the strain of coronavirus known as COVID-19;

and material adverse impacts related to labor shortages or increases in labor costs.

Trex Company, Inc.

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The Company is focused on using renewable resources within both our Trex Residential and Trex Commercial segments.

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence.

pandemic has increased the level of volatility and uncertainty globally and has created macroeconomic disruption.

We are actively managing our business to respond to this health crisis, and we continue to evaluate the nature and extent of its impact.

As of the date of this report, we continue to operate at output levels similar to those prior to the COVID-19

We have not experienced any material disruptions to our operations, production or our supply chain, and have not experienced any material reduction in demand for our products due to the COVID-19

We experienced $2.3 million and $6.0 million in COVID-19 management costs during the three months and twelve months ended December 31, 2020, respectively, of which $1.9 million and $4.8 million, respectively, were related to higher production costs.

These costs reflect measures we implemented to ensure the health and safety of our employees, such as additional cleaning and sterilization of work areas, and additional personnel expenses.

Even though a vaccine has been approved, the pandemic remains an evolving situation due to the continuation of the outbreak and any measures taken to contain the spread of the virus.

The extent and duration of the economic fallout from COVID-19

remains unclear.

We are actively managing our business to respond to the impact, such as engaging with our distributor network regarding market demand, ongoing communications with our suppliers, and continuing to ensure the safety of our employees.

Our commitment to stakeholders is to take the appropriate actions to ensure the safety and well-being of our employees and partners, comply with any governmental orders relating to COVID-19,

which may result in a period of disruption to our business, while at the same time leveraging our strengths and ensuring financial flexibility.

We are following or exceeding all Centers for Disease Control and Prevention (CDC) and public officials’ guidelines.

We have also adopted a business continuity plan and local emergency response plans at each location.

We continue to take precautionary measures, make contingency plans and improve our response to the developing situation.

We have assembled a cross-functional team whose chief charge is to oversee our efforts to ensure the health and safety of all employees and supply product to our customers.

That team constantly monitors the latest CDC, Federal, state and other regulatory guidance, works to secure personal protective equipment, finds new ways to help mitigate risk, and identifies opportunities for us to exceed recommendations.

We have implemented preventative or protective actions at our facilities, our corporate headquarters and with field sales personnel.

In order to mitigate the spread of the virus, we instructed our employees to practice social distancing.

Efforts for social distancing included employees working from home, where possible, revising our production processes to allow for compliance with our social distancing efforts, suspending air travel and enabling technologies to allow employees to effectively perform their functions remotely.

Our sales force worked from home and conducted training sessions with our channel partners by utilizing online audio and visual technologies.

Late in the second quarter, our employees began transitioning back to the workplace and conducting customer visits on a voluntary basis.

In addition, face masks and other protective equipment have been distributed to employees across all of our facilities, handwashing and hand sanitizing stations have been installed, and automated temperature scanners have been provided at the entrances to our manufacturing facilities and corporate office.

We have installed air purifier systems for all enclosed areas in every one of our buildings.

Our internal cleaning crew sanitizes an extensive checklist of high-touch items and areas across work facilities, and our facilities are cleaned repeatedly throughout each shift with CDC-recommended

chemicals and disinfectants by internal and external groups.

In addition, we fabricated face shields, donated the proceeds from decking sample sales to Feeding America, and supported the COVID-19

Relief Fund of our local United Way, supplementing our annual fund-raising campaign.

Trex Residential

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We offer a comprehensive set of aesthetically pleasing, high-performance, low maintenance, eco-friendly

products in the decking, railing, fencing, steel deck framing and outdoor lighting categories.

products in the decking, railing, fencing and outdoor lighting categories.

We believe that the range and variety of our products allow consumers to design much of their outdoor living space using Trex brand products.

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Trex Transcend ®

Trex Enhance ®

Trex Select ®

Trex Enhance ®

Trex Hideaway ®

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Trex Transcend Railing

Trex Signature ®

aluminum railing

Trex Select Railing

Trex Enhance Railing

Trex Signature ®

aluminum railing

Trex Seclusions ®

Steel Deck Framing System

Trex Elevations ®

Trex Commercial

is a leading national provider of custom-engineered railing and staging systems.

We offer modular and architectural railing and staging systems and solutions for the commercial and multifamily market, including sports stadiums and performing arts venues through Trex Commercial.

We offer modular and architectural railing and staging systems and solutions for the commercial and multifamily market, including sports stadiums and performing arts venues.

Highlights related to the twelve months ended December 31, 2020 include:

Increase in net sales of 9%, or $61.1 million, to $745.3 million in the twelve months ended December 31, 2019 compared to $684.3 million in the twelve months ended December 31, 2018.

Net sales in 2019 were the highest of any year in our history.

Trex Residential net sales increased $81 million, or 13%, in 2019 compared to 2018, and were the highest of any year in our history.

Increase in net sales of 18.2%, or $135.5 million, to $880.8 million in the twelve months ended December 31, 2020 compared to $745.3 million in the twelve months ended December 31, 2019 and were the highest of any year in our history.

Trex Residential net sales increased $133.5 million, or 19.2%, in the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019.

Net sales were the highest of any year in our history.

Increase in gross profit of 17.3%, or $53.0 million, to $359.5 million for the twelve months ended December 31, 2020 compared to $306.5 million for the twelve months ended December 31, 2019.

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Cash flows from operating activities were $187.3 million in the twelve months ended December 31, 2020 compared to $156.4 million in the twelve months ended December 31, 2019.

New capital expenditure program to increase production capacity at the Trex Residential facilities in Virginia and Nevada and projected at approximately $200 million in the aggregate by 2021.

Repurchase of 500,059 shares of our outstanding common stock under our Stock Repurchase Program in 2019, for a total of 959,380 shares repurchased under the program to date.

Business Acquisition.

On July 31, 2017, through our wholly-owned subsidiary, Trex Commercial Products, Inc., we entered into a definitive agreement with Staging Concepts Acquisition, LLC (SC Company) and on that date acquired certain assets and liabilities of SC Company for $71.8 million in cash.

The acquisition provides us with the opportunity to offer full service railing systems in the growing commercial and multi-family markets, access to a complementary product category with a track record of substantial revenue growth, the ability to achieve economies of scale around raw material procurement, and an increase in the range of products the Company may offer its core customers.

The Consolidated Financial Statements include the accounts of Trex Commercial Products, Inc.

from the date of acquisition.

Capital expenditures of $172.8 million, primarily to increase production capacity at the Virginia and Nevada facilities and for general plant cost reduction initiatives.

Repurchase of 884,018 shares of our outstanding common stock under our Stock Repurchase Program in 2020, for a total of 2.8 million share repurchased under the program as of December 31, 2020.

Net sales consist of sales and freight, net of returns and discounts.

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In addition, we offer price discounts or volume rebates on specified products and other incentives based on increases in purchases as part of specific promotional programs.

The timing of sales incentive programs can significantly impact sales, receivables and inventory levels during the offering period.

However, the timing and terms of the majority of our programs are generally consistent from year to year.

The timing of sales incentive programs can impact sales, receivables and inventory levels during the offering period.

In addition, the operating results for Trex Commercial have not historically varied from quarter to quarter as a result of seasonality, but are driven by the timing of individual projects, which may vary significantly each period.

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Cost of sales consists of raw materials costs, direct labor costs, manufacturing costs, warranty costs, and freight.

Raw materials costs generally include the costs to purchase and transport reclaimed wood fiber, scrap polyethylene and pigmentation

for coloring Trex products.

Raw materials costs generally include the costs to purchase and transport reclaimed wood fiber, scrap polyethylene and pigmentation for coloring Trex products.

Direct labor costs include wages and benefits of personnel engaged in the manufacturing process.

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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.

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.

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If there is a breach of such warranties, we have an obligation either to replace the defective product or refund the purchase price.

Depending on the product and its use, the Company also warrants its Trex Commercial products will be free of manufacturing defects for one to three years.

Depending on the product and its use, the Company also warrants its Trex Commercial products will be free of manufacturing defects for 1 to 3 years.

We continue to receive and settle claims for Trex Residential products manufactured at our Nevada facility prior to 2007 that exhibit surface flaking and maintain a warranty reserve to provide for the settlement of these claims.

Estimating the warranty reserve for surface flaking claims requires management to estimate (1) the number of claims to be settled with payment and (2) the average cost to settle each claim.

To estimate the number of claims to be settled with payment, we utilize actuarial techniques to quantify both the expected number of claims to be received and the percentage of those claims that will ultimately require payment (collectively, elements).

To estimate the number of surface flaking claims to be settled with payment, we utilize actuarial techniques to quantify both the expected number of claims to be received and the percentage of those claims that will ultimately require payment (collectively, elements).

Estimates for these elements are quantified using a range of assumptions derived from claim count history and the identification of factors influencing the claim counts.

The number of claims received has declined each year since peaking in 2009.

The cost per claim varies due to a number of factors, including the size of affected decks, the availability and type of replacement material used, the cost of production of replacement material and the method of claim settlement.

We monitor surface flaking claims activity each quarter for indications that our estimates require revision.

Typically, a majority of surface flaking claims received in a year are received during the summer outdoor season,

which spans the second and third quarters.

Typically, a majority of surface flaking claims received in a year are received during the summer outdoor season, which spans the second and third quarters.

It has been our practice to utilize the actuarial techniques discussed above during the third quarter, after a significant portion of all claims has been received for the fiscal year and variances to annual claims expectations are more meaningful.

The number of incoming claims received in the year ended December 31, 2019, was slightly lower than our expectations for 2019 and the number of claims received in the year ended December 31, 2018, continuing the historical year-over-year decline in incoming claims.

Average settlement cost per claim experienced in 2019 was considerably higher than our expectations for 2019 and the average settlement cost per claim experienced in 2018 due to an increase in larger claims settled and changes in the mix of settlement methods.

We believe our reserve at December 31, 2019 is sufficient to cover future surface flaking obligations and no adjustments were required in the current year.

The number of incoming claims received in the year ended December 31, 2020 was higher than the number of claims received in the year ended December 31, 2019 and exceeded our expectations for 2020.

Prior to 2020, the number of incoming claims received declined each year since 2009.

After evaluating the rise in incoming claims in our actuarial analysis, we increased our estimate of the number of future claims to be settled with payment.

Average cost per claim experienced in the year ended December 31, 2020 was lower than that experienced in the year ended December 31, 2019, but slightly higher than our expectations for 2020.

We estimate that average cost per claim will increase in future years, primarily due to inflation.

As a result of the increase in estimated future claims and expected rise in future average cost per claim, in the three-month period ended September 30, 2020, we recorded a provision of $6.5 million to our warranty reserve for the future settlement of surface flaking claims.

We believe the reserve at December 31, 2020 is sufficient to cover future surface flaking obligations.

Our analysis is based on currently known facts and a number of assumptions, as discussed above, and current expectations.

Projecting future events such as the number of claims to be received, the number of claims that will require payment and the average cost of claims 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 flows.

Projecting future events such as the number of claims to be received, the number of claims

that will require payment and the average cost of claims 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 flows.

We estimate that the annual number of claims received will continue to decline over time and that the average cost per claim will increase slightly, primarily due to inflation.

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For additional information about product warranties, see Notes 2 and 18 to the Consolidated Financial Statements appearing elsewhere in this report.

The Company evaluates the recoverability of goodwill in accordance with Accounting Standard Codification Topic 350, “ Intangibles—Goodwill and Other

We evaluate the recoverability of goodwill in accordance with Accounting Standard Codification Topic 350, “ Intangibles—Goodwill and Other

,” annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount.

Goodwill is considered to be impaired when the net book value of the reporting unit exceeds its estimated fair value.

The Company first assesses qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount to determine if it should proceed with the evaluation of goodwill for impairment.

If the Company proceeds with the two-step

impairment test, the Company first compares the fair value of the reporting unit to its carrying value.

If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and step two of the impairment analysis is performed.

In step two of the analysis, an impairment loss is recorded equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value should such a circumstance arise.

The Company measures fair value of the reporting unit based on a present value of future discounted cash flows and a market valuation approach.

We evaluate the recoverability of goodwill at the reporting unit level.

Goodwill is considered impaired when the carrying amount of a reporting unit exceeds its fair value, and an impairment loss is recognized in an amount equal to that excess but limited to the total amount of goodwill allocated to that reporting unit.

We first assesses qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill.

Qualitative factors we consider include events and circumstances such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant Company-specific events.

We evaluate, based on the weight of evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

Weighing the effect of various positive and negative factors is challenging and requires the use of significant judgment.

The weight we place on each factor depends on certain conditions, including uncertainty about future events.

If different conditions exist in future periods, future impairment charges could result.

If the qualitative assessment indicates that the carrying amount of the reporting unit exceeds its fair value, including goodwill, we are then required to perform a quantitative goodwill impairment test.

The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill.

The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date.

We measure the fair value of a reporting unit based on the present value of future cash flows and a market valuation approach using relevant data available through and as of the impairment testing date.

The assumptions we use are consistent with those we believe a market participant would use and are evaluated and updated as appropriate.

If other assumptions and estimates had been used, an impairment charge could have resulted, or if different conditions exist in future periods, future impairment charges could result.

At December 31, 2020 and December 31, 2019, the Company had goodwill of $68.5 million.

We perform the annual impairment testing of goodwill as of October 31 of each year.

For the years ended December 31, 2020, 2019, and 2018, we completed our annual impairment test of goodwill utilizing the qualitative assessment and concluded it was not more likely than not that the fair value of the reporting units was less than the carrying amounts.

Revenue Recognition

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Trex Residential principally generates revenue from the manufacture and sale of its high-performance, low-maintenance,

composite decking and railing products and accessories.

outdoor living products, consisting of composite decking and railing products, hidden fasteners, and a broad offering of outdoor living accessories.

Substantially all of its revenues are from contracts with customers, which are individual customer purchase orders of short-term duration of less than one year.

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Any performance obligation that remains unsatisfied at the end of a reporting period is part of a contract that has an original expected duration of one year or less.

Any variable consideration related to the unsatisfied performance obligation is allocated wholly to the unsatisfied performance obligation and recognized when the product ships and the performance obligation is satisfied.

Trex Residential may offer various sales incentive programs throughout the year.

It estimates the amount of sales incentive to allocate to each performance obligation, or product shipped, based on direct sales to the customer.

The estimate is updated each reporting period and any changes are allocated to the performance obligations on the same basis as at inception.

Changes in estimate allocated to a previously satisfied performance obligation are recognized as a reduction of revenue in the period in which the change occurs under the cumulative catch-up

In addition to sales incentive programs, Trex Residential may offer payment discounts.

It estimates the payment discount that it believes will be taken by the customer based on prior history using the most-likely-amount method of estimation.

Trex Commercial Products

Trex Commercial generates revenue from the manufacture and sale of its modular and architectural railing and staging systems.

Trex Commercial generates revenue from the manufacture and sale of its custom, modular and architectural railing and staging systems.

All of its revenues are from fixed-price contracts with customers.

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Trex Commercial satisfies its performance obligation over time as work progresses because control is transferred continuously to its customers.

Revenue and estimated profit is recognized over time based on the proportion of actual costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the performance obligation.

Revenue and estimated profit are recognized over time based on the proportion of actual costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the performance obligation.

Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.

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Trex Commercial net sales

The 9% increase in total net sales in 2019 compared to 2018 was primarily due to an increase in net sales of 13% at Trex Residential, offset by a 28% decrease in Trex Commercial net sales.

The primary driver of Trex Residential net sales was increased volume growth.

Through the first quarter of 2019, and to a much lesser extent in the second and third quarters of 2019, Trex Residential net sales were constrained due to supply issues primarily caused by new product startup inefficiencies related to our new Enhance decking product.

These inefficiencies resulted in lower throughput than was needed to support market demand.

Net sales in 2018 were impacted by a $6 million unfavorable charge related to expanded stocking positions in all residential sales channels.

Excluding this impact, Trex Residential net sales increased by 12%.

Trex Commercial net sales decreased mainly due to fewer large projects compared to the period of strong, large project completions experienced in 2018.

The 18.2% increase in total net sales in 2020 compared to 2019 was due to an increase in net sales of 19.2% at Trex Residential and a 3.8% increase in Trex Commercial net sales.

The increase in Trex Residential net sales was substantially all due to volume growth, resulting from the strong broad-based demand for our outdoor living products, positive momentum in the residential repair and remodeling sector and our initiatives to expand our addressable market and accelerate conversion from wood primarily through the growth of our newer Enhance product line.

In addition, through the first quarter of 2019, and to a much lesser extent in the second and third quarters of 2019, Trex Residential net sales were constrained due to supply issues primarily caused by new product startup inefficiencies related to our new Enhance decking product.

These inefficiencies resulted in lower throughput than was needed to support market demand in 2019.

As a result of our capacity expansion program at our Trex Residential manufacturing facilities in Virginia and Nevada, in 2020 we utilized capacity gains from incremental lines to address demand.

The production lines at our new Virginia facility will start coming online in the first quarter of 2021 and continue to ramp up through the second quarter.

Trex Commercial net sales increased reflecting the underlying growth in the commercial segment.

Year Ended December 31,

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Gross margin for Trex Residential and Trex Commercial products in 2020 totaled 41.6% and 29.2%, respectively, compared to 42.4% and 23.5%, respectively, in 2019.

The decrease in gross margin was primarily due to a decrease in Trex Residential gross profit related to new product startup costs and manufacturing inefficiencies associated with the slower than normal production ramp up on those products, including reduced line rates, increased material usage and lower manufacturing yields.

During March and through the third quarter, we made numerous changes to improve throughput.

As a result, our production rates largely returned to planned levels and associated operating inefficiencies have been reduced.

We believe these improvements will continue to result in improved throughput and efficiency.

The startup costs are largely behind us and we expect continued improvement in throughput and efficiency in future periods.

We have begun to reduce material added to the Enhance product in the first quarter of 2020 and expect to be essentially at the original design target by the end of the third quarter in 2020.

Trex Commercial gross margin increased primarily due to initiatives aimed at improving project management, estimating and manufacturing.

However, the increase was hampered due to under absorption of manufacturing overhead as a result of lower net sales.

Gross margin in 2020 at Trex Residential was impacted by hiring and training costs in advance of capacity ramp up at both our Virginia and Nevada facilities, initial startup costs, COVID-19

management costs, depreciation due to capital expansion expenditures and higher inflation, partially offset by the non-recurrence

of Enhance startup costs experienced in 2019 and by reducing the material usage in our Enhance decking profile to the original design target weight.

To offset these additional costs, we recently announced a mid single-digit

price increase at Trex Residential on multiple products across our decking and railing portfolio set to take effect at the beginning of 2021.

Excluding a $6.5 million provision to the Trex Residential warranty, consolidated gross margin in 2020 was 41.5% and Trex Residential gross margin was 42.3%.

This charge related to the legacy surface flaking issue that affected a portion of products produced at our Nevada facility prior to 2007.

Gross margin at Trex Commercial increased primarily due to the non-recurrence

of legacy low margin contracts coupled with a mix of higher margin contracts, and manufacturing cost improvements.

Selling, General and Administrative Expenses

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% of total net sales

Selling, general and administrative expenses in 2019 were comparable to those in 2018.

Incentive compensation decreased $4 million in 2019.

In addition, amortization expense decreased $2.7 million in 2019 due to the full amortization of intangible assets acquired as part of the SC Company acquisition in July 2017.

The decreases were offset primarily by increases in other personnel expense of $3.6 million, $0.7 million in branding and advertising spend in support of our market growth programs, $0.3 million in research and development expenses and an increase in other miscellaneous expenses.

Selling, general and administrative expenses increased $7.5 million in 2020 compared to 2019.

The increase was due to an increase in personnel related expenses, including higher incentive compensation, of $8.5 million and a net increase in other operating expenses of $5.3 million.

The increase was offset by a $4.0 million decrease in branding and advertising expense driven by disciplined spending as the impacts of COVID-19

played out during the second and third quarters of 2020, and by a $2.2 million decrease in travel and entertainment and other expenses.

Provision for Income Taxes

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Effective tax rate

The effective tax rate for 2019 decreased by 0.2% compared to the effective tax rate for 2018 primarily due to an increase in excess tax benefits from the exercise of share-based payments.

The effective tax rate for 2020 increased by 1.5% compared to the effective tax rate for 2019 primarily due to a decrease in 2020 in excess tax benefits from the exercise of share-based payments.

Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) 1

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EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP).

We have included data with respect to EBITDA because management evaluates the performance of its reportable segments using EBITDA.

We have included data with respect to EBITDA because management believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using EBITDA.

Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income and, in relation to its competitors, it eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets.

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The Company uses EBITDA to assess performance as it believes EBITDA facilitates performance comparison between the Company and its competitors and between its reportable segments by eliminating interest, income taxes, and depreciation and amortization charges to income.

Total EBITDA increased 4.7% to $202 million for 2019 compared to $193 million for 2018.

Total EBITDA increased 24.4%, or $49.3 million, to $251.6 million for 2020 compared to $202.2 million for 2019.

The increase was primarily driven by a $45.8 million increase in Trex Residential EBITDA driven by the increase in net sales.

The increase was offset by a decrease in EBITDA at Trex Commercial primarily related to a decrease in net sales.

Year Ended December 31, 2019 Compared To Year Ended December 31, 2018

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Net cash used in financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Operating Activities

Cash provided by operating activities increased $18.2 million in 2019 compared to 2018 primarily due to the increase in gross profit and related increase in net income resulting from the increase in net sales volume growth, offset by a decrease in working capital investment of $2.9 million.

Cash provided by operating activities increased $30.9 million in 2020 compared to 2019 primarily due to the increase in gross profit and related $30.9 million increase in net income resulting from the increase in net sales volume growth at Trex Residential, partially offset by a decrease in working capital investment of $8.9 million.

Investing Activities

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Financing Activities

Net cash used in financing activities in 2019 increased $16.8 million compared to 2018 primarily due to the increase in stock repurchase activity in 2019 of $16.5 million.

Net cash used in financing activities in 2020 decreased $2.2 million compared to 2019 primarily due to the decrease in stock repurchase activity in 2020 of $1.7 million.

Amendment of Restated Certificate of Incorporation.

At the annual meeting of stockholders of the Company held on April 29, 2020, the Company’s stockholders approved an amendment of the Company’s Restated Certificate of Incorporation (Amendment), effective as of April 29, 2020.

The Company’s Board of Directors unanimously approved the Amendment on February 19, 2020, subject to stockholder approval.

The Amendment increases the number of shares of common stock, par value $0.01 per share, that the Company is authorized to issue from 120 million shares to 180 million shares.

The Amendment was filed with the Delaware Secretary of State on April 29, 2020.

Stock Repurchase Program.

On February 16, 2018, the Board of Directors adopted a stock repurchase program of up to 11.6 million shares of the Company’s outstanding common stock (Stock Repurchase Program).

As of the date of this report, the Company has repurchased 959,380 shares under the Stock Repurchase Program.

As of December 31, 2020, the Company has repurchased 2.8 million shares under the Stock Repurchase Program.

On July 29, 2020, the Company’s Board of Directors approved a two-for-one

stock split of the Company’s common stock, par value, $0.01.

The stock split was in the form of a stock dividend distributed on September 14, 2020, to stockholders of record at the close of business on August 19, 2020.

The stock split entitled each stockholder to receive one additional share of common stock for each share they held as of the record date.

All common stock share and per share data for all periods presented in the accompanying Consolidated Financial Statements and notes thereto have been retroactively adjusted to reflect the stock split.

Inventory in Distribution Channels

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We are not aware of significant increases in the levels of inventory in the distribution channels at December 31, 2020 compared to inventory levels at December 31, 2019.

Business Acquisition.

On July 31, 2017, through our wholly-owned subsidiary, Trex Commercial Products, Inc., we entered into a definitive agreement with SC Company and on that date acquired certain assets and liabilities of SC Company for $71.8 million in cash.

We used cash on hand and $30.0 million from our existing revolving credit facility to acquire the business.

The operating results for Trex Residential have historically varied from quarter to quarter.

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However, they are driven by the timing of individual projects, which may vary significantly each period.

Indebtedness after November 4, 2019

On November 5, 2019, the Company as borrower, Trex Commercial Products, Inc.

Indebtedness.

Our Fourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) provides us with revolving loan capacity in a collective maximum principal amount of $250 million from January 1 through June 30 of each year, and a maximum principal amount of $200 million from July 1 through December 31 of each year throughout the term, which ends November 5, 2024.

At December 31, 2020, we had no outstanding indebtedness under the revolving credit facilities and borrowing capacity under the facilities of $300 million.

On May 26, 2020, the Company entered into a First Amendment to the Original Credit Agreement (the First Amendment) to provide for an additional $100 million line of credit.

The purpose of the additional $100 million line of credit is primarily to reduce risk associated with the COVID-19

pandemic should the Company need to secure additional capital to continue its strategy of accelerating the conversion of wood decking to Trex composite decking and expanding its addressable market.

As a matter of convenience, the parties incorporated the amendments to the Original Credit Agreement made by the First Amendment into a new Fourth Amended and Restated Credit Agreement (New Credit Agreement).

In the New Credit Agreement, the revolving commitments under the Original Credit Agreement are referred to as Revolving A Commitments and the new $100 million line of credit is referred to as Revolving B Commitments.

In the New Credit Agreement, all material terms and conditions related to the original line of credit (Revolving A Commitments) remain unchanged from the Original Credit Agreement.

The Company entered into the First Amendment, as borrower;

Trex Commercial Products, Inc.

(TCP), as guarantor;

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(Wells Fargo), who is also Syndication Agent;

SunTrust Bank (SunTrust);

and Branch Banking and Trust Company (BB&T) (each, a Lender and collectively, the Lenders), arranged by Bank of America Securities, Inc., as Sole Lead Arranger and Sole Bookrunner, entered into a Fourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) to amend and restate the Third Amended and Restated Credit Agreement dated as of January 12, 2016, as amended (Third Amended Credit Agreement), by and among the Company, as borrower;

BOA, as a lender, Administrative Agent, Swing Line Lender and L/C Issuer;

CitiBank, N.A.

Capital One, N.A.

(Capital One);

and SunTrust, each as a lender;

and Bank of America Merrill Lynch, as Sole Lead Arranger and Sole Bookrunner.

Under the Fourth Amended Credit Agreement, the Lenders agreed to provide the Company with one or more Revolving Loans in a collective maximum principal amount of $250 million from January 1 through June 30 of each year and a maximum principal amount of $200 million from July 1 through December 31 of each year (Loan Limit) throughout the term, which ends November 5, 2024 (Term).

Previously, under the Third Amended Credit Agreement, BOA, Citi, Capital One and SunTrust agreed to provide the Company with one or

more revolving loans in a collective maximum principal amount of $250 million from January 1 through June 30 of each year and a maximum principal amount of $200 million from July 1 through December 31 of each year throughout the term, which would have ended on January 12, 2021 if not replaced by the Fourth Amended Credit Agreement.

Included within the Loan Limit are sublimits for a Letter of Credit facility in an amount not to exceed $15 million and Swing Line Loans in an aggregate principal amount at any time outstanding not to exceed $5 million.

The Revolving Loans, the Letter of Credit facility and the Swing Line Loans are for the purpose of raising working capital and supporting general business operations.

The Notes provide the Company, in the aggregate, the ability to borrow an amount up to the Loan Limit during the Term.

The Company is not obligated to borrow any amount under the Loan Limit.

Within the Loan Limit, the Company may borrow, repay and reborrow at any time or from time to time while the Notes are in effect.

Base Rate Loans (as defined in the Fourth Amended Credit Agreement) under the Revolving Loans and the Swing Line Loans accrue interest at the Base Rate plus the Applicable Rate (as defined in the Fourth Amended Credit Agreement) and Eurodollar Rate Loans for the Revolving Loans and Swing Line Loans accrue interest at the Adjusted London InterBank Offered Rate plus the Applicable Rate (as defined in the Fourth Amended Credit Agreement).

The Base Rate for any day is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by BOA as its prime rate, and (c) the Eurodollar Rate plus 1.0%.

Repayment of all then outstanding principal, interest, fees and costs is due on November 5, 2024.

Under the terms of the Fourth Amended and Restated Security and Pledge Agreement, the Company and TCP, subject to certain permitted encumbrances, as collateral security for the above-stated loans and all other present and future indebtedness of the Company owing to the Lenders grants to BOA, as Administrative Agent for the Lenders, a continuing security interest in certain collateral described and defined in the Fourth Amended and Restated Security and Pledge Agreement.

Indebtedness through November 4, 2019

On January 12, 2016, the Company entered into a Third Amended Credit Agreement with BOA as Lender, Administrative Agent, Swing Line Lender and Letter of Credit Issuer;

and certain other lenders including Citi, Capital One, and SunTrust (collectively, Lenders) arranged by Bank of America Merrill Lynch as Sole Lead Arranger and Sole Bookrunner.

The Third Amended Credit Agreement amended and restated the Second Amended Credit Agreement.

Under the Third Amended Credit Agreement, the Lenders agreed to provide the Company with one or more revolving loans in a collective maximum principal amount of $250 million from January 1 through June 30 of each year and a maximum principal amount of $200 million from July 1 through December 31 of each year throughout the term, which would have ended on January 12, 2021.

Included within the revolving loan limit were sublimits for a letter of credit facility in an amount not to exceed $15 million and swing line loans in an aggregate principal amount at any time outstanding not to exceed $5 million.

The revolving loans, the letter of credit facility and the swing line loans were for the purpose of funding working capital needs and supporting general business operations.

Additionally, within the Revolving Loan Limit, the Company could borrow, repay, and reborrow, at any time or from time to time while the Third Amended Credit Agreement was in effect.

The Company had the option to select interest rates for each loan request at the Base Rate or Eurodollar Rate.

Base rate loans under the revolving loans and the swing line loans accrued interest at the Base Rate plus the Applicable Rate.

Eurodollar Rate Loans for the revolving loans and swing line loans accrued interest at the Adjusted London InterBank Offered Rate plus the Applicable Rate.

The Base Rate for any day was a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by BOA as its prime rate, and (c) the Eurodollar Rate plus 1.0%.

Repayment of all then outstanding principal, interest, fees and costs would have been due on January 12, 2021.

The Third Amended Credit Agreement was secured by property with respect to which liens in favor of the Administrative Agent, for the benefit of itself and the other holders of the obligations, were purported to be granted pursuant to and in accordance with the terms of the collateral documents as referenced in the Third Amended Credit Agreement.

Truist Bank (Truist);

and Regions Bank (Regions) (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc.

as Sole Lead Arranger and Sole Bookrunner.

The First Amendment further provides that the New Credit Agreement is amended and restated by changing Schedule 2.01 to add applicable Lender percentages related to the Revolving B Commitment for BOA of 47.5%, Well Fargo of 28.0% and Regions of 24.5%.

Compliance with Debt Covenants and Restrictions.

Pursuant to the terms of the Fourth Amended Credit Agreement, the Company, is subject to certain loan compliance covenants.

The Company was in compliance with all covenants as of December 31, 2019.

The Company was in compliance with all covenants at December 31, 2020.

Failure to comply with the financial covenants could be considered a default of repayment obligations and, among other remedies, could accelerate payment of any amounts outstanding.

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Operating leases represent office space, storage warehouses, manufacturing facilities and certain office and plant equipment under various operating leases, and include operating leases accounted for under Financial Accounting Standards Board Accounting Standards Codification Topic 842 and short-term leases.

Off-Balance Sheet Arrangements.

Sheet Arrangements.

We do not have off-balance

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Capital and Other Cash Requirements.

In order to meet future demand, in June 2019 we announced a new multi-year capital expenditure program projected at approximately $200 million between 2019 and 2021.

The program will increase production capacity by at least 70% at our Trex Residential facilities in Virginia and Nevada and will bring further manufacturing efficiencies to our production operations.

In the third quarter of 2019, we installed two additional lines in our Nevada facility and three new lines will begin ramping up there in the second quarter of 2020.

One new production line was operational in Virginia in the fourth quarter of 2019, and a new building being constructed in Virginia is scheduled to start ramping up production by early 2021 at the latest.

The investment will allow us to increase production output for future projected growth related to our strategy of converting wood demand to Trex Residential composite decking.

We currently estimate that capital expenditures in 2020 will be approximately $140 million to $160 million.

In June 2019, we announced a new capital expenditure program to increase production capacity at our Trex Residential facilities in Virginia and Nevada.

The new multi-year capital expenditure program is projected at approximately $200 million through 2021 and involves the construction of a new decking facility at the existing Virginia site and the installation of additional production lines at the Nevada site.

The investment will allow us to increase production output for future projected growth related to our strategy of converting wood demand to Trex Residential wood-alternative composite decking.

When completed these investments will increase our Trex Residential production capacity by approximately 70 percent.

In addition to the above, our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, upgrading equipment, and acquisitions which fit our long-term growth strategy as we continue to evaluate opportunities that would be a good strategic fit for Trex, and return of capital to shareholders.

We believe that cash on hand, cash flows from operations and borrowings expected to be available under our revolving credit facility will provide sufficient funds to enable us to fund planned capital expenditures, make scheduled principal and interest payments, fund the warranty reserve, meet other cash requirements and maintain compliance with terms of our debt agreements for at least the next 12 months.

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The actual amount and timing of future capital requirements may differ materially from our estimate depending on the demand for Trex products and new market developments and opportunities.

Our ability to meet our cash needs during the next 12 months and thereafter could be adversely affected by various circumstances, including increases in raw

materials and product replacement costs, quality control problems, higher than expected product warranty claims, service disruptions and lower than expected collections of accounts receivable.

Our ability to meet our cash needs during the next 12 months and thereafter could be adversely affected by various circumstances, including increases in raw materials and product replacement costs, quality control problems, higher than expected product warranty claims, service disruptions and lower than expected collections of accounts receivable.

In addition, any failure to negotiate amendments to our existing debt agreements to resolve any future noncompliance with financial covenants could adversely affect our liquidity by reducing access to revolving credit borrowings needed primarily to fund seasonal borrowing needs.

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There can be no assurance as to whether, or as to the terms on which, we would be able to obtain such financing, which would be restricted by covenants contained in our existing debt agreements.

In addition, we believe our financial resources will allow us to manage the impact of the COVID-19

pandemic on the Company’s business operations for the foreseeable future.

However, we will continue to evaluate our financial position and liquidity needs in light of future developments.

NEW ACCOUNTING STANDARDS

In August 2018, the FASB issued ASU No.

“Intangibles—Goodwill and Other—Internal-Use

Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of FASB Emerging Issues Task Force)”.

The new guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use

software license.

Under that model, implementation costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred.

Capitalized implementation costs are amortized over the term of the associated hosted cloud computing arrangement service contract on a straight-line basis, unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from its right to access the hosted software.

Capitalized implementation costs would then be assessed for impairment in a manner similar to long-lived assets.

The new guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Early adoption is permitted.

Entities can choose to adopt the new guidance either prospectively to eligible costs incurred on or after the date the guidance is first applied or retrospectively.

The Company will adopt the guidance on January 1, 2020, and has determined that adoption will not have a material impact on its financial condition or results of operations.

In January 2017, the FASB issued ASU No.

“Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”.

The guidance removes Step 2 of the goodwill impairment test and eliminates the need to determine the fair value of individual assets and liabilities to measure goodwill impairment.

A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary.

The guidance will be applied prospectively, and is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019.

Early adoption is permitted for any impairment tests performed on testing dates after January 1, 2017.

The Company will adopt the guidance on January 1, 2020.

The Company does not believe adoption will have a material impact on its financial condition or results of operations.

In June 2016, the FASB issued ASU 2016-13,

“Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses in Financial Instruments,” and issued subsequent amendments to the initial guidance in November 2018 within ASU No.

April 2019 within ASU No.

and May 2019 within ASU No.

The ASU amends the guidance on the impairment of financial instruments and adds an impairment model, known as the current expected credit loss (CECL) model.

The CECL model requires an entity to recognize its current estimate of all expected credit losses, rather than incurred losses, and applies to trade receivables and other receivables.

The CECL model is designed to capture expected credit losses through the establishment of an allowance account, which will be presented as an offset to the amortized cost basis of the related financial asset.

The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is applied using the modified-retrospective approach.

The Company will adopt the guidance on January 1, 2020.

The Company has determined that adoption will not have a material impact on its financial condition or results of operations.

In March 2020, the FASB issued ASU No.

“ Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting

The guidance provides temporary optional expedients and exceptions related to contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates.

The new guidance allows entities to elect not to apply certain modification accounting requirements, if certain criteria are met, to contracts affected by what the guidance calls reference rate reform.

An entity that makes this election would consider changes in reference rates and other contract modifications related to reference rate reform to be events that do not require contract remeasurement at the modification date or reassessment of a previous accounting determination.

The ASU notes that changes in contract terms that are made to affect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to affect that transition.

The guidance is effective upon issuance and generally can be applied as of March 12, 2020 through December 31, 2022.

The Company does not expect adoption of the guidance to have a material effect on its consolidated financial statements.

In December 2019, the FASB issued ASU No.

“ Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes

The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries.

The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up

in the tax basis of goodwill.

The standard will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The Company does not intend to early adopt the standard and does not expect the standard to have a material effect on its consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis