What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-02-22 compared with 2020-02-24 · 330 added, 296 removed, 872 unchanged (42% of the section changed)

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Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of its President and Chief Executive Officer, who is the Company’s principal executive officer, and its Executive Vice President and Chief Financial Officer, who is the Company’s principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2019.

Based on this evaluation, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

The Company’s management, with the participation of its President and Chief Executive Officer, who is the Company’s principal executive officer, and its Senior Vice President and Chief Financial Officer, who is the Company’s principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2020.

Based on this evaluation, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

Management’s Report on Internal Control Over Financial Reporting

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February 22, 2021

/ S / B RYAN H.

President and Chief Executive Officer

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February 22, 2021

Executive Vice President and Chief Financial Officer

/ S / D ENNIS C.

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

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Other Information

Amendment of Amended and Restated 1999 Incentive Plan for Outside Directors

On February 17, 2021, the Board of Directors approved an amendment to the Amended and Restated 1999 Incentive Plan for Outside Directors (Outside Directors Plan), effective February 17, 2021, as follows:

The annual cash retainer for service on the Board was increased from $65,000 to $73,750.

The annual equity award for service on the Board was increased from $100,000 to $110,000.

The annual committee fee for members of the Audit Committee was increased from $8,750 to $10,000.

The annual committee fee for members of the Compensation Committee was increased from $7,500 to $10,000.

The annual committee fee for members of the Nominating and Corporate Governance Committee was increased from $6,250 to $10,000.

The annual committee fee for the chairman of the Audit Committee was increased from $17,500 to $20,000.

The annual committee fee for the chairman of the Compensation Committee was increased from $15,000 to $20,000.

The annual committee fee for the chairman of the Nominating/Corporate Governance Committee was increased from $12,500 to $20,000.

The additional compensation for the Lead Independent Director was increased from $20,000 to $25,000.

The additional compensation for a non-executive

Chairman of the Board was increased from $80,000 to $85,000.

The additional compensation for a non-executive

Vice Chairman of the Board was increased from $50,000 to $55,000.

The Nominating and Corporate Governance Committee and the Board of Directors of the Company amended the Outside Directors Plan as described above based upon a Board of Directors compensation study undertaken by Korn Ferry Hay Group, which is the Company’s independent compensation consultant.

The foregoing description of the amendment to the Outside Directors Plan is qualified in its entirety by reference to the full text of the Outside Directors Plan, which is filed as Exhibit 10.3 to this Form 10-K .

Directors, Executive Officers and Corporate Governance

Information responsive to this Item 10 is incorporated herein by reference to our definitive proxy statement for our 2021 annual meeting of stockholders, which we will file with the SEC on or before 120 days after our 2020 fiscal year-end.

We have adopted a Code of Conduct and Ethics, which is applicable to all of our directors, officers and employees, including our Chief Executive Officer and Chief Financial Officer.

We have adopted a Code of Conduct and Ethics, which is applicable to all directors, officers and employees, including our Chief Executive Officer and Chief Financial Officer.

The code is available on our corporate web site and in print to any stockholder who requests a copy.

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2021 expressed an unqualified opinion thereon.

Adoption of New ASU No.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No.

Leases (Topic 842), as amended, effective January 1, 2019, using the modified retrospective approach.

Basis for Opinion

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(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical

audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Surface Flaking Warranty

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The actuarial analysis utilized determines a reasonably possible range of claims to be received and the percentage of those claims that will ultimately require payment.

Auditing the surface flaking warranty reserve is complex and required the involvement of a specialist due to the highly judgmental nature of the actuarially determined number of claims.

Auditing the surface flaking warranty reserve is complex and required the involvement of specialists due to the highly judgmental nature of the actuarially determined number of claims.

Auditing the reserve is also complex due to the judgmental nature of the significant assumptions made by management (e.g., the size of the affected decks, the availability and type of replacement material used, the cost of production of replacement material and the method of claim settlement) and used in the measurement process.

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Operating lease liabilities

Deferred income taxes

accrued warranty

Deferred income taxes

Other long-term liabilities

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Preferred stock, $ 0.01 par value, 3,000,000 shares authorized;

no ne issued and outstanding

none issued and outstanding

Common stock, $ 0.01 par value, 180,000,000 shares authorized;

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Stock-based compensation

Repurchases of common stock

Balance, December 31, 2018

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Stock-based compensation

Loss on disposal of property, plant and equipment

(Gain) loss on disposal of property, plant and equipment

Other non-cash

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Proceeds from sales of property, plant and equipment

Acquisition of business, net of cash acquired

Net cash used in investing activities

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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

Cash and cash equivalents at beginning of year

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Trex Company, Inc.

(together with its subsidiaries, the Company), a Delaware corporation, was incorporated on September 4, 1998.

The Company’s principal business based on net sales is the manufacture and distribution of wood and plastic composite products, as well as related accessories, primarily for residential and commercial decking and railing applications.

A majority of its products are manufactured in a proprietary process that combines reclaimed wood fibers and scrap polyethylene.

On July 31, 2017, through its newly-formed, wholly-owned subsidiary, Trex Commercial Products, Inc., the Company acquired certain assets and assumed certain liabilities of Staging Concepts Acquisition, LLC (SC Company) and thus expanded its markets to include the design, engineering and marketing of modular and architectural railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues.

Additional information on the acquisition of SC Company is presented in Note 3.

(together with its wholly-owned subsidiary, the Company), a Delaware corporation, was incorporated on September 4, 1998.

The Company operates in two reportable segments, Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial).

The Company’s principal business based on net sales is the manufacture and distribution of Trex Residential wood and plastic composite products, as well as related accessories, primarily for residential decking and railing applications.

Trex Commercial designs, engineers and markets modular and architectural railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues.

The principal executive offices are located at 160 Exeter Drive, Winchester, Virginia 22603, and the telephone number at that address is (540) 542-6300.

Subsequent to the acquisition, the Company operates in two reportable segments, Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial).

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, Trex Commercial Products, Inc.

(Trex Commercial Products), from date of acquisition of July 31, 2017.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Trex Commercial Products, Inc.

Intercompany accounts and transactions have been eliminated in consolidation.

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Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments purchased with original maturities of three months or less.

Cash equivalents consist of highly liquid investments purchased with original maturities of

three months or less.

Concentrations and Credit Risk

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The Company routinely assesses the financial strength of its customers and believes that its trade receivables credit risk exposure is limited.

Trade receivables are recognized at the amount of revenue recognized on each shipment for Trex Residential products and for satisfied performance obligations for Trex Commercial

products as the Company has an unconditional right to consideration from the customer and payment is due based solely on the passage of time.

A valuation allowance is provided for known and anticipated credit losses and disputed amounts, as determined by management in the course of regularly evaluating individual customer receivables.

This evaluation takes into consideration a customer’s financial condition and credit history, as well as current economic conditions.

There was no material valuation allowance recorded as of December 31, 2019 and 2018.

Trade receivables are recognized at the amount of revenue recognized on each shipment for Trex Residential products and for satisfied performance obligations for Trex Commercial products as the Company has an unconditional right to consideration from the customer and payment is due based solely on the passage of time.

An estimate of expected credit losses is recognized as a valuation allowance and adjusted each reporting period.

The estimate is based on the current expected credit loss model and is determined using an aging schedule, including past events, current conditions and reasonable and supportable forecasts about the future.

There was no material valuation allowance recorded as of December 31, 2020 and December 31, 2019.

In the years ended December 31, 2020, 2019, and 2018 sales to certain customers of Trex Residential accounted for 10 % or more of the Company’s total net sales.

For the year ended December 31, 2019, three

customers of Trex Residential represented approximately 57 % of the Company’s total net sales.

For the year ended December 31, 2018, two

customers of Trex Residential represented approximately 42 % of the Company’s total net sales.

For the year ended December 31, 2017, two

customers of Trex Residential represented approximately 41 % of the Company’s total net sales.

At December 31, 2019, three customers of Trex Residential represented 30 %, 24 % and 10 %, respectively, of the Company’s total accounts receivable balance.

For each year ended December 31, 2019, 2018 and 2017, approximately 27 %, 33 % and 33 %, respectively, of the Company’s materials purchases at Trex Residential were purchased from its four largest suppliers.

Inventories for the Company’s composite decking and railing products are stated at the lower of cost (last-in,

or LIFO, method) and market.

For the year ended December 31, 2020, three customers represented approximately 56 % of the Company’s total net sales.

For the year ended December 31, 2019,

three customers of Trex Residential represented approximately 57 % of the Company’s total net sales.

For the year ended December 31, 2018,

two customers of Trex Residential represented approximately 42 % of the Company’s total net sales.

At December 31, 2020 two customers represented 27 % and 15 %, respectively, of the Company’s accounts receivable balance.

At December 31, 2019 three customers represented 30 %, 24 % and 10 %, respectively, of the Company’s total accounts receivable balance.

For each year ended December 31, 2020, 2019, and 2018, approximately 28 %, 27 %, and 33 %, respectively, of the Company’s materials purchases at Trex Residential were purchased from its

four largest suppliers.

Inventories for the Company’s composite decking and railing products are valued at the lower of cost (last-in,

or LIFO, method) and market as this method results in a better matching of costs and revenues.

The Company periodically reviews its inventory for slow moving or obsolete items and writes down the related products to estimated realizable value.

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The reclaimed material is valued at the costs of the raw material components of the material.

Inventories for the Company’s railing and staging products at Trex Commercial for the commercial and multi-family market are stated at the lower of cost (first-in,

Inventories for the Company’s railing and staging products at Trex Commercial for the commercial and multi-family market are valued at the lower of cost (first-in,

or FIFO method), using actual cost, and net realizable value.

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The costs of additions and improvements are capitalized, while maintenance and repairs are expensed as incurred.

Unpaid liabilities related to property, plant and equipment are included in accounts payable and were $ 0.8 million at December 31, 2019.

Unpaid liabilities related to property, plant and equipment are included in accounts payable and were $ 12.9 million and $ 0.8 million at December 31, 2020 and December 31, 2019, respectively.

Cash flows for capital expenditures as reported in cash flows from investing activities in the Consolidated Statements of Cash Flows are adjusted to exclude unpaid amounts accrued at period end.

Depreciation is provided using the straight-line method over the following estimated useful lives:

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As a result, the carrying amount of long-lived assets could be reduced in the future.

Long-lived assets held for sale are stated at the lower of cost or fair value less cost to sell.

Long-lived assets

held for sale are stated at the lower of cost or fair value less cost to sell.

The Company leases office space, storage warehouses and certain plant equipment under various operating leases.

At inception of an arrangement, the Company evaluates, among other things, whether it has the right to control the use of an identified asset in order to determine if the arrangement is or contains a lease.

Operating leases are included in operating lease right-of-use

(ROU) assets, accrued expenses and other current liabilities, and operating lease liabilities in the consolidated balance sheets.

Operating leases with an initial term of 12 months or less are not included in the consolidated balance sheet.

The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.

The Company gives consideration to instruments with similar characteristics when calculating its incremental borrowing rate.

Certain events, such as a modification to the arrangement or a change in the lease term, are assessed by the Company to determine if it is required to reassess estimates and judgments and remeasure the lease liability and ROU asset.

The Company reviews its ROU asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable.

The carrying amount of the ROU asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.

An impairment loss is measured as the amount by which the carrying amount of the ROU asset exceeds its fair value.

The Company’s operating leases have remaining lease terms of 1 year to 8 years.

Lease terms may include options to extend or terminate the lease when the Company determines that it is reasonably certain it will exercise the option.

Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease

components, which are accounted for separately.

Consideration for non-lease

components is stated on a stand-alone basis in the applicable agreements.

Fair Value Measurement

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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 units is less than the carrying amount to determine if it should proceed with the evaluation of goodwill for impairment.

The Company assigned its goodwill to reporting units and tests each reporting unit’s goodwill for impairment at least on an annual basis, or more frequently if an event occurs or circumstances change in the interim that indicate the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill.

The Company identified its reporting units based on the way it manages its operating segments.

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The Company assigned goodwill to the reporting units based on the excess of the fair values acquired over the fair value of the sum of the individual assets acquired and liabilities assumed that were assigned to the reporting units.

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 units based on a present value of future discounted cash flows and a market valuation approach.

In testing for goodwill impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill.

If the qualitative assessment indicates that the carrying amount of the reporting unit exceeds its fair value, including goodwill, the Company is 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.

If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

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

The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the reporting unit is expected to generate in the future.

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and working capital effects.

The market valuation approach

indicates the fair value of the business based on a comparison of the Company against certain market information.

The market valuation approach indicates the fair value of the business based on a comparison of the Company against certain market information.

Significant estimates in the market approach model include identifying appropriate market multiples and assessing earnings before interest, income taxes, depreciation and amortization (EBITDA) in estimating the fair value of the reporting unit.

For the years ended December 31, 2019, 2018 and 2017, the Company completed its annual impairment test of goodwill utilizing the qualitative assessment and concluded it was not more likely than no t that the fair value of the reporting units was less than the carrying amounts.

For the years ended December 31, 2020, 2019, and 2018, the Company completed its annual impairment test of goodwill utilizing the qualitative assessment and concluded it was not more likely than

no t that the fair value of the reporting units was less than the carrying amounts.

The Company performs the annual impairment testing of its goodwill as of October 31 of each year.

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The Company warrants that its Trex Residential decking products will be free from material defects in workmanship and materials.

This warranty generally extends for a period of 25 years for residential use and 10 years for commercial use.

This warranty generally extends for a period of 25 years for residential use and

10 years for commercial use.

With respect to Trex Signature ®

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and Universal Fascia product, the Company further warrants that the product will not fade in color more than a certain amount and will be resistant to permanent staining from food substances or mold, provided the stain is cleaned within seven days of appearance.

This warranty extends for a period of 25 years for residential use and 10 years for commercial use.

This warranty extends for a period of 25

years for residential use and 10 years for commercial use.

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

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The Company establishes warranty reserves to provide for estimated future expenses as a result of product defects that result in claims.

Reserve estimates are based on management’s judgment, considering such factors as cost per claim, historical experience, anticipated rates of claims, and other available information.

Management reviews and adjusts these estimates, if necessary, based on the differences between actual experience and historical estimates.

Reserve estimates are based on management’s judgment, considering such factors as cost per claim, historical experience, anticipated rates of claims, and other available

Management reviews and adjusts these estimates, if necessary, based on the differences between actual

experience and historical estimates.

Treasury Stock

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Revenue Recognition

Effective January 1, 2018, the Company retrospectively adopted the requirements of Financial Accounting Standards Board (FASB)

Accounting Standards Update (ASU)

Effective January 1, 2018, the Company retrospectively adopted the requirements of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09,

“Revenue from Contracts with Customers” (Topic 606).

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composite decking and railing products and 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.

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.

Trex Residential satisfies its performance obligations at a point in time.

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Trex Commercial contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and is, therefore, not distinct.

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.

Trex Commercial satisfies its performance obligation over time

as work progresses because control is transferred continuously to its customers.

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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Deferred tax assets are reduced by a valuation allowance when, after considering all available positive and negative evidence, it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.

The tax legislation H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” known as the Tax Cuts and Jobs Act (Act), was enacted on December 22, 2017.

The Act reduces the corporate tax rate to 21 percent, effective

January 1, 2018.

Accordingly, we recognized the tax effects of the Act in our financial statements and related notes as of and for the year ended December 31, 2017.

Accordingly, the Company recognized the tax effects of the Act in its financial statements and related notes.

As of December 31, 2019, the Company has a valuation allowance of $

3.0 million against these deferred tax assets.

As of December 31, 2020, the Company has a valuation allowance of $ 2.8 million against these deferred tax assets.

The Company analyzes its position in subsequent reporting periods, considering all available positive and negative evidence, in determining the expected realization of its deferred tax assets.

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Production costs are deferred and recognized as expense in the period that the related advertisement is first used.

At December 31, 2019 $ 0.5 million was included in prepaid expenses for production costs.

At December 31, 2018 there were no production costs included in prepaid expenses.

At December 31, 2020 and December 31, 2019 $ 0.01 million and $ 0.5 million was included in prepaid expenses for production costs, respectively.

For the years ended December 31, 2020, 2019, and 2018, branding expenses, including advertising expenses as described above, were $ 31.7 million, $ 35.7 million, and $ 35.0 million, respectively.

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Recently Adopted Accounting Standards

In June 2018, the FASB issued ASU No.

“Compensation—Stock Compensation (Topic 718).” The ASU expands the scope of Topic 718, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods or services.

The ASU supersedes Subtopic 505-50,

Equity-Based Payment to Non-Employees.”

Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned.

The ASU was effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.

The Company adopted the guidance on January 1, 2019.

Adoption did not have an impact on the Company’s financial condition or results of operations.

In February 2016, the FASB issued ASU No.

“Leases (Topic 842),” and issued subsequent amendments to the initial guidance in January 2018 within ASU No.

in July 2018 within ASU Nos.

in December 2018 within ASU No.

and in March 2019 within ASU No.

(collectively, the standard).

The standard requires lessees to recognize operating leases on the balance sheet as a right-of-use

asset and a lease liability.

The liability is equal to the present value of the lease payments over the remaining lease term.

The asset is based on the liability, subject to certain adjustments.

Operating leases result in straight-line expense.

The Company adopted the standard on January 1, 2019, and elected the modified retrospective method of adoption that allowed the Company to apply the standard as of the beginning of the period of adoption.

The Company opted to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs, and certain other

practical expedients, including the use of hindsight to determine the lease term for existing leases and in assessing impairment of the right-of-use

asset, and the exception for short-term leases.

For its current classes of

underlying assets, the Company did not elect the practical expedient under which the lease components would not be separated from the nonlease components.

Nonlease components include certain maintenance services provided by the lessor and the related consideration is specified on a stand-alone basis in the applicable lease agreements.

Adoption of the standard had a significant impact on the Company’s condensed consolidated balance sheet due to the recognition of a right-of-use

asset and lease liability (current and non-current)

of $ 45.8 million and $ 47.2 million, respectively, upon adoption.

As the Company’s leases do not provide an implicit rate that can be readily determined, the Company used its incremental borrowing rate based on the information available at the implementation date in determining the present value of lease payments.

New Accounting Standards Not Yet Adopted

In August 2018, the FASB issued ASU No.

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

“ Intangibles – Goodwill and Other – Internal-Use

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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.

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

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

The Company adopted the guidance prospectively on January 1, 2020.

Adoption did not have a material impact on its consolidated financial condition or results of operations.

In January 2017, the FASB issued ASU No.

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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 believes adoption will have no material impact on its financial condition or results of operations.

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

The Company adopted the guidance on January 1, 2020.

Adoption did not have a material impact on its consolidated 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.

Measurement of Credit Losses in Financial Instruments

,” as amended.

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.

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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.

The acquired business designs, engineers and markets modular architectural railing and staging systems for the commercial and multi- family market, including sports stadiums and performing arts venues.

As a result of the purchase, the Company gained access to growing commercial markets, expanded its custom design and engineering capabilities, and added the contract architect and specifier communities as new channels for its products.

The acquisition was accounted for using the acquisition method of accounting under U.S.

Generally Accepted Accounting Principles, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.

The fair values of consideration transferred and net assets acquired were determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, “ Fair Value Measurements and Disclosures

.” The Company believes that the fair values assigned to the assets acquired and liabilities assumed were

based on reasonable assumptions.

The Company’s consolidated results of operations include the operating results of the acquired business from the date of acquisition.

Goodwill of $ 57.9 million is primarily attributable to the potential opportunity for the Company 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, an increase in the range of products the Company may offer its core customers, and intangible assets that do not qualify for separable or legal criterion, such as an assembled workforce.

The amount of goodwill that was amortized and deductible for tax purposes in 2019, 2018 and 2017 was $ 3.9 million, $ 3.9 million and $ 1.6 million, respectively.

Primarily all of the goodwill was recorded to Trex Commercial.

The new guidance was 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 adopted the guidance on January 1, 2020.

Adoption did not have a material impact on its consolidated financial condition or results of operations.

New Accounting Standards Not Yet Adopted

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.

Inventories at LIFO value consist of the following as of December 31 (in thousands):

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Under the LIFO method, reductions in inventory cause a portion of the Company’s cost of sales to be based on historical costs rather than current year costs.

There was no material inventory reduction during 2019 or 2018.

Inventories valued at lower of cost (FIFO method) and net realizable value as of December 31, 2019 and December 31, 2018, consist of $ 1.2 million and $ 2.3 million, respectively, of raw materials.

no material inventory reduction during 2020 or 2019.

Inventories valued at lower of cost (FIFO method) and net realizable value as of December 31, 2020 and December 31, 2019, were $ 1.5 million and $ 1.2 million, respectively, consisting primarily of raw materials.

The Company utilizes the FIFO method of accounting related to its Trex Commercial products.

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The Company’s intangible assets consist of domain names purchased in May 2018.

At December 31, 2019 and 2018, intangible assets were $ 6.3 million, net of accumulated amortization of $ 0.7 million and $ 0.3 million, respectively.

At December 31, 2020 and 2019, intangible assets were $ 6.3 million, and accumulated amortization was $ 1.1 million and $ 0.7 million, respectively.

Intangible asset amounts were determined based on the estimated economics of the asset and are amortized over the estimated useful lives on a straight-line basis over 15 years, which approximates the pattern in which the economic benefits are expected to be received.

The Company evaluates the recoverability of intangible assets periodically and considers events or circumstances that may warrant revised estimates of useful lives or that may indicate an impairment.

Intangible asset amortization expense for the years ended December 31, 2019 and December 31, 2018, was $ 0.4 million and $ 3.1 million, respectively.

Intangible asset amortization expense for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, was $ 0.4 million, $ 0.4 million and $ 3.1 million, respectively.

Intangible asset amortization expense for the year ended December 31, 2018 included amortization expense for customer backlog and trade names and trademarks, which were fully amortized as of December 31, 2018.

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Revolving Credit Facility

Indebtedness after November 4, 2019

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

On November 5, 2019, the Company entered into a Fourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) as borrower, Trex Commercial Products, Inc., as guarantor;

Bank of America, N.A.

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

and certain other lenders including Wells Fargo Bank, N.A., who is also Syndication Agent, and Truist Bank, arranged by BOA Securities, Inc., as Sole Lead Arranger and Sole Bookrunner, to amend and restate the Third Amended and Restated Credit Agreement (Third Amended Credit Agreement), dated as of January 12, 2016, as amended.

The Fourth Amended Credit Agreement provides 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 ends November 5, 2024 .

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 through May 26, 2022.

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 of the 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 BOA 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 %, Wells

Fargo of 28.0 % and Regions of 24.5 %.

The Notes and interest rates for the Revolving A Commitments remained unchanged and are the same as previously disclosed.

The Notes for Revolving A Commitments and Revolving B Commitments provide the Company, in the aggregate, the ability to borrow an amount up to the respective Revolving A Loan Limit and Revolving B Loan Limit during the respective Revolving A Term and Revolving B Term.

The Company is not obligated to borrow any amount under either the Revolving A Loan or the Revolving B Loan.

Within either the Revolving A Loan or the Revolving B Loan, the Company may borrow, repay and reborrow at any time or from time to time while the respective Revolving A Loan or Revolving B Loan remains 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 %.

The Applicable Rate for Revolving B Commitments means the following percentages per annum, based upon the Consolidated Debt to Consolidated EBITDA Ratio as set forth in the most recent Compliance Certificate received by BOA as the Administrative Agent and as set forth in the New Credit Agreement:

Consolidated Debt to

Eurodollar Rate

Loans / LIBOR

Base Rate Loans

Commitment Fee

< 2.50:1.00 but

< 2.00:1.00 but

Compliance with Debt Covenants and Restrictions

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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.