TREX CO INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following management discussion should be read in conjunction with the Trex Company, Inc. (Company, we or our) Annual Report on Form 10-K for the year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission (SEC) and the condensed consolidated financial statements and notes thereto included in Part I, Item 1. “Financial Statements” of this quarterly report. NOTE ON FORWARD-LOOKING STATEMENTS This management’s discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements regarding our expected financial position and operating results, our business strategy, our financing plans, forecasted demographic and economic trends relating to our industry and similar matters are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” “intend” or similar expressions. We cannot promise you that our expectations in such forward-looking statements will turn out to be correct. Our actual results could be materially different from our expectations because of various factors, including the factors discussed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC, and the factor discussed under “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q. These statements are also subject to risks and uncertainties that could cause the Company’s actual operating results to differ materially. Such risks and uncertainties include, but are not limited to: the extent of market acceptance of the Company’s current and newly developed products; the costs associated with the development and launch of new products and the market acceptance of such new products; the sensitivity of the Company’s business to general economic conditions; the impact of seasonal and weather-related demand fluctuations on inventory levels in the distribution channel and sales of the Company’s products; the availability and cost of third-party transportation services for the Company’s products and raw materials; the Company’s ability to obtain raw materials, including scrap polyethylene, wood fiber, and other materials used in making our products, at acceptable prices; the Company’s ability to maintain product quality and product performance at an acceptable cost; the Company’s ability to increase throughput and capacity to adequately match supply with demand; the level of expenses associated with product replacement and consumer relations expenses related to product quality; the highly competitive markets in which the Company operates; cyber-attacks, security breaches or other security vulnerabilities; 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. OVERVIEW Operations and Products: Trex Company, Inc. currently operates in two reportable segments: Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). Refer to Note 16, Segments , in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1. Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information. The Company is focused on using renewable resources within both our Trex Residential and Trex Commercial segments. Trex Residential is the world’s largest manufacturer of high-performance composite decking and residential railing products, which are marketed under the brand name Trex ® and manufactured in the United States. We offer a comprehensive set of aesthetically appealing and durable, low-maintenance product offerings in the decking, residential railing, fencing and outdoor lighting categories. A majority of the products are eco-friendly and leverage recycled and reclaimed materials to the extent possible. Trex Residential decking is made in a proprietary process that combines reclaimed wood fibers and recycled polyethylene film, making Trex one of the largest recyclers of plastic film in North America. In addition to resisting fading and surface staining, Trex Residential products require no sanding and sealing, resist moisture damage, provide a splinter-free surface and do not require chemical treatment against rot or insect infestation. Combined, these aspects yield significant aesthetic advantages and lower maintenance than wood decking and railing and ultimately render Trex products less costly than wood over the life of the deck. Special characteristics (including resistance to splitting, the ability to bend, and ease and consistency of machining and finishing) facilitate installation, reduce contractor call-backs and afford consumers a wide range of design options. Trex Residential products are sold to distributors and home centers for final resale primarily to the residential market. 17 Table of Contents Trex offers the following products through Trex Residential: Decking and Accessories Our principal decking products are Trex Transcend ® , Trex Select ® and Trex Enhance ® . In addition, our Trex Transcend decking product can also be used as cladding. Our high-performance, low-maintenance, eco-friendly composite decking products are comprised of a blend of 95 percent reclaimed wood fibers and recycled polyethylene film and feature a protective polymer shell for enhanced protection against fading, staining, mold and scratching. We also offer accessories to our decking products, including Trex Hideaway ® and Trex DeckLighting ™ , an outdoor lighting system. Trex DeckLighting is a line of energy-efficient LED dimmable deck lighting, which is designed for use on posts, floors and steps. The line includes a post cap light, deck rail light, riser light and a recessed deck light. Railing Our residential railing products are Trex Transcend ® Railing, Trex Select ® Railing, Trex Enhance ® Railing and Trex Signature ® aluminum railing. Trex Transcend Railing, made from approximately 40 percent recycled content, is available in the colors of Trex Transcend decking and finishes that make it appropriate for use with Trex decking products as well as other decking materials, which we believe enhances the sales prospects of our railing products. Trex Select Railing, made from approximately 40 percent recycled content, is offered in a white finish and is ideal for consumers who desire a simple clean finished look for their deck. Trex Enhance, made from approximately 40 percent recycled content, is available in three colors and is offered through home improvement retailers in kits that contain the complete railing system. Trex Signature aluminum railing, made from a minimum of 50 percent recycled content, is available in three colors and designed for consumers who want a sleek, contemporary look. Fencing Our Trex Seclusions ® fencing product is offered through two specialty distributors. This product consists of structural posts, bottom rail, pickets, top rail and decorative post caps. Trex Commercial is a leading national provider of custom-engineered railing and staging systems. Trex Commercial designs and engineers custom solutions, which are prevalent in professional and collegiate sports facilities, commercial and high-rise applications, performing arts, sports, and event production and rentals. With a team of devoted engineers, and industry-leading reputation for quality and dedication to customer service, Trex Commercial markets to architects, specifiers, contractors, and building owners. Trex offers the following products through Trex Commercial: Architectural Railing Systems Our architectural railing systems are pre-engineered guardrails with options to accommodate styles ranging from classic and elegant wood top rail combined with sleek stainless components and glass infill, to modern and minimalist stainless cable and rod infill choices. Trex Commercial can also design, engineer and manufacture custom railing systems tailored to the customer’s specific material, style and finish. Many railing styles are achievable, including glass, mesh, perforated railing and cable railing. Aluminum Railing Systems Trex Signature ® aluminum railing collection, made from a minimum of 50 percent recycled content, combines superior styling with the unparalleled strength of aluminum – making it an ideal railing choice for a variety of commercial settings. Its straightforward, unobtrusive design features traditional balusters and contemporary vertical rods, and can be installed with continuously graspable rail options for added safety, comfort and functionality. Trex Signature is available in a variety of colors and stock lengths to accommodate project needs. 18 Table of Contents Staging Equipment and Accessories Our advanced modular, lightweight custom staging systems include portable platforms, orchestra shells, guardrails, stair units, barricades, camera platforms, VIP viewing decks, ADA infills, DJ booths, pool covers, and other custom applications. Our systems provide superior staging product solutions for facilities and venues with custom needs. Our modular stage equipment is designed to appear seamless, feel permanent, and maximize the functionality of the space. Highlights for the three months ended September 30, 2021: • Increase in net sales of 45.1%, or $104.4 million, to $335.9 million for the three months ended September 30, 2021 compared to $231.5 million for the three months ended September 30, 2020. • Increase in gross profit of 50.9%, or $43.3 million, to $128.3 million for the three months ended September 30, 2021 compared to $85.0 million for the three months ended September 30, 2020. • Increase in net income to $73.8 million, or $0.64 per diluted share, for the three months ended September 30, 2021 compared to $42.7 million, or $0.37 per diluted share, for the three months ended September 30, 2020. • Increase in EBITDA (earnings before interest, income tax and depreciation and amortization) of 75.7%, or $46.5 million, to $108 million for the three months ended September 30, 2021 compared to $61.5 million for the three months ended September 30, 2020. • Capital expenditures of $29.6 million, primarily to increase production capacity at the Trex Residential facilities and for cost reduction initiatives and other production improvements. Net Sales . Net sales consist of sales and freight, net of discounts. The level of net sales is principally affected by sales volume and the prices paid for Trex products. Trex Residential operating results have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home and commercial improvement and residential and commercial construction and can shift demand for our products to a later period. As part of our normal business practice and consistent with industry practice, we have historically provided our distributors and dealers of our Trex Residential products incentives to build inventory levels before the start of the prime deck-building season to ensure adequate availability of our product to meet anticipated seasonal consumer demand and to enable production planning. These incentives include payment discounts, favorable payment terms, 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 our incentive programs can significantly impact sales, receivables and inventory levels during the offering period. In addition, the operating results for Trex Commercial are driven by the timing of individual projects, which may vary each quarterly period. Gross Profit. Gross profit represents the difference between net sales and cost of sales. Cost of sales consists of raw material costs, direct labor costs, manufacturing costs, subcontract costs and freight. Raw material costs generally include the costs to purchase and transport reclaimed wood fiber, reclaimed polyethylene, pigmentation for coloring our products, and commodities used in the production of railing and staging. Direct labor costs include wages and benefits of personnel engaged in the manufacturing process. Manufacturing costs consist of costs of depreciation, utilities, maintenance supplies and repairs, indirect labor, including wages and benefits, and warehouse and equipment rental activities. Selling, General and Administrative Expenses. The largest component of selling, general and administrative expenses is personnel related costs, which includes salaries, commissions, incentive compensation, and benefits of personnel engaged in sales and marketing, accounting, information technology, corporate operations, research and development, and other business functions. Another component of selling, general and administrative expenses is branding and other sales and marketing costs, which are used to build brand awareness. These costs consist primarily of advertising, merchandising, and other promotional costs. Other general and administrative expenses include professional fees, office occupancy costs attributable to the business functions previously referenced, and consumer relations expenses. As a percentage of net sales, selling, general and administrative expenses may vary from quarter to quarter due, in part, to the seasonality of our business. Product Warranty. We warrant that our Trex Residential products will be free from material defects in workmanship and materials for warranty periods ranging from 10 years to 25 years, depending on the product and its use. 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, we also warrant our Trex Commercial products will be free of manufacturing defects for periods ranging from 1 year to 3 years. 19 Table of Contents We continue to receive and settle claims for decking products manufactured at our Trex Residential Nevada facility prior to 2007 that exhibit surface flaking and maintain a warranty reserve to provide for the settlement of these claims. 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 fiscal year are received during the summer outdoor season, which spans the second and third fiscal quarters. It has been our practice to utilize actuarial techniques 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. Our actuarial analysis is based on currently known facts and a number of assumptions. 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. The number of incoming claims received in the nine months ended September 30, 2021 was lower than the number of claims received in the nine months ended September 30, 2020 and lower than our expectations for 2021. Average cost per claim experienced in the nine months ended September 30, 2021 was higher than that experienced in the nine months ended September 30, 2020 but was consistent with expectations for the current year. We believe the reserve at September 30, 2021 is sufficient to cover future surface flaking obligations. Refer to Note 18, Commitments and Contingencies, Product Warranty , in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1. Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information. We estimate that the annual number of claims received will decline over time and that the average cost per claim will continue to increase, primarily due to inflation. If the level of claims received or average cost per claim differs materially from expectations, it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flows in future periods. We estimate that a 10% change in the expected number of remaining claims to be settled with payment or the expected cost to settle claims may result in approximately a $1.9 million change in the surface flaking warranty reserve. The following table details surface flaking claims activity related to our warranty: Nine Months Ended September 30, 2021 2020 Claims open, beginning of period 1,799 1,724 Claims received (1) 788 1,263 Claims resolved (2) (785 ) (1,042 ) Claims open, end of period 1,802 1,945 Average cost per claim (3) $ 3,492 $ 3,396 (1) Claims received include new claims received or identified during the period. (2) Claims resolved include all claims settled with or without payment and closed during the period. (3) Average cost per claim represents the average settlement cost of claims closed with payment during the period. COVID-19. Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence. The COVID-19 pandemic increased the level of volatility and uncertainty globally and created macroeconomic disruption. As of the date of this report, we have not experienced any material disruptions to our operations, production, or supply chain due to the COVID-19 pandemic. The pandemic remains an evolving situation and while macro-economic recovery seems likely, the duration and extent of the recovery remains uncertain. We are managing our business to ensure the continuity of operations and the safety of employees. Trex Residential has not experienced any decline in demand for its outdoor living products. Trex Commercial has not experienced any material reduction to its net sales as it has continued to execute on pre-pandemic projects. However, measures taken to contain the spread of the virus have influenced new project commitments. We continue to assess if the impact on project commitments will adversely affect Trex Commercial’s financial condition and results of operations in future periods. Fire at Virginia Facility On March 13, 2021, an electrical fire occurred at one of our manufacturing buildings in its Virginia complex. No injuries occurred from the event. The building was temporarily off-line while damage to the building’s electrical systems was addressed. We have insurance coverage for repairs, incremental direct costs to serve its customers, and losses in operating income from the loss in net sales and are currently working through the claim process with our insurance company. During the three months and nine months ended September 30, 2021, we received partial settlements from our insurance company of $3.7 million and $4.7 million, respectively, resulting in gains on insurance proceeds. The gains on insurance proceeds are reported as a reduction to selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income. 20 Table of Contents RESULTS OF OPERATIONS Below is our discussion and analysis of our operating results and material changes in our operating results for the three months ended September 30, 2021 (2021 quarter) compared to the three months ended September 30, 2020 (2020 quarter), and for the nine months ended September 30, 2021 (2021 nine-month period) compared to the nine months ended September 30, 2020 (2020 nine-month period). Three Months Ended September 30, 2021 Compared To The Three Months Ended September 30, 2020 Net Sales Three Months Ended September 30, $ Change % Change 2021 2020 (dollars in thousands) Total net sales $ 335,872 $ 231,502 $ 104,370 45.1 % Trex Residential net sales $ 319,207 $ 218,435 $ 100,772 46.1 % Trex Commercial net sales $ 16,665 $ 13,067 $ 3,598 27.5 % Total net sales increased by 45.1% in the 2021 quarter compared to the 2020 quarter reflecting a 46.1% increase in Trex Residential net sales and a 27.5% increase in Trex Commercial net sales. The increase in net sales was substantially all due to volume growth across all Trex Residential product lines. However, labor shortages impacted the extent of the volume growth. The increase also reflects a price increase on certain product lines at Trex Residential that was realized in early September 2021 to address inflationary pressures in key raw materials and transportation. Volume growth in the 2021 quarter was a result of sustained broad-based demand, driven by continued strong, secular trends across Trex Residential’s outdoor living products, continued market share gains from wood, and increased product availability as additional capacity came online. Trex Commercial contributed $16.7 million to consolidated net sales. Gross Profit Three Months Ended September 30, $ Change % Change 2021 2020 (dollars in thousands) Cost of sales $ 207,622 $ 146,538 $ 61,084 41.7 % % of total net sales 61.8 % 63.3 % Gross profit $ 128,250 $ 84,964 $ 43,286 50.9 % Gross margin 38.2 % 36.7 % Gross profit as a percentage of net sales, gross margin, was 38.2% in the 2021 quarter compared to 36.7% in the 2020 quarter. Gross margin for Trex Residential and Trex Commercial was 38.9% and 24.0%, respectively, in the 2021 quarter compared to 37.4% and 24.4%, respectively, in the 2020 quarter. Excluding a $6.5 million provision during the 2020 quarter to the Trex Residential legacy warranty reserve, gross margin for the 2020 quarter was 39.5% compared to 38.2% in the 2021 quarter. Excluding the provision in the 2020 quarter, gross margin decreased as a result of inflationary pressures on key raw materials, higher transportation costs and labor shortages, partially offset by the price increase realized in September and increased production efficiencies. Selling, General and Administrative Expenses Three Months Ended September 30, $ Change % Change 2021 2020 (dollars in thousands) Selling, general and administrative expenses $ 30,154 $ 28,027 $ 2,127 7.6 % % of total net sales 9.0 % 12.1 % 21 Table of Contents Selling, general and administrative expenses in the 2021 quarter increased compared to the 2020 quarter primarily due to a $4.7 million increase in personnel related expenses and incentive compensation and a $1.1 million increase in research and development expenses, offset by a gain on insurance proceeds of $3.7 million related to the fire at the Virginia facility. Provision for Income Taxes Three Months Ended September 30, $ Change % Change 2021 2020 (dollars in thousands) Provision for income taxes $ 24,311 $ 14,435 $ 9,876 68.4 % Effective tax rate 24.8 % 25.3 % The effective tax rate for the 2021 quarter of 24.8% was relatively unchanged compared to the effective tax rate of 25.3% for the 2020 quarter. Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) 1 (in thousands) Reconciliation of net income (GAAP) to EBITDA (non-GAAP): Three Months Ended September 30, 2021 Trex Residential Trex Commercial Total Net income $ 72,603 $ 1,192 $ 73,795 Interest income, net (10 ) — (10 ) Income tax expense 23,899 412 24,311 Depreciation and amortization 9,643 258 9,901 EBITDA $ 106,135 $ 1,862 $ 107,997 Three Months Ended September 30, 2020 Trex Residential Trex Commercial Total Net income $ 42,225 $ 485 $ 42,710 Interest income, net (208 ) — (208 ) Income tax expense 14,276 159 14,435 Depreciation and amortization 4,326 209 4,535 EBITDA $ 60,619 $ 853 $ 61,472 Three Months Ended September 30, $ Change % Change 2021 2020 (dollars in thousands) Total EBITDA $ 107,997 $ 61,472 $ 46,525 75.7 % Trex Residential EBITDA $ 106,135 $ 60,619 $ 45,516 75.1 % Trex Commercial EBITDA $ 1,862 $ 853 $ 1,009 118.3 % Total EBITDA increased 75.7% to $108 million for the 2021 quarter compared to $61.5 million for the 2020 quarter. The increase was driven by a 75.1% increase in Trex Residential EBITDA, primarily due to the volume growth in net sales. 1 EBITDA represents net income before interest, income taxes, depreciation and amortization. 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 believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using several measures, including 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 or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important information regarding the operating performance of the Company and its reportable segments. 22 Table of Contents Nine Months Ended September 30, 2021 Compared To The Nine Months Ended September 30, 2020 Net Sales Nine Months Ended September 30, $ Change % Change 2021 2020 (dollars in thousands) Total net sales $ 892,991 $ 652,545 $ 240,446 36.8 % Trex Residential net sales $ 850,909 $ 614,187 $ 236,722 38.5 % Trex Commercial net sales $ 42,082 $ 38,358 $ 3,724 9.7 % The 36.8% increase in total net sales in the 2021 nine-month period compared to the 2020 nine-month period was substantially all due to volume growth at Trex Residential across all product lines. Our capacity expansion program was fully operational as of the end of May 2021 enabling our ability to capture additional growth. The increase in Trex Residential net sales was primarily driven by sustained broad-based demand, driven by continued strong, secular trends across Trex Residential’s outdoor living products, and market share gains from wood. The increase in net sales at Trex Residential was also impacted by our price increases realized in September to address inflationary pressures across many key raw materials and transportation. Trex Commercial contributed $42.1 million to consolidated net sales. Gross Profit Nine Months Ended September 30, $ Change % Change 2021 2020 (dollars in thousands) Cost of sales $ 550,668 $ 385,479 $ 165,189 42.9 % % of total net sales 61.7 % 59.1 % Gross profit $ 342,323 $ 267,066 $ 75,257 28.2 % Gross margin 38.3 % 40.9 % Gross profit as a percentage of net sales, gross margin, was 38.3% in the 2021 nine-month period compared to 40.9% in the 2020 nine-month period. Gross margin for Trex Residential and Trex Commercial products in the 2021 nine-month period were 39.2% and 21.2%, respectively, compared to 41.6% and 29.6%, respectively, in the 2020 nine-month period. Excluding a $6.5 million provision during the 2020 nine-month period to the Trex Residential legacy warranty reserve, gross margin for the 2020 nine-month period was 41.9% compared to 38.3% for the 2021 nine-month period. Gross margin at Trex Residential was unfavorably impacted by inflationary pressures on key raw materials and transportation, by start-up costs and increased depreciation related to the capacity expansion program at Trex Residential, labor shortages and reduced overhead absorption due to the fire at the Virginia facility. The decrease in gross margin was partially offset by the price increases realized in September 2021 on certain product lines at Trex Residential. Selling, General and Administrative Expenses Nine Months Ended September 30, $ Change % Change 2021 2020 (dollars in thousands) Selling, general and administrative expenses $ 97,383 $ 91,598 $ 5,785 6.3 % % of total net sales 10.9 % 14.0 % The $5.8 million increase in selling, general and administrative expenses in the 2021 nine-month period compared to the 2020 nine-month period resulted primarily from a $8.9 million increase in personnel related expenses and incentive compensation and a $2.0 million increase in research and development expenses, offset by $4.7 million in gains on insurance proceeds related to the fire at the Virginia facility. Provision for Income Taxes Nine Months Ended September 30, $ Change % Change 2021 2020 (dollars in thousands) Provision for income taxes $ 61,235 $ 43,938 $ 17,297 39.4 % Effective tax rate 25.0 % 24.9 % 23 Table of Contents The effective tax rate for the 2021 nine-month period was comparable to the effective tax rate for the 2020 nine-month period. Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) 2 (in thousands) Reconciliation of net income (GAAP) to EBITDA (non-GAAP): Nine Months Ended September 30, 2021 Trex Residential Trex Commercial Total Net income $ 182,437 $ 1,268 $ 183,705 Interest income, net — — — Income tax expense 60,797 438 61,235 Depreciation and amortization 24,873 731 25,604 EBITDA $ 268,107 $ 2,437 $ 270,544 Nine Months Ended September 30, 2020 Trex Residential Trex Commercial Total Net income $ 129,157 $ 3,174 $ 132,331 Interest income, net (801 ) — (801 ) Income tax expense 42,853 1,085 43,938 Depreciation and amortization 11,855 595 12,450 EBITDA $ 183,064 $ 4,854 $ 187,918 Nine Months Ended September 30, $ Change % Change 2021 2020 (dollars in thousands) Total EBITDA $ 270,544 $ 187,918 $ 82,626 44.0 % Trex Residential EBITDA $ 268,107 $ 183,064 $ 85,043 46.5 % Trex Commercial EBITDA $ 2,437 $ 4,854 $ (2,417 ) (49.8 )% Total EBITDA increased 44% to $270.5 million for the 2021 nine-month period compared to $188 million for the 2020 nine-month period. The increase was driven by a 46.5% increase in Trex Residential EBITDA, primarily due to the volume growth in net sales. LIQUIDITY AND CAPITAL RESOURCES We finance operations and growth primarily with cash flows from operations, borrowings under our revolving credit facilities, operating leases and normal trade credit terms from operating activities. At September 30, 2021 we had $54 million of cash and cash equivalents. 2 EBITDA represents net income before interest, income taxes, depreciation and amortization. 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 believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using several measures, including 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 or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important information regarding the operating performance of the Company and its reportable segments. 24 Table of Contents S ources and Uses of Cash. The following table summarizes our cash flows from operating, investing and financing activities (in thousands): Nine Months Ended September 30, 2021 2020 Net cash provided by operating activities $ 113,059 $ 12,514 Net cash used in investing activities (123,096 ) (97,546 ) Net cash used in financing activities (57,622 ) (43,720 ) Net decrease in cash and cash equivalents $ (67,659 ) $ (128,752 ) Operating Activities Cash provided by operating activities was $113.1 million during the 2021 nine-month period primarily from an increase in gross profit and related increase in net income resulting from the increase in net sales volume growth at Trex Residential. Cash flows used in operations related to higher working capital investment in accounts receivable, the majority of which will be collected in the fourth quarter, offset by increases in accounts payable and accrued expenses. Investing Activities Capital expenditures in the 2021 nine-month period of $124.5 million consisted primarily of $56.7 million in capacity expansion at our Trex Residential facilities, $49.2 million in general plant cost reduction initiatives and other production improvements and $6.2 million in other non-production expenditures. Financing Activities Net cash used in financing activities of $57.6 million in the 2021 nine-month period consisted primarily of repurchases of our common stock of $59 million. 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 September 30, 2021, the Company has repurchased 3.3 million shares of the Company’s outstanding common stock under the Stock Repurchase Program. 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 September 30, 2021, we had no outstanding borrowings 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. 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; Bank of America, N.A. (BOA), as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; and certain other lenders including Wells Fargo Bank, N.A. (Wells Fargo), who is also Syndication Agent; 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. 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 September 30, 2021. 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. 25 Table of Contents We believe that cash on hand, cash from operations and borrowings expected to be available under our revolving credit facilities, as amended, will provide sufficient funds to fund planned capital expenditures, make scheduled principal and interest payments, fund warranty payments, and meet other cash requirements. We currently expect to fund future capital expenditures from operations and financing activities. 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. Capital Requirements. In June 2019, we announced a $200 million capital expenditure program to increase production capacity at our Trex Residential facilities in Virginia and Nevada. The program involved 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 allowed us to increase production output for future projected growth related to our strategy of converting wood demand to Trex Residential wood-alternative composite decking. Our capacity expansion program increased our Trex Residential production capacity by approximately 70 percent when compared to 2019 volume levels. On October 26, 2021, we announced plans to add a third U.S.-based Trex Residential manufacturing facility in Little Rock, Arkansas. The new campus will sit on nearly 300 acres of land and will include buildings dedicated to decking and railing production, plastic film recycling and processing, reclaimed wood storage, warehousing, and administrative offices to address increased demand for Trex Residential outdoor living products. Construction is slated to begin in early 2022 with the first production output anticipated in 2024. Funded primarily through ongoing cash generation, we expect to invest an estimated $400 million over five years in the development of the new Arkansas site. Our capital expenditure guidance for 2021 is $135 million to $155 million. In addition to our capital expenditure program, our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, upgrading equipment and support systems, 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. Inventory in Distribution Channels. We sell our Trex Residential decking and railing products through a tiered distribution system. We have over 50 distributors worldwide and two national retail merchandisers to which we sell our products. The distributors in turn sell the products to dealers and retail locations who in turn sell the products to end users. Significant increases in inventory levels in the distribution channel without a corresponding change in end-use demand could have an adverse effect on future sales. We cannot definitively determine the level of inventory in the distribution channels at any time. Seasonality . The operating results for Trex Residential have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift demand for its products to a later period. As part of its normal business practice and consistent with industry practice, Trex Residential has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of its product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs. The operating results for Trex Commercial have not historically varied from quarter to quarter as a result of seasonality. However, they are driven by the timing of individual projects, which may vary significantly each quarterly period.