What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-10-31 compared with 2022-08-08 · 157 added, 167 removed, 267 unchanged (55% of the section changed)

40 unchanged sentences

— a general description of our business, a brief overview of our reportable segments’ products, and a discussion of our operational highlights.

Financial Highlights for the three months ended June

a summary of the financial highlights for the quarterly period ended June 30, 2022, a description of relevant financial statement line items, and a general discussion of factors that may affect our operations.

Highlights and Financial Performance Quarter-to-Date

and Year-to-Date

a summary of financial performance and highlights for the three months and nine months ended September 30, 2022, a general discussion of factors that may affect our operations, and a description of relevant financial statement line items.

Results of Operations

— an analysis of our consolidated results of operations for the three months and six months in the period ended June 30, 2022 compared to three months and six months in the period ended June 30, 2021, respectively.

— an analysis of our consolidated results of operations for the three months and nine months in the period ended September 30, 2022 compared to three months and nine months in the period ended September 30, 2021, respectively.

Liquidity and Capital Resources

6 unchanged sentences

, in the Notes to the Condensed Consolidated Financial Statements in Part I.

Condensed Consolidated Financial Statements

Condensed Consolidated

Financial Statements

of this Quarterly Report on Form 10-Q

7 unchanged sentences

A majority of the products are eco-friendly

and leverage recycled materials to the extent possible.

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 Residential one of the largest recyclers of plastic film in North America.

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Our principal decking products are Trex Transcend ®

, Trex Transcend ®

, Trex Select ®

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Railing, Trex Select ®

Railing, Trex Enhance ®

Railing, and Trex Signature ®

2 unchanged sentences

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 40 percent recycled content, is available in three colors and designed for consumers who want a sleek, contemporary look.

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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 advanced modular, lightweight custom staging systems, including portable platforms and other custom applications, provide 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.

Operational Highlights:

Trex Residential Begins Production of New Product

On May 16, 2022, we announced the expansion of our premium Trex Residential decking line with the introduction of Transcend ®

The new Transcend Lineage boards feature an elevated aesthetic with subtle, elegant graining, available in two new color options that expand the Transcend collection with nature-inspired tones and texturing that today’s homeowners are seeking.

Like all Trex Residential decking, Lineage boards are made from 95% recycled and reclaimed content and engineered with a proprietary, high-traffic formulation and ultra-durable integrated shell.

Transcend Lineage decking launched in mid-May

and will be sold nationwide through Trex Residential dealers and major home centers.

Production and sale of the new Transcend Lineage boards began in May 2022.

Trex Residential Arkansas Facility

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The new campus will sit on approximately 300 acres of land and will address increased demand for Trex Residential outdoor living products.

The development approach for the new campus will be modular and calibrated to demand trends for Trex Residential outdoor living products.

In July 2022, the Company entered into a design-build agreement and, as previously announced, anticipates spending approximately $400 million on the facility.

The budget for the design-build agreement is contained within this amount.

The first production output is anticipated in 2024.

Strategic Investments in the Six Months Ended June

During the six months ended June 30, 2022, we made strategic investments to enhance the support of our Trex Residential brand and channel partners, including the debut of our new “We See It Too” marketing campaign.

We also launched Trex Academy, an online multimedia content hub dedicated to helping the Trex Residential Do-It-Yourself

customer bring their deck dreams to life by providing how-to

In addition, we are investing to drive margin enhancement through supply chain and manufacturing cost out programs, and recently hired a new director at Trex Residential to lead a team dedicated to spearheading these initiatives.

Publication of 2021 Environmental, Social and Governance Report

On June 23, 2022, the Company published its 2021 Environmental, Social and Governance (ESG) report.

The annual ESG report highlights how the Company is “Building a Better Tomorrow Together” through a broad spectrum of initiatives to address its most material ESG priorities.

Highlights include:

Investing to reduce environmental impact and advance sustainability;

Prioritizing employee safety and career growth;

Nurturing a diverse, equitable and inclusive workplace;

Conducting business responsibly through strong governance and ethics;

Adding value to the communities where we operate.

Trex Residential NexTrex

Grassroots Movement.

In August 2022, Trex Residential launched its NexTrex Grassroots Movement to broaden its recycling initiative to enlist communities and organizations to partner in its robust recycling efforts.

The initiative provides a turnkey framework for municipalities, universities, nonprofits and other qualifying businesses to serve as centralized drop-off

locations for recycling polyethylene plastic film while earnings funds for their organizations.

Organizations approved for participation in the NexTrex program can earn funding by serving as drop-off

locations where community members can recycle their discarded plastic film packaging.

Trex will pick up and transport the material to its manufacturing facilities in Virginia or Nevada, where it will begin its new life as high-performance Trex Residential composite decking.

Russian Invasion of Ukraine

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We cannot predict the impact of the continued conflict on the global economy, our industry or our business.

FINANCIAL HIGHLIGHTS FOR THE THREE MONTHS ENDED JUNE

Increase in net sales of 24%, or $74.7 million, to $386.2 million for the three months ended June 30, 2022 compared to $311.6 million for the three months ended June 30, 2021.

Increase in net income to $88.9 million, or $0.79 per diluted share, for the three months ended June 30, 2022 compared to $61.4 million, or $0.53 per diluted share, for the three months ended June 30, 2021.

Increase in EBITDA (earnings before interest, income tax and depreciation and amortization) of 40.9%, or $37.5 million, to $129.1 million for the three months ended June 30, 2022 compared to $91.6 million for the three months ended June 30, 2021.

Capital expenditures of $44.3 million at Trex Residential, primarily related to cost reduction initiatives, the new Arkansas manufacturing facility, capacity expansion in our existing facilities, our new corporate headquarters, and safety, environmental and general support.

Repurchase of 2.8 million shares of our outstanding common stock during the three months ended June 30, 2022 under our Stock Repurchase Program for a total 7.3 million shares repurchased under the program as of June 30, 2022.

HIGHLIGHTS AND FINANCIAL PERFORMANCE QUARTER-TO-DATE

AND YEAR-TO-DATE

Financial performance.

The following table presents quarter-to-date

and year-to-date

highlights of our financial performance:

Three Months Ended

Nine Months Ended

(in thousands, except per share amounts)

Diluted earnings per share

Capital expenditures

During the 2022 third quarter, our capital expenditures were $41.6 million primarily at Trex Residential related to cost reduction initiatives, the new Arkansas manufacturing facility, capacity expansion in our existing facilities, our new corporate headquarters, and safety, environmental and general support.

Repurchase of common shares

We repurchased 1.7 million shares of our outstanding common stock in the 2022 third quarter under our Stock Repurchase Program for a total 9.0 million shares repurchased under the program as of September 30, 2022.

RESULTS OF OPERATIONS

Our results of operations are affected by a number of factors, including, but not limited to, the cost to manufacture and distribute products, cost of raw materials, inflation, interest rates, consumer spending and preferences, the impact of any supply chain disruptions, economic conditions, and any adverse effects from the COVID-19

pandemic and geopolitical conflicts.

Strong sales growth in the first and second quarters of 2022 reflected an increase in Trex Residential net sales driven by pricing actions taken in 2021 and 2022, volume growth that continued to reflect strong secular trends in the outdoor living category, continued execution of our wood-to-composite

market strategy share conversion, and channel inventory build to support historically high growth rates.

The channel inventory build was due in part to expected consumer demand along the lines of what was seen in 2020 and 2021, but also was a consequence of improved product availability following more than two years of capacity constraints and product allocations.

However, towards the end of June Trex Residential experienced a reduction in demand from its distribution partners, spurred by concerns over a potential easing in consumer demand due to rising interest rates, declining consumer sentiment and expectations of a general slowing in the economy.

As a result, beginning in the third quarter Trex Residential’s channel partners met demand partially through inventory drawdown.

The drawdown negatively impacted third quarter sales and will impact fourth quarter sales.

In response to this changed environment, Trex Residential immediately took measures to manage a production slowdown, including labor force reductions, production optimization, as well as other cost actions.

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

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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.

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 six months ended June 30, 2022, was significantly lower than the number of claims received in the six months ended June 30, 2021 and lower than our expectations for 2022.

Average cost per claim experienced in the six months ended June 30, 2022 was significantly higher than that experienced in the six months ended June 30, 2021 and higher than our expectations for the current year.

The elevated average cost per claim experienced in the six months ended June 30, 2022, was primarily the result of the closure of two large claims, which were considered in our estimation of the surface flaking warranty reserve.

We believe the reserve at June 30, 2022 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.

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 increase.

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 $1.7 million change in the surface flaking warranty reserve.

The following table details surface flaking claims activity related to our warranty:

Six Months Ended June 30,

Claims open, beginning of period

Claims received (1)

Claims resolved (2)

Claims open, end of period

Average cost per claim (3)

Claims received include new claims received or identified during the period.

Claims resolved include all claims settled with or without payment and closed during the period.

Average cost per claim represents the average settlement cost of claims closed with payment during the period.

RESULTS OF OPERATIONS

pandemic and geopolitical conflicts.

Strong sales growth at Trex Residential continued through the second quarter reflecting an increase in average price per unit and volume growth from strong secular trends, including growth in the outdoor living category, and the successful execution of our wood-to-composite

market share conversion strategy.

Price increases to address inflationary pressures were absorbed by the market and also benefitted net sales.

In late June we experienced a reduction in demand from our distribution partners, spurred by concerns over a potential easing in consumer demand due to rising interest rates, declining consumer sentiment and expectations of a general slowing in the economy.

We expect our channel partners to meet demand partially through inventory drawdown, rather than reordering product.

We believe the drawdown will likely impact the next two quarters.

In response to this new environment, we immediately took measures to manage a production slowdown, including selective labor force and production optimization, as well as other coast reduction actions.

Below is the discussion and analysis of our operating results and material changes in our operating results for the three months ended June 30, 2022 (2022 quarter) compared to the three months ended June 30, 2021 (2021 quarter), and for the six months ended June 30, 2022 (2022 six-month

period) compared to the six months ended June 30, 2021 (2021 six-month

Three Months Ended June 30, 2022 Compared To The Three Months Ended June 30, 2021

Three Months Ended June 30,

Below is the discussion and analysis of our operating results and material changes in our operating results for the three months ended September 30, 2022 (2022 quarter) compared to the three months ended September 30, 2021 (2021 quarter), and for the nine months ended September 30, 2022 (2022 nine-month period) compared to the nine months ended September 30, 2021 (2021 nine-month period).

Three Months Ended September 30, 2022 Compared To The Three Months Ended September 30, 2021

Three Months Ended September 30,

(dollars in thousands)

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Trex Commercial net sales

Total net sales increased by 24.0% in the 2022 quarter compared to the 2021 quarter reflecting a 25.2% increase in Trex Residential net sales and a 4.9% decrease in Trex Commercial net sales.

The increase in Trex Residential net sales was primarily due to an increase in average price per unit of 20.3% and an increase in volume of 4.0%.

The increase in price was due to price increases taken in 2021 and 2022 on certain products to address inflationary pressures across many key raw materials, labor and transportation.

The sustained broad-based demand continued to reflect strong secular trends, including growth in the outdoor living category.

In addition, we continue to execute on our wood-to-composite

market share conversion strategy and drive consumers from wood decking to our eco-friendly

Trex decking.

The increase in sales also reflected channel inventory build.

Over the last four quarters the channel has continued to build and restock inventory.

This was due, in part, to strong consumer demand, but was also a consequence of improved product availability following more than two years of the capacity constraints and product allocations.

Three Months Ended June 30,

Total net sales decreased by 43.9% in the 2022 quarter compared to the 2021 quarter reflecting a 44.3% decrease in Trex Residential net sales and a 35.8% decrease in Trex Commercial net sales.

The decrease in Trex Residential net sales was primarily due to a 48.2% decline in volume.

Beginning in the third quarter, our channel partners looked to rightsize their inventory and meet demand partially through inventory drawdown rather than reordering products, which adversely impacted third quarter sales.

Three Months Ended September 30,

(dollars in thousands)

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Gross margin for Trex Residential and Trex Commercial was 25.4% and 10.2%, respectively, in the 2022 quarter compared to 38.9% and 24.0%, respectively, in the 2021 quarter.

The increase in consolidated gross margin was driven primarily by a 10.8% increase from pricing realization at Trex Residential and a continuing focus on cost reductions, offset by inflationary pressures on raw materials, labor and transportation.

The decrease in consolidated gross margin was driven by the decrease in Trex Residential gross margin.

The decrease was primarily due to reduced production resulting from our channel partners inventory drawdown to rightsize their inventories and additional costs as we rightsize our inventory with current production levels.

The decrease was offset by labor force reductions, production optimization, and other actions to improve our cost position.

Selling, General and Administrative Expenses

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands)

1 unchanged sentence

% of total net sales

The increase in selling, general and administrative expenses in the 2022 quarter compared to the 2021 quarter was primarily the result of a $5.6 million increase in marketing and branding spend and a $1.8 million increase in technology and other operating expenses, offset by a $4.4 million decrease in personnel related expenses.

Selling, general and administrative expenses decreased $7.1 million in the 2022 quarter.

Excluding the $1.2 million severance charge related to labor force reductions in the 2022 quarter, the decrease in selling, general and administrative expenses in the 2022 quarter was $8.3 million compared to the 2021 quarter.

The $8.3 million decrease was primarily the result of a $10.2 million decrease in personnel related expenses, offset by a $1.9 million increase in marketing and branding spend, and a $1.7 million increase in other operating expenses.

Provision for Income Taxes

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands)

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Effective tax rate

The effective tax rate for the 2022 quarter of 24.6% was relatively unchanged compared to the effective tax rate of 25.5% for the 2021 quarter.

The effective tax rate for the 2022 quarter of 25.5% and was 0.7% higher than the effective tax rate of 24.8% for the 2021 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 June 30, 2022

(dollars in thousands)

Reconciliation of net income (GAAP) to EBITDA and EBITDA margin (non-GAAP):

Three Months Ended September 30, 2022

Net income (loss)

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Depreciation and amortization

Three Months Ended June 30, 2021

Interest expense, net

Net income as a percentage of net sales

EBITDA as a percentage of net sales (EBITDA margin)

Three Months Ended September 30, 2021

Interest (income), net

Income tax expense

Depreciation and amortization

Three Months Ended June 30,

Net income as a percentage of net sales

EBITDA as a percentage of net sales (EBITDA margin)

Three Months Ended September 30,

(dollars in thousands)

1 unchanged sentence

Trex Commercial EBITDA

Total EBITDA increased 40.9% to $129.1 million for the 2022 quarter compared to $91.6 million for the 2021 quarter.

The increase was driven by a 42.4% increase in Trex Residential EBITDA, primarily due to the pricing actions coupled with cost reductions, production efficiencies and spending controls.

Six Months Ended June 30, 2022 Compared To The Six Months Ended June 30, 2021

Six Months Ended June 30,

(dollars in thousands)

Total net sales

Trex Residential net sales

Trex Commercial net sales

Total net sales increased by 30.2% in the 2022 six-month

period compared to the 2021 six-month

period reflecting a 31.9% increase in Trex Residential net sales and a 4.2% decrease in Trex Commercial net sales.

The increase in Trex Residential net sales was primarily due to an increase in average price per unit of 19.1% and an increase in volume of 10.7%.

The increase of 31.9% in Trex Residential net sales during the 2022 six-month

period was primarily driven by sustained broad-based demand and market share gains from wood and was also impacted by our price increases taken in 2021 and 2022 to address inflationary pressures across many key raw materials, labor and transportation.

Total EBITDA decreased 71.5% to $30.8 million for the 2022 quarter compared to $108 million for the 2021 quarter.

EBITDA as a percentage of net sales, EBITDA margin, was 16.4% for the 2022 quarter compared to 32.2% in the 2021 quarter.

The decrease in EBITDA and EBITDA margin was driven by a 70.1% decrease in Trex Residential EBITDA, primarily due to the decrease in net sales and gross margin.

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.

We have included data with respect to EBITDA and EBITDA as a percentage of net sales (EBITDA margin) 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 and EBITDA margin.

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.

In relation to competitors, EBITDA and EBITDA margin eliminate differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets.

For these reasons, management believes that EBITDA and EBITDA margin provide important information regarding the operating performance of the Company and its reportable segments.

financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP and are not meant to be considered superior to or a substitute for our GAAP results.

Six Months Ended June 30,

Nine Months Ended September 30, 2022 Compared To The Nine Months Ended September 30, 2021

Nine Months Ended September 30,

(dollars in thousands)

Total net sales

Trex Residential net sales

Trex Commercial net sales

Total net sales increased by 2.3% in the 2022 nine-month period compared to the 2021 nine-month period reflecting a 3.3% increase in Trex Residential net sales and a 16.7% decrease in Trex Commercial net sales.

Trex Residential net sales were impacted positively by a 16.1% increase in pricing, offset by an 11.1% reduction in volume.

The decrease in Trex Residential net sales was primarily due to a decline in demand in the third quarter as our distribution and pro channel partners drew down their inventory levels to address the expectations of a slowing economy.

Nine Months Ended September 30,

(dollars in thousands)

Cost of sales

% of total net sales

Gross profit as a percentage of net sales, gross margin, was 40.3% in the 2022 six-month

period compared to 38.4% in the 2021 six-month

Gross margin for Trex Residential and Trex Commercial products in the 2022 six-month

period were 41.3% and 11.5%, respectively, compared to 39.3% and 19.4%, respectively, in the 2021 six-month

Gross profit as a percentage of net sales, gross margin, was 37.0% in the 2022 nine-month period compared to 38.3% in the 2021 nine-month period.

Gross margin for Trex Residential and Trex Commercial products in the 2022 nine-month period were 38.1% and 11.1%, respectively, compared to 39.2% and 21.2%, respectively, in the 2021 nine-month period.

The decrease in consolidated gross margin was driven primarily by a slight decrease in gross margin at Trex Residential primarily due to reduced production volume.

Selling, General and Administrative Expenses

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

1 unchanged sentence

% of total net sales

The $10.6 million increase in selling, general and administrative expenses in the 2022 six-month

period compared to the 2021 six-month

period resulted primarily from a $10.4 million increase in marketing and branding spend.

Selling, general and administrative expenses increased $3.5 million during the 2022 nine-month periods.

The $3.5 million increase resulted primarily from a $12.3 million increase in marketing and branding spend, offset by a $10.7 million reduction in personnel related expenses.

Provision for Income Taxes

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

1 unchanged sentence

Effective tax rate

The effective tax rate for the 2022 six-month

period was comparable to the effective tax rate for the 2021 six-month

The effective tax rate for the 2022 nine-month period was comparable to the effective tax rate for the 2021 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):

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).

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.

Six Months Ended June 30, 2022

(dollars in thousands)

Reconciliation of net income (GAAP) to EBITDA and EBITDA margin (non-GAAP):

Nine Months Ended September 30, 2022

Net income (loss)

2 unchanged sentences

Depreciation and amortization

Six Months Ended June 30, 2021

Net income as a percentage of net sales

EBITDA as a percentage of net sales (EBITDA margin)

Nine Months Ended September 30, 2021

Interest expense, net

1 unchanged sentence

Depreciation and amortization

Six Months Ended June 30,

Net income as a percentage of net sales

EBITDA as a percentage of net sales (EBITDA margin)

Nine Months Ended September 30,

(dollars in thousands)

1 unchanged sentence

Trex Commercial EBITDA

Total EBITDA increased 44.3% to $234.6 million for the 2022 six-month

period compared to $162.5 million for the 2021 six-month

The increase was driven by a 45.7% increase in Trex Residential EBITDA, primarily due to the increase in net sales at Trex Residential.

Total EBITDA decreased 1.9% to $265.4 million for the 2022 nine-month period compared to $270.5 million for the 2021 nine-month period.

EBITDA as a percentage of net sales, EBITDA margin, was 29.0% for the 2022 nine-month period compared to 30.3% in the 2021 nine-month period.

The decrease in EBITDA and EBITDA margin was driven primarily due to the decrease in gross margin at Trex Residential and Trex Commercial.

LIQUIDITY AND CAPITAL RESOURCES

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).

In relation to competitors, EBITDA and EBITDA margin eliminate differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets.

For these reasons, management believes that EBITDA and EBITDA margin provide important information regarding the operating performance of the Company and its reportable segments.

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 June 30, 2022 we had $16.6 million of cash and cash equivalents.

At September 30, 2022 we had $5.9 million of cash and cash equivalents.

S ources and Uses of Cash.

The following table summarizes our cash flows from operating, investing and financing activities (in thousands):

Six Months Ended June 30,

Net cash provided by (used in) operating activities

Nine Months Ended September 30,

Net cash provided by operating activities

Net cash used in investing activities

2 unchanged sentences

Operating Activities

Cash provided by operations was $190 million during the 2022 six-month

period compared to cash used in operations of $18.2 million during the 2021 six-month

The increase of $208.2 million in cash provided by operating activities was primarily due to an increase in net sales at Trex Residential and higher collection of accounts receivables in the 2022 six-month

period compared to the 2021 six-month

Cash provided by operations was $244.4 million during the 2022 nine-month period compared to cash provided by operations of $113.1 million during the 2021 nine-month period.

The increase in cash provided by operating activities was primarily due to a decrease in accounts receivable, offset by an increase in inventories and a decrease in accounts payable and accrued expenses.

Investing Activities

Capital expenditures in the 2022 six-month

period were $66.5 million at Trex Residential, primarily related to cost reduction initiatives, the new Arkansas manufacturing facility, capacity expansion in our existing facilities, our new corporate headquarters, and safety, environmental and general support.

Capital expenditures in the 2022 nine-month period were $107.9 million at Trex Residential, primarily related to cost reduction initiatives, the new Arkansas manufacturing facility, capacity expansion in our existing facilities, our new corporate headquarters, and safety, environmental and general support.

Financing Activities

Net cash used in financing activities of $247.8 million in the 2022 six-month

period consisted primarily of repurchases of our common stock.

Net cash used in financing activities in the 2022 nine-month period consisted primarily of $348 million in repurchases of our common stock, offset by net borrowings of $76 million.

Stock Repurchase Program.

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

As of June 30, 2022, the Company has repurchased 7.3 million shares under the Stock Repurchase Program.

As of September 30, 2022, the Company has repurchased 9.0 million shares under the Stock Repurchase Program.

Indebtedness On and After May

42 unchanged sentences

The Company’s revolving credit facility executed November 5, 2019 was completely replaced by the Company’s revolving credit facility executed May 18, 2022.

At June 30, 2022, we had no outstanding borrowings under the revolving credit facilities and borrowing capacity under the facilities of $400 million.

At September 30, 2022, we had $76 million in outstanding borrowings under the revolving credit facility and borrowing capacity under the facility of $324 million.

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 June 30, 2022.

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

The Company was in compliance with all covenants as of September 30, 2022.

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.

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 believe that cash on hand, cash from operations and borrowings expected to be available under our revolving credit facilities 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.

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The new campus will sit on approximately 300 acres of land and will address increased demand for Trex Residential outdoor living products.

The development approach for the new campus will be modular and calibrated to demand trends for Trex Residential outdoor living products.

Construction began on the new facility in the second quarter 2022, and in July 2022, the Company entered into a design-build agreement.

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Construction for the new facility will be funded primarily through the Company’s ongoing cash generation or its line of credit.

The first production output is anticipated in 2024.

Our capital expenditure guidance for 2022 is $170 million to $180 million.

In addition to the construction of our third facility in Arkansas, 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

In addition to the construction of our third facility, which will be located in Arkansas, 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.

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demand could have an adverse effect on future sales.

Product Warranty.

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.

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.

Our actuarial analysis is based on currently known facts and a number of assumptions.

The number of incoming claims received in the nine months ended September 30, 2022, was significantly lower than the number of claims received in the nine months ended September 30, 2021 and lower than our expectations for 2022.

Average cost per claim experienced in the nine months ended September 30, 2022 was significantly higher than that experienced in the nine months ended September 30, 2021 and higher than our expectations for the current year.

The elevated average cost per claim experienced in the nine months ended September 30, 2022, was primarily the result of the closure of three large claims, which were considered in our estimation of the surface flaking warranty reserve.

We believe the reserve at September 30, 2022 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.

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 increase.

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 $1.6 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,

Claims open, beginning of period

Claims received (1)

Claims resolved (2)

Claims open, end of period

Average cost per claim (3)

Claims received include new claims received or identified during the period.

Claims resolved include all claims settled with or without payment and closed during the period.

Average cost per claim represents the average settlement cost of claims closed with payment during the period.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis