What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2023-02-27 compared with 2022-02-28 · 34 added, 60 removed, 120 unchanged (44% of the section changed)

Our business operates in two reportable segments, Trex Residential and Trex Commercial, and is subject to a number of risks, including the following.

If applicable to a particular segment, we have specified the respective segment subject to the risk factor.

Through December 30, 2022, our Company operated in two reportable segments, Trex Residential and Trex Commercial.

On December 30, 2022, we sold substantially all of the assets of our wholly owned subsidiary and reportable segment, Trex Commercial Products, Inc.

As of December 31, 2023, our business is subject to a number of risks, including the following:

Risks Related to the Distribution and Sale of Our Product

4 unchanged sentences

Although we have developed, and continue to develop, new products made from other materials, if we should experience significant problems, real or perceived, with acceptance of the Trex wood/polyethylene composite material, our lack of product diversification could have a significant adverse impact on our net sales levels.

If our Trex Commercial products do not keep up with consumer trends, demands, and preferences we could lose market share, which could have a material adverse effect on our business.

Our primary competition for Trex Residential products consists of wood products, which constitute a substantial majority of decking, railing, fencing, and deck framing sales.

7 unchanged sentences

• Resistance of many consumers and contractors to change from well-established wood products;

• Consumer lack of awareness that the greater initial expense of Trex Residential products compared to wood is a one-time

cost that is reduced over time as Trex Residential products have lower maintenance costs and a longer life span than wood;

• Consumer lack of awareness that the greater initial expense of Trex Residential products compared to wood is a one-time cost that is reduced over time as Trex Residential products have lower maintenance costs and a longer life span than wood;

• Established relationships existing between suppliers of wood products and contractors and homebuilders;

1 unchanged sentence

• Competition from other wood-alternative manufacturers.

Although Trex Commercial is a leading national provider of custom-engineered railing and staging systems for the commercial and multi-family market, including performing arts venues and sports stadiums, there is significant competition for projects.

In order to effectively compete, we must continually produce and install high quality products and innovate with new products.

We may not be able to fully maintain our Trex Residential wholesaler and dealer channels.

The demand for our products is influenced by the home improvement market and could be adversely affected by conditions that negatively impact this market.

We cannot predict conditions that may negatively impact the home remodeling and new home construction environment.

Any economic downturn or adverse changes in the home improvement market could reduce consumer income or equity capital available for spending on discretionary items, which could adversely affect the demand for our Trex Residential products.

The demand for Trex Residential composite decking and railing products is influenced by the general health of the economy, the level of home improvement activity and, to a much lesser extent, new home construction.

These factors are affected by home equity values, credit availability and interest rates, consumer confidence, income and spending habits, employment, inflation and general economic conditions.

We may not be able to fully maintain or expand our Trex Residential wholesaler and dealer channels.

If Trex Residential fails to compete successfully for wholesale distributors and dealers, our business could experience material adverse effects, which could negatively impact profitability and cash flows.

6 unchanged sentences

We expect that a significant portion of our Trex Residential sales will continue to be sold through a small number of customers, and certain customers will continue to account for a significant portion of our sales.

We have limited ability to project inventory build-ups

in our Trex Residential distribution channel that can negatively affect our sales in subsequent periods.

We cannot definitively determine the level of inventory in the Trex Residential distribution channels at any time and, therefore, have limited ability to precisely project inventory build-ups

in the Trex Residential two-step

distribution channel.

Significant increases in inventory levels in the distribution channel without a corresponding change in end-use

demand could have an adverse effect on the timing of future sales.

We have limited ability to project inventory build-ups in our Trex Residential distribution channel that can negatively affect our sales in subsequent periods.

We cannot definitively determine the level of inventory in the Trex Residential distribution channels at any time and, therefore, have limited ability to precisely project inventory build-ups in the Trex Residential two-step distribution channel.

Significant increases in inventory levels in the distribution channel without a corresponding change in end-use demand could have an adverse effect on the timing of future sales.

Trex Residential sells most of our composite decking and railing products through our network of wholesale distributors who, in turn, sell to retail outlets.

The seasonal nature of, and changing conditions in, our industry can result in substantial fluctuations in inventory levels of Trex Residential products carried in our two-step

distribution channel.

The seasonal nature of, and changing conditions in, our industry can result in substantial fluctuations in inventory levels of Trex Residential products carried in our two-step distribution channel.

Because of the seasonal nature of the demand for our products, our distribution channel partners must forecast demand for our products, place orders for the products, and maintain Trex Residential product inventories in advance of the prime deck-building season, which generally occurs in the latter part of the first calendar quarter through the third calendar quarter.

13 unchanged sentences

In particular, a significant portion of our finished goods are transported by flatbed trucks, which are occasionally in high demand (especially at the end of calendar quarters) and/or subject to price fluctuations based on market conditions and the price of fuel.

The demand for our products is influenced by the home improvement and commercial construction markets and could be adversely affected by conditions that negatively impact these markets.

We cannot predict conditions that may negatively impact the home remodeling and new home construction environment.

We cannot predict conditions that may negatively impact the commercial construction environment.

Any economic downturn could negatively impact the availability of funding for commercial construction projects and the ability of Trex Commercial customers to engage in commercial construction activity, which could adversely affect the demand for Trex Commercial products.

These factors are affected by home equity values, credit availability and interest rates, consumer confidence, income and spending habits, employment, inflation and general economic conditions.

The demand for Trex Commercial railing and staging system products is influenced by the general health of the economy and the level of commercial construction activity, building variances, funding availability for large public use facilities, including sports stadiums and arenas, and the construction schedules of our projects.

Risks Related to the Manufacture of Our Product

6 unchanged sentences

Our sourcing team must obtain raw materials on a timely basis at an appropriate volume.

We have made and may continue to make significant capital investments in new and existing manufacturing facilities, and in acquired businesses or operations that may become impaired or obsolete and result in a charge to our earnings.

Our ability to achieve the expected benefits from our capital investments, such as increased production, improved efficiency, cost savings, or diversification into new product markets, is subject to estimates and assumptions, including economic, competitive, consumer preference, and other uncertainties.

If the actual results differ from our estimates and assumptions, we may not achieve the benefits from the investments within the estimated time frame or not at all, which could adversely affect our financial condition and results of operations.

In addition, our acquisitions have resulted in, and may in the future result in, the recognition of goodwill.

The recognition of goodwill may result in an impairment charge to our earnings if circumstances change and reduce the fair value of the goodwill acquired below its carrying amount.

We have made and may continue to make significant investments in new manufacturing facilities, upgrading our existing facilities and acquiring businesses or operations.

These investments sometimes involve the implementation of new technologies and replacement of existing equipment.

While we anticipate that these investments will increase production, improve efficiency, achieve cost savings or allow us to diversify into new product markets, we cannot be certain we will realize the benefits of these initiatives when anticipated or at all.

Failure to achieve the expected benefits from our investments may result in reduced cash flows in future periods, obsolete or impaired assets, and charges to our earnings.

Our prospects for sales growth and profitability may be adversely affected if we fail to maintain product quality and product performance at an acceptable cost.

2 unchanged sentences

Future increases to our Trex Residential warranty reserve could have a material adverse effect on our profitability and cash flows.

In the event lawsuits relating to alleged product quality issues are brought against us in the future, such lawsuits may be costly and could cause adverse publicity, which in turn could result in a loss of consumer confidence in our products and reduce our sales.

Product quality claims could increase our expenses, have a material adverse effect on demand for our products and decrease net sales, net income and liquidity.

In order to expand our net sales and sustain profitable operations we must maintain the quality and performance of our products.

3 unchanged sentences

Increases to the warranty reserve and payments for related claims have had a material adverse effect on our profitability and cash flows.

Product quality claims could increase our expenses, have a material adverse effect on demand for our products and decrease net sales, net income and liquidity.

A number of class action lawsuits alleging defects in our products have been brought against us, all of which have been settled.

5 unchanged sentences

In addition to wood fiber and scrap polyethylene, we also use a small percentage of other materials in making our products, which are sometimes subject to volatility in supply and could negatively affect our profitability.

The manufacture of our Trex Commercial products requires substantial amounts of aluminum, steel, glass and wood.

These materials are also sometimes subject to volatility in supply, which could negatively affect our profitability.

Periods of significant or prolonged inflation could affect our ability to obtain raw materials and transportation at acceptable prices and may negatively impact our profitability.

6 unchanged sentences

At the same time, we would expand our marketing campaigns, including campaigns to highlight the advantages of Trex Residential decking over wood, as well as campaigns focused on innovation and new product development that further strengthens our consumer brand and distribution advantages.

In general, we believe that an effect of inflation would be a short-term disruption and that, over time, we would offset increased input costs with through cost reduction projects, purchasing strategies, and increased production efficiencies and improvement opportunities to enhance our margins.

In general, we believe that an effect of inflation would be a short-term disruption and that, over time, we would offset increased input costs through cost reduction projects, purchasing strategies, and increased production efficiencies and improvement opportunities to enhance our margins.

In addition, we would be able to increase prices to counteract the majority of any inflationary effects of increasing costs and to generate sufficient cash flows to maintain our productive capability.

9 unchanged sentences

Further, improvements in the economy and labor markets could impact our ability to attract and retain key personnel.

We have significant capital invested in assets that may become obsolete or impaired and result in a charge to our earnings.

The recognition of goodwill may result in an impairment charge to our earnings if circumstances change and reduce the fair value of the goodwill acquired below its carrying amount.

Significant replacement of equipment or changes in the expected cash flows related to our assets could result in reduced earnings or cash flows in future periods.

We have made and may continue to make significant capital investments in order to acquire businesses or operations that allow us to diversify into new product markets.

These investments have resulted in, and may in the future result in, the recognition of goodwill.

As further described in Note 2 and Note 5 in the Notes to the Consolidated Financial Statements in this Form 10-K,

during the fourth quarter of 2021, we recognized a goodwill impairment charge at Trex Commercial’s railing reporting unit and staging reporting unit of $42.5 million and $11.8 million, respectively, which was the amount by which the carrying amount of the respective reporting unit exceeded its fair value.

As of December 31, 2021, the carrying amount of goodwill was $14.2 million at the Trex Residential reportable segment.

In addition, we have made and may continue to make significant capital investments to our property plant and equipment in order to improve or expand our manufacturing capabilities.

These investments sometimes involve the implementation of new technology and replacement of existing equipment at our manufacturing facilities, which may result in charges to our earnings if the existing equipment is not fully depreciated.

Risks Related to the Availability of Capital

Our ability to continue to obtain financing on favorable terms, and the level of any outstanding indebtedness, could adversely affect our financial health and ability to compete.

Our ability to continue to obtain financing on favorable terms, and the level of any outstanding indebtedness, could adversely affect our financial condition and ability to compete.

Our ability to make future principal and interest payments, borrow and repay amounts under our senior credit facility and continue to comply with our loan covenants will depend primarily on our ability to generate sufficient cash flow from operations.

6 unchanged sentences

Risks Related to Other Matters

Our business, results of operations and financial condition may be disrupted and adversely affected by global public health pandemics, including the strain of coronavirus known as COVID-19.

If our employees or the employees of our suppliers or transportation providers are unable to work because of illness related to the COVID-19

pandemic, or if we or our suppliers or transportation providers are forced to temporarily cease operations, either on a voluntary or mandatory basis, then we may have a period of reduced operations and be unable to supply our customers in a timely manner, which could have a material negative impact on our business.

If the COVID-19

outbreak disrupts the operations of our distributors and retail outlets and negatively impacts economies in the United States, Canada and the rest of the world, our business, results of operations and financial condition may be adversely affected.

In December 2019, a novel strain of coronavirus, COVID-19,

was reported to have surfaced in Wuhan, China.

It spread to other countries, including the United States, and efforts to contain COVID-19

have intensified.

In March 2020, the World Health Organization characterized COVID-19

as a pandemic.

Our business, results of operations and financial condition may be adversely affected if COVID-19

interferes with the ability of our employees, suppliers and other business partners to perform their respective responsibilities and obligations relative to the conduct of our business.

We continue to monitor the recent outbreak of COVID-19

and evaluate its impact on our business, including new information as it emerges concerning its severity and the continuation of the outbreak or a new surge in cases, and any actions to prevent, contain or treat it, among others.

The extent to which COVID-19

may impact our business will depend on future developments, which are highly uncertain and cannot be predicted.

Our business, results of operations and financial condition may be disrupted and adversely affected by global public health pandemics or geopolitical conflicts.

If our employees or the employees of our suppliers or transportation providers are unable to work because of illness related to a global public health pandemic, or if we or our suppliers or transportation providers are forced to temporarily cease operations, either on a voluntary or mandatory basis, then we may have a period of reduced operations and be unable to supply our customers in a timely manner, which could have a material negative impact on our business.

If geopolitical conflicts disrupt the operations of our distributors and retail outlets or negatively impacts economies in the United States, Canada and the rest of the world, our business, results of operations and financial condition may be adversely affected.

Our business, results of operations and financial condition may be adversely affected if a global public health pandemic interferes with the ability of our employees, suppliers and other business partners to perform their respective responsibilities and obligations relative to the conduct of our business.

We monitor the outbreak of any global public health pandemic or global political conflicts and evaluate the impact on our business as information emerges.

The extent to which the impact of a global public health pandemic or a continuing global political conflict may have on our business, supply chains, commodity and fuel prices, and prices of raw materials will depend on future developments, which may be highly uncertain and cannot be predicted.

Climate change and legal or regulatory responses thereto may have a long-term adverse impact on our business and results of operations.

12 unchanged sentences

The secure storage, maintenance, and transmission of and access to this information is important to our operations and reputation.

Computer hackers may attempt to penetrate our computer systems and, if successful, misappropriate our proprietary and confidential information including e-mails

and other electronic communications.

Computer hackers may attempt to penetrate our computer systems and, if successful, misappropriate our proprietary and confidential information including e-mails and other electronic communications.

In addition, an employee, contractor, competitor, or other third party with whom we do business may attempt to obtain such information and may purposefully or inadvertently cause a breach involving such information.

11 unchanged sentences

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

What changed 10-K

Item 1A. Risk Factors