What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-28 · 260 added, 232 removed, 216 unchanged (69% of the section changed)

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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 our products and raw materials;

the Company’s ability to obtain raw materials at acceptable prices;

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;

increasing inflation in the macro-economic environment;

the Company’s ability to maintain product quality and product performance at an acceptable cost;

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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;

material adverse impacts from global public health pandemics and geopolitical conflicts;

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

The following MD&A is intended to help the reader understand the operations and current business environment of Trex Company, Inc.

(Trex, Company, we or our).

The following MD&A is intended to help the reader understand the operations and current business environment of the Company.

The MD&A is provided as a supplement to — and should be read in conjunction with — our Consolidated Financial Statements and the accompanying notes thereto contained in “ Item 8.

Financial Statements and Supplementary Data

” of this report.

Financial Statements and Supplementary Data ” of this report.

MD&A includes the following sections:

— a general description of our business, a brief overview of our reportable segments’ products, highlights of our operations for the twelve months ended December 31, 2021, an update on our response to the COVID-19

pandemic, and a description of our plan for the Trex Residential Arkansas facility.

Critical Accounting Policies and Estimates

— a discussion of accounting policies that require critical judgments and estimates.

Results of Operations

— an analysis of our consolidated results of operations for 2021 and 2020 and year-to-year

An analysis of our consolidated results of operations for 2020 and 2019 and year-to-year

comparisons between 2020 and 2019 can be found in MD&A in Part II, Item 7 of the Company’s Form 10-K

for the year ended December 31, 2020.

Liquidity and Capital Resources

— an analysis of cash flows;

contractual obligations, and a discussion of our capital and other cash requirements.

New Accounting Standards

— a discussion of Financial Accounting Standards Board new accounting standards not yet adopted.

Trex is the world’s largest manufacturer of high-performance, low-maintenance

wood-alternative decking and residential railing and outdoor living products and accessories, marketed under the brand name Trex ®

, with 30 years of product experience.

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

Also, the Company is a leading national provider of custom-engineered commercial railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues.

Trex currently operates in two reportable segments:

Our Business — a general description of our business, a brief overview of our reportable segments’ products, and operational and financial highlights for the twelve months ended December 31, 2022.

Critical Accounting Policies and Estimates — a discussion of accounting policies that require critical judgments and estimates.

Results of Operations — an analysis of our consolidated results of operations for 2022 and 2021 and year-to-year comparisons.

An analysis of our consolidated results of operations for 2021 and 2020 and year-to-year comparisons between 2021 and 2020 can be found in MD&A in Part II, Item 7 of the Company’s Form 10-K for the year ended December 31, 2021.

Liquidity and Capital Resources — an analysis of cash flows, contractual obligations, and a discussion of our capital and other cash requirements.

The Company is the world’s largest manufacturer of high-performance, low-maintenance wood-alternative decking and residential railing and outdoor living products and accessories, marketed under the brand name Trex ® , with more than 30 years of product experience.

A majority of our products are manufactured in a

proprietary process that combines reclaimed wood fibers and recycled polyethylene.

The Company is focused on using renewable resources within our Trex Residential segment.

Also, through December 30, 2022, the Company provided custom-engineered commercial railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues.

During the three years in the period ended December 31, 2022, the Company operated in two reportable segments:

Trex Residential Products (Trex Residential), the Company’s principal business based on net sales, and Trex Commercial Products (Trex Commercial).

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

On December 30, 2022, we completed the sale of substantially all of the assets of our wholly-owned subsidiary and reportable segment, Trex Commercial.

Outdoor living remains one of the fastest growing categories within the repair and remodel sector, and the strength of the Trex Residential brand coupled with our expanded manufacturing capacity, our key competitive advantages, help us to effectively unlock potential market share and drive long term growth.

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We remain focused on ensuring the capacity to service our Trex Residential channel partners is aligned with both current demand and expected future growth.

Having recently completed a manufacturing capacity expansion at our Virginia and Nevada facilities, our engineering team installed incremental decking and railing lines within our Virginia campus that further expanded our production capability.

Additionally, we recently announced plans to develop a third U.S.

based Trex Residential manufacturing facility on approximately 300 acres in Little Rock, Arkansas.

When this plant opens in 2024, Trex will have the strategic advantage of unmatched geographical coverage with sites servicing the East Coast, West Coast and Central regions that will provide our customers with better access to Trex Residential products when and where they need them.

The new site represents a strategic investment in the Company’s future and the success of our valued channel partners.

Little Rock emerged as the best fit for our future needs, as it offers proximity to a center of raw materials, a strong pool of qualified and skilled labor, proximity to key growth regions for wood conversion and adjacency for major transportation hubs that can optimize freight costs.

We plan to invest approximately $400 million over the next five years, funded primarily through ongoing cash generation.

With the potential to become our largest manufacturing facility over time, the Arkansas manufacturing campus will address increased demand for Trex Residential outdoor living products.

Construction is slated to begin early in 2022 with a modular development approach calibrated in alignment with demand trends.

We expect initial production output to begin in 2024 and, over time, the facility will employ approximately 500 people.

These expansion activities provide Trex Residential with additional capacity to flex with demand by adding capacity as needed, while providing bandwidth to pursue opportunities to expand domestically and internationally, as we continue to drive wood conversion and capture incremental market share from the strength of Trex Residential products and the brand.

In October 2021, we announced plans to add a third U.S.-based Trex Residential manufacturing facility located in Little Rock, Arkansas, that will sit on approximately 300 acres of land.

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

Construction began in the second quarter of 2022, and in July 2022, we entered into a design-build agreement.

As previously announced, we anticipate spending approximately $400 million on the facility and the budget for the design-build agreement is contained within this amount.

Construction will be funded primarily through our ongoing cash generation or our line of credit.

We continue to focus on cost reduction projects and identifying continuous improvement opportunities to enhance our margins.

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These initiatives should help drive continued topline and profit growth and accelerated market share conversion.

In addition to our capacity expansion efforts and profit growth, in 2021 we continued to focus on increasing staffing to meet future needs and support our growth and welcomed approximately 400 employees to the Trex team.

As we continue to grow our employee base, additional focus on diversity, equity and inclusion remains

important to our strategy.

In 2021, we expanded our recruiting efforts to further increase diversity and sustained our focus on bringing new ideas and perspectives to our team.

The safety and wellbeing of our employees is important to us, and we consistently prioritized safety practices by building new safety teams and changing the structure of our work areas to focus on safety.

We continually emphasized employee wellbeing as we endured ongoing waves of COVID-19.

Trex Residential

is the world’s largest manufacturer of wood-alternative composite decking and railing products marketed under the brand name Trex ®

and manufactured in the United States.

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

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

Trex Residential is the world’s largest manufacturer of wood-alternative composite decking and railing products marketed under the brand name Trex ® and manufactured in the United States.

We offer a comprehensive set of aesthetically pleasing, high-performance, low maintenance, eco-friendly products in the decking, railing, fencing, cladding and outdoor lighting categories.

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

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Decking and Accessories

Trex Transcend ®

Trex Select ®

Trex Enhance ®

Trex Hideaway ®

hidden fastening system

Trex DeckLighting ™

outdoor lighting system

Trex Transcend ® Lineage ™ decking

Trex Transcend ® decking

Trex Signature ® decking

Trex Select ® decking

Trex Enhance ® decking

Trex Hideaway ® hidden fastening system

Trex DeckLighting ™ outdoor lighting system

Trex Transcend Railing

Trex Select Railing

Trex Enhance Railing

Trex Signature ®

aluminum railing

Trex Seclusions ®

fencing product

Trex Commercial

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

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

Highlights related to the twelve months ended December 31, 2021 include:

Increase in net sales of 35.9%, or $316 million, to $1.2 billion in the twelve months ended December 31, 2021 compared to $881 million in the twelve months ended December 31, 2020 and were the highest of any year in our history.

Trex Residential net sales increased $311 million, or 37.6%, to $1.14 billion in the twelve months ended December 31, 2021 compared to $828 million in the twelve months ended December 31, 2020.

Trex Residential net sales were the highest of any year in its history.

Increase in gross profit of 28.1%, or $101 million, to $461 million for the twelve months ended December 31, 2021 compared to $359 million for the twelve months ended December 31, 2020.

Increase in net income to $209 million, a 18.8% increase over 2020 net income of $176 million.

Cash flows from operating activities were $258 million in the twelve months ended December 31, 2021 compared to $187 million in the twelve months ended December 31, 2020.

Capital expenditures of $159 million, primarily to increase production capacity at the Virginia and Nevada facilities and for general plant cost reduction initiatives.

Repurchase of 809,099 shares of our outstanding common stock under our Stock Repurchase Program in 2021, for a total of 3.6 million shares repurchased under the program as of December 31, 2021.

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

The level of net sales is principally affected by sales volume and the prices paid for Trex products.

The operating results for Trex Residential have historically varied from quarter to quarter, often due to seasonal trends in the demand for outdoor living products.

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 practices, 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 to ensure adequate availability of its product to meet anticipated seasonal consumer demand and to enable production planning.

These incentives include prompt payment discounts and favorable payment terms.

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

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

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

Gross Profit.

Gross profit represents the difference between net sales and cost of sales.

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

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

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 include 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 of Trex.

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 have varied from quarter to quarter due, in part, to the seasonality of our business.

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

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

The pandemic remains an evolving situation and while macro-economic recovery seems likely, the duration and extent of the recovery remains uncertain.

However, we continue to manage our business to ensure the continuity of operations and the safety of our employees.

Trex Residential has not experienced any decline in demand for its outdoor living products.

Trex Commercial had not experienced any material reduction to its net sales.

However, measures taken to contain the spread of the virus have reduced new project commitments from its customer base.

The reduction in project commitments was influenced by a delay in new projects due to lingering uncertainty created in the commercial railing and staging markets by the COVID-19 virus.

The delay in new projects, coupled with the Company’s successful fulfillment of its pre-pandemic projects, resulted in lower project backlog and reduced forecasted net sales and EBITDA, which became apparent in the fourth quarter of 2021.

The Company continued to assess the impact on project commitments throughout the year and, during the fourth quarter of 2021, determined that the impact will adversely affect Trex Commercial’s financial condition and results of operations in future periods.

The continued impact of COVID-19

and its effect on project commitments was a consideration in the Company’s quantitative assessment for goodwill impairment testing at its railing and staging reporting units as of October 31, 2021.

Refer to the below discussion in “Critical Accounting Policies and Estimates” for additional information.

Trex Signature ® aluminum railing

Trex Seclusions ® fencing product

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

Operational Highlights:

Sale of Substantially All of the Assets of Trex Commercial Products, Inc.

On December 30, 2022, we completed the sale of substantially all of the assets of our wholly-owned subsidiary and reportable segment, Trex Commercial, for net proceeds of $7.3 million.

The divestiture of Trex Commercial reflects our decision to focus on driving the most profitable growth strategy for the Company and its shareholders through the execution of our outdoor living strategy.

With the sale complete, we will dedicate our resources to accelerating conversion to composites from wood and further strengthen our leadership position in the outdoor living category.

The divestiture did not represent a strategic shift with a major effect on the Company’s operations and financial results.

As such, the results of operations of Trex Commercial are consolidated in the Company’s results of operations for the year ended December 31, 2022, through the date of sale.

Refer to Note 17, Segment Information, for additional information on the Trex Commercial segment.

Trex Residential New Product .

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

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 primarily from 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 Manufacturing Facility .

On October 26, 2021, we announced our plan 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 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 approximately $400 million over the next five years in the development of the new Arkansas site.

Construction began on the new Trex Residential manufacturing facility located in Arkansas in the second quarter 2022.

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.

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 earning 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.

Each grassroots partner is equipped with a baler, which is housed on site for use in bundling and weighing recycled plastic material.

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.

Trex Residential Earns Top Honors in Builder Brand Use Study.

For the fourth time in the 15-year history of the Builder Brand Use Study, we earned top honors across all of the measured criteria for the Composite/PVC Decking category and outperformed all other brands in the Deck Railing category as well.

The annual Builder Brand Use Study measures the attitudes of builders, developers, and contractors toward the products they recognize, use, and trust.

The results of this year’s study are based on input from more than 850 building professionals who, for the 15th consecutive year, voted Trex #1 for “brand familiarity,” “brand used during the past two years,” and “brand used most” in the Composite/PVC Decking category.

Trex also secured top honors for the same criteria in the Deck Railing category.

Additionally, Trex received the highest score for “Product Quality” among the 27 composite and PVC decking brands included in the study.

Publication of 2021 Environmental, Social and Governance Report .

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

The annual ESG report highlights how we are “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.

Strategic Investments.

During 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 content.

Russian Invasion of Ukraine .

The conflict between Russia and Ukraine has not directly affected our business and results of operations.

We have no operations in Russia or Ukraine but continue to monitor the potential economic impact of the conflict on supply chains, commodity and fuel prices, and prices of raw materials.

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

Highlights and Financial Performance for the Twelve Months Ended December 31, 2022:

(000s omitted, except per share data)

Diluted earnings per share

Capital expenditures .

In 2022, we spent a total of $176.2 million on capital expenditures, primarily at our Trex Residential facilities, including $85.7 million related to construction of our Arkansas facility, $39.2 million related to general plant cost reduction initiatives at our Virginia and Nevada facilities, $19.1 million related to our new corporate office development, and $17.6 million for general support, safety and environmental initiatives.

Repurchase of common shares .

We repurchased 6.5 million shares of our outstanding common stock in 2022 under our Stock Repurchase Program.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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We prepare our financial statements in conformity with accounting principles generally accepted in the United States.

As a result, we are required to make estimates, judgments and assumptions that we believe are reasonable based upon the information available.

result, we are required to make estimates, judgments and assumptions that we believe are reasonable based upon the information available.

These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented.

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Product Warranty.

We warrant that our Trex Residential products will be free from material defects in workmanship and materials.

Generally, this warranty period is 25 years for residential use and 10 years for commercial use, excluding Trex Signature ®

Railing, which has a warranty period of 25 years for both residential and commercial use.

We further warrant that Trex Transcend, Trex Enhance, Trex Select and Universal Fascia products will not fade in color more than a certain amount and will be resistant to permanent staining from food substances or mold, provided the stain is cleaned within seven days of appearance.

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

We warrant that for the applicable warranty period our Trex Residential products, when properly installed, used and maintained, will be free from material defects in workmanship and materials and our decking, cladding, fascia and railing products will not split, splinter, rot or suffer structural damage from termites or fungal decay.

Products sold on or after January 1, 2023:

The warranty period for residential use is 50 years for Transcend ® decking, 35 years for Select ® decking and Universal Fascia, and 25 years for Enhance ® decking and Transcend, Select, Enhance and Signature ® railing.

The warranty period for commercial use is 10 years, excluding Signature railing and Transcend cladding, which each have a warranty period of 25 years.

We further warrant that Trex Transcend, Trex Enhance and Trex Select decking and cladding and Universal Fascia products will not fade in color from light and weathering exposure more than a certain amount and will be resistant to permanent staining from food and beverage substances or mold and mildew, provided the stain is cleaned within seven days of appearance, for the warranty period referred to above.

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

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

Products sold prior to January 1, 2023:

The warranty period is 25 years for residential use and 10 years for commercial use.

With respect to Trex Signature railing, the warranty period is 25 years for both residential and commercial use.

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

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

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

The number of incoming claims received in the year ended December 31, 2021 was lower than the number of claims received in the year ended December 31, 2020 and lower than our expectations for 2021.

Average cost per claim experienced in the year ended December 31, 2021 was higher than that experienced in the year ended December 31, 2020 but was slightly lower than our expectations for 2021.

The number of incoming claims received in the year ended December 31, 2022 was significantly lower than the number of claims received in the year ended December 31, 2021, and lower than our expectations for 2022.

Average cost per claim experienced in the year ended December 31, 2022 was significantly higher than that experienced in the year ended December 31, 2021, and higher than our expectations for 2022.

The elevated average cost per claim experienced in the year ended December 31, 2022, was primarily the result of the closure of three large claims, which were considered in our estimation of the surface flaking reserve.

We believe the reserve at December 31, 2022 is sufficient to cover future surface flaking obligations.

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For additional information about product warranties, see Notes 2 and 19 to the Consolidated Financial Statements appearing elsewhere in this report.

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

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

We evaluate the recoverability of goodwill in accordance with Accounting Standard Codification (ASC) Topic 350, “ Intangibles—Goodwill and Other ,” annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount.

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

We have determined that the Company has three reporting units:

Through December 30, 2022 and during the two years ended December 31, 2021, we determined that the Company had three reporting units:

a residential reporting unit in the Trex Residential reportable segment, and a commercial railing reporting unit and a staging reporting unit in the Trex Commercial reportable segment.

We completed the sale of our wholly-owned subsidiary, Trex Commercial Products, Inc., on December 30, 2022.

Trex Commercial Products, Inc.

had been a reportable segment of the Company.

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

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

The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction

between market participants at the measurement date.

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

If the carrying amount of a reporting unit is in excess of the estimated fair value of that reporting unit, a goodwill impairment charge is recognized in the amount by which the reporting unit’s carrying amount exceeds its fair value, but not to exceed the total goodwill assigned to the reporting unit.

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

At December 31, 2021 and December 31, 2020, the Company had goodwill of $14.2 million and $68.5 million, respectively.

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

For fiscal years 2021, 2020, and 2019, we completed our annual impairment test of goodwill for our residential reporting unit utilizing the qualitative assessment and concluded it was not more likely than not that the fair value of the reporting unit was less than its carrying amount.

For fiscal years 2020 and 2019, we completed our annual impairment test of goodwill for our commercial railing reporting unit and our staging reporting unit utilizing the qualitative assessment and concluded it was not more likely than not that the fair values of the reporting units were less than their respective carrying amounts.

For fiscal year 2021 the Company determined that it was necessary to perform the goodwill impairment test for our railing and staging reporting units utilizing the quantitative assessment.

We performed a quantitative assessment primarily due to a reduction in project commitments, which adversely impacted project backlog and forecasted net sales and EBITDA.

The reduction in project commitments was influenced by a delay in new projects due to lingering uncertainty created in the commercial railing and staging markets by the COVID-19 virus.

As a result, during the fourth quarter of 2021, we recognized an impairment charge at our commercial railing reporting unit and at our staging reporting unit of $42.5 million and $11.8 million, respectively.

Refer to Note 2 and Note 5 to the Consolidated Financial Statements in this Form 10-K

for additional discussion related to the goodwill impairment charge in 2021.

Revenue Recognition

Trex Residential Products

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

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

Trex Residential principally generates revenue from the manufacture and sale of its high-performance, low-maintenance, eco-friendly outdoor living products, consisting of composite decking and railing products, hidden fasteners, and a broad offering of outdoor living accessories.

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

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

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

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

Should estimates change or prove to have been incorrect, it could negatively affect our results of operations and financial condition.

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

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Trex Commercial Products

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

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

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

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

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

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

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

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

Trex Commercial satisfied its performance obligation over time as work progressed because control was transferred continuously to its customers.

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

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

Incurred costs include all direct material, labor, subcontract and certain indirect costs.

The Company reviews and updates its estimates regularly and recognizes adjustments in estimated profit on contracts under the cumulative catch-up

Incurred costs included all direct material, labor, subcontract and certain indirect costs.

The Company reviewed and updated its estimates regularly and recognized adjustments in estimated profit on contracts under the cumulative catch-up method.

Under this method, the impact of the adjustment on revenue and estimated profit to date on a contract is recognized in the period the adjustment is identified.

Revenues and profits in future periods are recognized using the adjusted estimate.

If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the period it is identified.

If at any time the estimate of contract profitability indicated an anticipated loss on the contract, the Company recognized the total loss in the period it was identified.

During the year ended December 31, 2022, no adjustment to any one contract was material to the Company’s Consolidated Financial Statements and no material impairment loss on any contract was recorded.

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 global health pandemics 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 consistent with 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 and fourth quarter sales.

In response to this changed environment, Trex Residential immediately took measures to better align its cost structure with current demand by decreasing production levels, right sizing the employee base, and focusing on cost efficiency programs.

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

The level of net sales is principally affected by sales volume and the prices paid for Trex products.

The operating results for Trex Residential have historically varied from quarter to quarter, often due to seasonal trends in the demand for outdoor living products.

These incentives include prompt payment discounts and

favorable payment terms.

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

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

Gross Profit.

Gross profit represents the difference between net sales and cost of sales.

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

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

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.

Another component of selling, general and administrative expenses is branding and other sales and marketing costs, which are used to build brand awareness of Trex.

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 have varied from quarter to quarter due, in part, to the seasonality of our business.

Below we have included a discussion of our operating results and material changes in our operating results for the year ended December 31, 2022 compared to the year ended December 31, 2021.

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Trex Commercial net sales

The 35.9% increase in total net sales in 2021 compared to 2020 was substantially due to volume growth at Trex Residential across all product lines.

Our capacity expansion program and the additional lines installed at our new Virginia facility were fully operational in 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 on certain products to address inflationary pressures across many key raw materials and transportation.

Trex Commercial contributed $57.7 million to consolidated net sales.

Total net sales in 2022 decreased $90.9 million, or 7.6%, compared to total net sales in 2021, due to a decrease in Trex Residential and Trex Commercial net sales of $79.7 million and $11.2 million, respectively.

The decrease in Trex Residential net sales was due primarily to an 18.2% reduction in volume, offset by a 13.6% increase in pricing, The decrease in Trex Residential volume was primarily due to a decline in demand beginning in the third quarter of 2022 as our distribution partners serviced demand requirements primarily through inventory drawdowns rather than reorders.

The increase in pricing 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.

Year Ended December 31,

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Gross profit as a percentage of net sales, gross margin, was 36.5% in 2022 compared to 38.5% in 2021.

Gross margin for Trex Residential and Trex Commercial products in 2021 were 39.3% and 22.0%, respectively, compared to 41.6% and 29.2%, respectively, in 2020.

Excluding a $6.5 million provision during 2020 to the Trex Residential legacy surface flaking warranty reserve, consolidated gross margin for 2020 was 41.5% compared to 38.5% for 2021.

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, and reduced overhead absorption due to the fire at the Virginia facility.

The decrease in gross margin was partially offset by price increases on certain product lines at Trex Residential.

Gross margin for Trex Residential and Trex Commercial in 2022 were 37.7% and 8.9%, respectively, compared to 39.3% and 22.0%, respectively, in 2021.

Gross margin at Trex Residential was unfavorably impacted primarily by reduced production volume and inflationary pressures, offset by pricing realization increases on certain product lines, right sizing our employee base, and other actions to better align our cost structure with current demand.

Selling, General and Administrative Expenses

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% of total net sales

Selling, general and administrative expenses increased $13.8 million in 2021 compared to 2020 primarily resulting from a $7.3 million increase in personnel related expenses, a $2.6 million increase in research and development expenses, and a $3.7 million increase in system and technology expenses.

Selling, general and administrative expenses increased $2.2 million in 2022 compared to 2021 primarily resulting from a $12.6 million increase in branding and marketing expenses.

The increase was offset by a $10.3 million decrease in personnel and personnel related expenses.

Year Ended December 31,

(dollars in thousands)

% of total net sales

On December 30, 2022, we completed the sale of substantially all of the assets of our wholly-owned subsidiary and reportable segment, Trex Commercial, for net proceeds of $7.3 million.

The divestiture reflects our decision to focus on driving the most profitable growth strategy for the Company and its shareholders through the execution of our outdoor living strategy.

With the sale complete, we will dedicate our resources to accelerating conversion to composites from wood and further strengthen our leadership position in the outdoor living category.

The sale resulted in a loss on sale of $15.4 million and is reported in the Consolidated Statements of Comprehensive Income.

Goodwill Impairment Loss

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We performed a quantitative assessment primarily due to a reduction in project commitments, which adversely impacted project backlog and forecasted net sales and EBITDA.

The reduction in project commitments was influenced by a delay in new projects due to lingering uncertainty created in the commercial railing and staging markets by the COVID-19 virus.

The reduction in project commitments was influenced by a continued delay in new projects due to lingering uncertainty created in the commercial railing and staging markets by the COVID-19 virus.

Refer to Note 2 and Note 5 in the Notes to the Consolidated Financial Statements in this Form 10-K

for additional discussion of the goodwill impairment charge.

Gain on Insurance Proceeds

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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 our customers, and losses in operating income from the loss in net sales.

The building was temporarily off-line while damage to the building’s electrical systems was addressed.

Our insurance covered repairs, incremental direct costs to serve our customers, and losses in operating income from the loss in net sales.

During 2021, gains on insurance proceeds primarily related to the settlement from our insurance company of $6.8 million related to the fire at the Virginia facility.

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Effective tax rate

The effective tax rate for 2021 was comparable to the effective tax rate for 2020.

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

(in thousands)

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

The effective tax rate for 2022 was 25.2% compared to the effective tax rate for 2021 of 24.2%.

The increase in the effective tax rate was driven primarily by a reduction in excess tax benefits resulting from the vesting of outstanding share-based employee compensation.

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

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

Year Ended December 31, 2022

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Year Ended December 31, 2021

Net income (loss)

Interest income, net

Income tax expense

Income tax expense (benefit)

Depreciation and amortization

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 EBITDA.

Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income and.

In relation to its competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets, especially when comparing financial results to prior periods.

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

measures are not meant to be considered superior to or a substitute for our GAAP results.

Year Ended December 31,

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Trex Commercial EBITDA

Total EBITDA increased 23.7% to $311.3 million for 2021 compared to $251.6 million for 2020.

The increase was due to a $116.7 million increase in Trex Residential EBITDA, primarily driven by volume growth in net sales, and to a lesser extent, an $8.7 million gain on insurance proceeds.

The increase was offset in part by a $56.9 million decrease in Trex Commercial EBITDA, primarily related to a $54.2 million goodwill impairment charge recognized in the fourth quarter of 2021.

Excluding the impairment charge and gain on insurance proceeds in 2021, and the $6.5 million surface flaking warranty charge in 2020, EBITDA increased 38.3% to $356.8 million for 2021 compared to $258.1 million for 2020.

Refer to Note 2 and Note 5 to the Consolidated Financial Statements in this Form 10-K

for additional discussion of the goodwill impairment charge.

Total EBITDA decreased 6.5% to $291 million for 2022 compared to $311 million for 2021.

The decrease was due to a $50.2 million decrease in Trex Residential EBITDA, primarily driven by a decrease in net sales and gross profit.

The decrease was offset in part by an increase in EBITDA at Trex Commercial, which resulted primarily from a fourth quarter 2021 goodwill impairment charge of $54.2 million, offset by a fourth quarter 2022 loss on sale of $15.4 million.

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 the measures facilitate performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using EBITDA.

Management considers EBITDA to be important supplemental indicators of our core operating performance because the measures eliminate interest, income taxes, and depreciation and amortization charges to net income.

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

Non-GAAP measures are not meant to be considered superior to or a substitute for our GAAP results.

Year Ended December 31, 2021 Compared To Year Ended December 31, 2020

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Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Operating Activities

Cash provided by operating activities increased $71 million in 2021 compared to 2020.

The increase resulted from a $117 million increase in Trex Residential EBITDA, offset in part by a $44 million increase in working capital, including an increase in accounts receivable and accounts payable, which are expected to be collected or paid in the first quarter of 2022.

Cash provided by operating activities in 2022 were primarily impacted by lower net sales and gross profit at Trex Residential, a loss on sale of Trex Commercial Products, Inc., and an increase in inventories, offset by an decrease in accounts receivable.

Investing Activities

Investing activities in 2021 consisted of $159.4 million in capital expenditures, primarily at our Trex Residential facilities, and included $126.3 million related to capacity expansion and general plant cost reduction initiatives, $24.9 million in other equipment expenditures and production improvements, $6.4 million for general support initiatives.

In 2022, cash used in investing activities for capital expenditures was $176.2 million, primarily at our Trex Residential facilities, including $85.7 million related to construction of our Arkansas facility, $39.2 million related to general plant cost reduction initiatives at our Virginia and Nevada facilities, $19.1 million related to our new corporate office development, and $17.6 million for general support, safety and environmental initiatives.

Cash provided by investing activities in 2022 included $7.3 million in proceeds from the sale of Trex Commercial.

Financing Activities

Net cash used in financing activities in 2021 consisted primarily of $82.5 million in repurchases of our common stock under our Stock Repurchase Program.

Net cash used in financing activities in 2022 consisted primarily of $398.4 million in repurchases of our common stock under our Stock Repurchase Program, offset by net borrowings under our revolving credit facility of $222 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 December 31, 2021, the Company has repurchased 3.6 million shares under the Stock Repurchase Program.

For the year ended December 31, 2022, the Company repurchased 6.5 million shares under the Stock Repurchase Program.

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.

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.

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.

Seasonality .

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

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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 period.

Indebtedness.

Indebtedness Prior to May 18, 2022.

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.

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

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

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

The Company entered into the First Amendment, as borrower;

Trex Commercial Products, Inc.

(TCP), as guarantor;

(Trex Commercial), as guarantor;

Bank of America, N.A.

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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%.

At December 31, 2021, we had no outstanding indebtedness under the revolving credit facilities and borrowing capacity under the facilities of $300 million.

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

Indebtedness On and After May 18, 2022 .

On May 18, 2022, the Company, as borrower;

Trex Commercial Products, Inc.

(Trex Commercial), as guarantor;

Bank of America, N.A.

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

Wells Fargo Bank, National Association (Wells Fargo), as lender and Syndication Agent;

Regions Bank, PNC Bank, National Association, and TD Bank, N.A.

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

as Sole Lead Arranger and Sole Bookrunner, entered into a Credit Agreement (Credit Agreement) to amend and restate the Fourth Amended and Restated Credit Agreement dated as of November 5, 2019.

Under the Credit Agreement, the Lenders agreed to provide the Company with one or more Revolving Loans in a collective maximum principal amount of $400,000,000 (Loan Limit) throughout the term, which ends May 18, 2027 (Term).

Included within the Loan Limit are sublimits for a Letter of Credit facility in an amount not to exceed $60,000,000;

and Swing Line Loans in an aggregate principal amount at any time outstanding not to exceed $20,000,000.

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

The Credit Agreement provides the Company, in the aggregate, the ability to borrow an amount up to the Loan Limit during the Term.

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

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

Base Rate Loans (as defined in the Credit Agreement) under the Revolving Loans and the Swing Line Loans accrue interest at the Base Rate plus the Applicable Rate (as defined in the Credit Agreement) and Term SOFR Loans for the Revolving Loans accrue interest at the rate per annum equal to the sum of Term SOFR for such interest period plus the Applicable Rate (as defined in the Credit Agreement).

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

Repayment of all then outstanding principal, interest, fees and costs is due at the end of the Term.

The Company and BofA Securities, Inc.

as a sustainability coordinator, are entitled to establish specified key performance indicators (KPIs) with respect to certain environmental, social and governance targets of the Company and its subsidiaries.

The sustainability coordinator and the Company may amend the Credit Agreement for the purpose of incorporating the KPIs and other related provisions, unless the Lenders object to such amendment on or prior to the date that is ten business days after the date on which such amendment is posted for review by the Lenders.

Based on the performance of the Company and its subsidiaries against the KPIs, certain adjustments (increase, decrease or no adjustment) to otherwise applicable pricing will be made;

provided that the amount of such adjustments shall not exceed certain aggregate caps as in the definitive loan documentation.

Under the terms of the Security and Pledge Agreement, the Company and Trex Commercial, subject to certain permitted encumbrances, as collateral security for the above-stated loans and all other present and future indebtedness of the Company owing to the Lenders grants to BOA, as Administrative Agent for the Lenders, a continuing security interest in certain collateral described and defined in the Security and Pledge Agreement but excluding the Excluded Property (as defined in the Security and Pledge Agreement).

Indebtedness On and After December 22, 2022 .

As of December 22, 2022, the Company entered into a First Amendment to the Credit Agreement (First Amendment) by and among the Company, as borrower, the guarantors party thereto;

Bank of America, N.A.

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

TD Bank, N.A.

as lender and Syndication Agent;

Regions Bank, PNC Bank, National Association, and Wells Fargo Bank, National Association (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc.

as Sole Lead Arranger and Sole Bookrunner, amending that certain Credit Agreement dated as of May 18, 2022, by and among the Company, as borrower, the guarantors party thereto, BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer and the other lenders identified therein (as so amended, the “Credit Agreement”).

As a part of the First Amendment, the Credit Agreement was amended and restated to provide for an additional Revolving B Loan (as hereinafter defined).

Under the First Amendment, the Lenders agreed to provide the Company with a Revolving B Loan consisting of one or more revolving loans in a collective maximum principal amount of $150,000,000 (Revolving B Loan Limit) throughout the term, which ends December 22, 2024 (Revolving B Loan Term).

Previously, under the Credit Agreement, there was no Revolving B Loan.

The First Amendment also provided that TD Bank, N.A.

would serve as Syndication Agent.

As of December 22, 2022, the Credit Agreement was amended and restated to refer to this loan as the Revolving A Loan.

The amended and restated Credit Agreement was made an Exhibit A to the First Amendment.

All of the terms of the Credit Agreement apply to the Revolving B Loan.

The Credit Agreement continues to include sublimits under the Revolving A Loan for a Letter of Credit facility in an amount not to exceed $60,000,000;

and Swing Line Loans in an aggregate principal amount at any time outstanding not to exceed $20,000,000.

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

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

The Company is not obligated to borrow any amount under the revolving loans.

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

With respect to Revolving B Loans, for any day, the rate per annum is a tiered pricing based upon the Consolidated Debt to Consolidated EBITDA Ratio.

The applicable rate for Revolving B Loans that are Base Rate Loans range between1.20% and 2.15% and the applicable rate for Revolving B Loans that are Term SOFR/Term SOFR Daily Floating Rate range between 0.20% and 1.15%.

At December 31, 2022, we had $222 million in outstanding borrowings under the revolving credit facility and borrowing capacity under the facility of $328 million.

Compliance with Debt Covenants and Restrictions.

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

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 at December 31, 2022.

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Open purchase orders written in the normal course of business for goods or services that are provided on demand have been excluded as the timing of which is not certain.

As of December 31, 2021, we have purchase obligations under material supply contracts of $47 million for the year ending December 31, 2022, $49.9 million in 2023, $25.0 million in 2024, $13.3 million in 2025 and $5.6 million in 2026.

As of December 31, 2022, we have purchase obligations under material supply contracts of $53 million for the year ending December 31, 2023, $26.1 million in 2024, $13.3 million in 2025, and $5.6 million in 2026.

Please refer to Note 19 to the Consolidated Financial Statements in this filing for additional information on our purchase commitments.

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The Company believes that its cash on hand and cash generated through operating activities, both over the next 12 months and beyond the next 12 months, should be sufficient to cover purchase obligations and operating leases.

Sheet Arrangements.

We do not have off-balance

sheet financing arrangements.

Off-Balance Sheet Arrangements.

We do not have off-balance sheet financing arrangements.

Capital and Other Cash Requirements.

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 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 approximately $400 million over the next five years in the development of the new Arkansas site.

In October 2021, we announced plans to add a third U.S.-based Trex Residential manufacturing facility located in Little Rock, Arkansas.

The new campus will sit on approximately 300 acres of land and will address 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.

As previously announced, the Company anticipates spending approximately $400 million on the facility and the budget for the design-build agreement is contained within this amount.

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

Our capital expenditure guidance for 2023 is $130 million to $140 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.

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.

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

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

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

claims, service disruptions and lower than expected collections of accounts receivable.

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

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

NEW ACCOUNTING STANDARDS

In March 2020, the FASB issued ASU No.

“ Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting

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

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

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

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

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

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

In November 2021, the FASB issued ASU No.

“ Government Assistance (Topic 832):

Disclosures by Business Entities About Government Assistance

The guidance requires business entities to make annual disclosures about material transactions with a government that are accounted for by analogizing to a grant or contribution accounting model, such as International Accounting Standards 20, ASC 958-605.

The annual disclosure requirements include:

the nature of the transactions, the entity’s related accounting policy used, the line items on the balance sheet and income statement that are affected and the amounts applicable to each financial statement line item, and significant terms and conditions of the transactions.

The disclosure requirements can be applied either prospectively to all transactions in the scope of the amendments that are reflected in the financial statements at the date of initial application and new transactions that are entered into after the date of initial application, or retrospectively.

The guidance is effective for fiscal years beginning after December 15, 2021, with early application permitted.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis