What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2023-02-27 compared with 2022-02-28 · 307 added, 279 removed, 859 unchanged (41% of the section changed)

19 unchanged sentences

February 27, 2023

/S/ B RYAN H.

President and Chief Executive Officer

1 unchanged sentence

February 27, 2023

/S/ D ENNIS C.

Senior Vice President and Chief Financial Officer

25 unchanged sentences

/s/ Ernst & Young LLP

Richmond, Virginia

Tysons, Virginia

February 27, 2023

Other Information

Amendment of Amended and Restated 1999 Incentive Plan for Outside Directors

On February 23, 2022, the Board of Directors approved an amendment to the Amended and Restated 1999 Incentive Plan for Outside Directors (Outside Directors Plan), effective February 23, 2022, as follows:

The annual cash retainer for service on the Board was increased from $73,750 to $82,500.

The annual equity award for service on the Board was increased from $110,000 to $120,000.

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

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

Trex Residential Arkansas Manufacturing Facility

On October 26, 2021, the Company announced its 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, the Company expects 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 increased demand for Trex Residential outdoor living products.

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

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

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.

Sale 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 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 of this segment 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.

Directors, Executive Officers and Corporate Governance

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

We also make available on our web site, at www.trex.com/our-company/corporate-governance

, and in print to any stockholder who requests them, copies of our corporate governance principles and the charters of each standing committee of our board of directors.

We also make available on our web site, at www.trex.com/our-company/corporate-governance , and in print to any stockholder who requests them, copies of our corporate governance principles and the charters of each standing committee of our board of directors.

Requests for copies of these documents should be directed to Corporate Secretary, Trex Company, Inc., 160 Exeter Drive, Winchester, Virginia 22603-8605.

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All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable or not material and, therefore, have been omitted.

(a)(3) See Exhibit Index at the end of the Annual Report on Form 10-K

for the information required by this Item.

(a)(3) See Exhibit Index at the end of the Annual Report on Form 10-K for the information required by this Item.

TREX COMPANY, INC.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 42 )

Consolidated Financial Statements

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We have audited the accompanying consolidated balance sheets of Trex Company, Inc.

(the Company) as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).

(the Company) as of December 31, 2022 and 2021 the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

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

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

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

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

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

Surface Flaking Warranty

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As discussed in Note 19 of the consolidated financial statements, the Company continues to receive and settle claims for decking products manufactured at its Nevada facility prior to 2007 that exhibit surface flaking and maintains a warranty reserve to provide for the settlement of these claims.

The Company’s warranty reserve is based on an actuarial analysis of the number of claims to be settled and management’s estimate of the average cost to settle each claim.

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

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

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

replacement material) and used in the measurement process.

These determinations, assumptions and judgments have a significant effect on the surface flaking reserve.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the Company’s measurement and valuation of the surface flaking warranty reserve.

For example, we tested controls over the appropriateness of the assumptions used and the completeness and accuracy of the underlying data.

To test the surface flaking warranty reserve, our audit procedures included, among others, evaluating the methodologies and the significant assumptions used.

For example, we involved an actuarial specialist to assist us in independently calculating a range of the expected number of claims and compared that to the Company’s range.

We also performed sensitivity analyses to evaluate changes in the liability that would result from changes in significant assumptions.

In addition, we assessed the historical accuracy of management’s estimates to identify potential changes in the measurement and valuation of the surface flaking reserve.

We performed audit procedures on the completeness and accuracy of the underlying data used by the Company in its analysis.

Valuation of Goodwill

Description of the Matter

At December 31, 2021, the Company’s goodwill totaled $14.2 million.

As discussed in Note 2 of the consolidated financial statements, goodwill is tested for impairment annually during the fourth quarter and when events or changes in circumstances indicate the carrying value of reporting units might exceed their current fair values.

The Company determined that it was necessary to perform a quantitative annual goodwill impairment test as of October 31, 2021 of its commercial railing and staging reporting units utilizing a combination of the income and market approaches.

As a result of the annual test performed, the Company recorded $54.2 million of impairment losses in the fourth quarter of 2021.

Auditing management’s annual goodwill impairment test was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting units.

In particular, the fair value estimates were sensitive to changes in significant assumptions, such as the weighted average cost of capital and assumptions used in the prospective financial information (including the long-term rate of growth and profitability of the business), which are affected by expectations about future market or economic conditions.

The Company’s surface flaking warranty reserve is based on management’s estimate of the number of claims to be settled with payment and the average cost to settle each claim.

Auditing the surface flaking warranty reserve is complex because it involves the estimation of the number of claims to be settled with payment and requires the use of actuarial specialists.

This estimate has a significant effect on the surface flaking warranty reserve.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s annual goodwill impairment review process, including controls over management’s review of the significant assumptions described above and the completeness and accuracy of the underlying data.

To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above as well as the underlying data used by the Company in its analysis.

For example, we compared the significant assumptions used by management in the prospective financial information to current industry and economic trends and to historical results.

We performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions.

We inquired of the Company’s executives to understand the business initiatives supporting the assumptions in the prospective financial information and assessed the historical accuracy of management’s estimates.

We also involved a valuation specialist to assist in our evaluation of the Company’s valuation methodology and certain significant assumptions, such as the weighted average cost of capital.

We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the Company’s process to estimate the number of claims to be settled with payment.

To test the estimated number of claims to be settled with payment, our audit procedures included, among others, evaluating the methodologies and the significant assumptions used by management.

We also involved an actuarial specialist to assist us in independently calculating a range of the expected number of claims to be settled with payment and compared that to the Company’s range.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1995.

Richmond, Virginia

Tysons, Virginia

February 27, 2023

5 unchanged sentences

Selling, general and administrative expenses

Goodwill impairment losses

Goodwill impairment

Gain on insurance proceeds

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Property, plant and equipment, net

Goodwill and other intangible assets, net

Operating lease assets

Goodwill and other intangible assets, net

LIABILITIES AND STOCKHOLDERS’ EQUITY

3 unchanged sentences

Accrued warranty

Line of credit

Total current liabilities

Deferred income taxes

Operating lease liabilities

accrued warranty

Deferred income taxes

Other long-term liabilities

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Common stock, $ 0.01 par value, 360,000,000 shares authorized;

140,734,753 and 140,577,005 shares issued and 115,148,152 and 115,799,503 shares outstanding at December 31, 2021 and 2020, respectively

140,841,833 and 140,734,753 shares issued and 108,743,423 and 115,148,152 shares outstanding at December 31, 2022 and December 31, 2021, respectively

Additional paid-in

Retained earnings

Treasury stock, at cost, 25,586,601 and 24,777,502 shares at December 31, 2021 and 2020, respectively

Treasury stock, at cost, 32,098,410 and 25,586,601 shares at December 31, 2022 and December 31, 2021, respectively

Total Stockholders’ Equity

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Employee stock plans

Shares withheld for taxes on

Shares withheld for taxes on awards

Stock-based compensation

2 unchanged sentences

Employee stock plans

Shares withheld for taxes on

Shares withheld for taxes on awards

Stock-based compensation

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Adjustments to reconcile net income to net cash provided by operating activities:

Goodwill impairment losses

Goodwill impairment

Depreciation and amortization

1 unchanged sentence

Stock-based compensation

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

Gain on disposal of property, plant and equipment

Other non-cash

7 unchanged sentences

Investing Activities

Expenditures for property, plant and equipment and intangibles

Expenditures for property, plant and equipment

Proceeds from sale of assets

Proceeds from sales of property, plant and equipment

7 unchanged sentences

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Net decrease increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

3 unchanged sentences

Cash paid for income taxes, net

Capital expenditures in accounts payable

See Notes to Consolidated Financial Statements.

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Trex Company, Inc.

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

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

(Trex), a Delaware corporation, was incorporated on September 4, 1998.

Through December 30, 2022, Trex had one wholly-owned subsidiary, Trex Commercial Products, Inc.

Together, Trex and Trex Commercial Products, Inc.

are referred to as the Company.

During the three years ended December 31, 2022, the Company operated in two reportable segments, Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial).

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

Refer to Note 3 below for more information on the sale .

The Company’s principal business based on net sales is the manufacture and distribution of Trex Residential high-performance, low-maintenance

1 unchanged sentence

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

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

Trex Commercial designed, engineered and marketed modular and architectural railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues.

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

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

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

The consolidated financial statements include the accounts of the Company.

Intercompany accounts and transactions have been eliminated in consolidation.

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

However, the Company continues to manage its business to ensure the continuity of its operations and the safety of its 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 commercial railing and staging reporting units as of October 31, 2021.

The Company’s 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, consumer spending and preferences, interest rates, the impact of any supply chain disruptions, economic conditions, and/or any adverse effects from pandemics and geopolitical conflicts.

Towards the end of June 2022, we experienced a reduction in demand from our distribution partners, spurred by concerns over a potential easing in consumer demand due to rising interest rates, declining consumer sentiment and expectations of a general slowing in the economy.

As a result, beginning in the third quarter our channel partners met demand partially through inventory drawdown rather than reordering products and maintaining current inventories.

The drawdown negatively impacted third quarter and fourth quarter sales.

Use of Estimates

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The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable.

The Company from time to time may have bank deposits in excess of insurance limits of the Federal Deposit Insurance Corporation.

As of December 31, 2021,

substantially all deposits are maintained in one financial institution.

The Company from time to time may have bank

deposits in excess of insurance limits of the Federal Deposit Insurance Corporation.

As of December 31, 2022, substantially all deposits are maintained in one financial institution.

The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to its cash and cash equivalents.

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In the years ended December 31, 2022, 2021, and 2020 sales to certain customers of Trex Residential accounted for 10 % or more of the Company’s total net sales.

For the year ended December 31, 2021, three customers of Trex Residential represented approximately 61 % of the Company’s total net sales.

For the year ended December 31, 2022 three customers of Trex Residential represented 64 % of the Company’s total net sales.

For the year ended December 31, 2021, three customers of Trex Residential represented approximately 61 % of the Company’s total net sales.

1 unchanged sentence

At December 31, 2022, two customers represented 35 % and 26 %, respectively, of the Company’s total accounts receivable balance.

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

At December 31, 2021, two customers represented 29 % and 25 %, respectively, of the Company’s total accounts receivable balance.

For each year ended December 31, 2022, 2021, and 2020, approximately 17.5 %, 26 %, and 28 %, respectively, of the Company’s materials purchases at Trex Residential were purchased from its four largest suppliers.

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

Inventories for the composite decking and railing products at Trex Residential are valued at the lower of cost (last-in,

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

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There were no LIFO inventory liquidations or related impact on cost of sales in 2022.

A majority of the Company’s products at Trex Residential are made in a proprietary process that combines reclaimed wood fibers and scrap polyethylene.

The Company grinds up scrap materials generated from its manufacturing process and inventories deemed no longer salable and reintroduces the reclaimed material into the manufacturing process as a substitute for raw materials.

A majority of the products at Trex Residential are made in a proprietary process that combines reclaimed wood fibers and scrap polyethylene.

Trex Residential grinds up scrap materials generated from its manufacturing process and inventories deemed no longer salable and reintroduces the reclaimed material into the manufacturing process as a substitute for raw materials.

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

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

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

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

process includes estimated production costs.

Property, Plant and Equipment

Property, plant and equipment are stated at historical cost.

Property, plant and equipment are stated at historical

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

Unpaid liabilities related to property, plant

and equipment are included in accounts payable and were $ 2.6 million and $ 12.9 million at December 31, 2021 and December 31, 2020, respectively.

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

Cash flows for capital expenditures as

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

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

Machinery and equipment

Furniture and equipment

Furniture and fixtures

Forklifts and tractors

Computer equipment and software

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset.

Leasehold improvements are amortized over the shorter of the lease term or 15 years.

The Company reviews its long-lived assets, including property, plant and equipment, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable.

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

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

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

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

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Fair Value Measurement

Assets and liabilities measured at fair value are measured at the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and classified into one of the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

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Qualitative factors the Company considered include events and circumstances such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant Company-specific events, as applicable.

For fiscal years 2020 and 2019, the Company completed its annual impairment test of goodwill for its commercial railing reporting unit and its staging reporting unit utilizing the qualitative assessment and concluded that it was not more likely than no t that the fair value of the respective reporting unit was less than its carrying amount.

For the fiscal year 2020, the Company completed its annual impairment test of goodwill for its commercial railing reporting unit and its staging reporting unit utilizing the qualitative assessment and concluded that it was not more likely than no t that the fair value of the respective reporting unit was less than its carrying amount.

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

The Company 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, the Company recognized an impairment charge at its commercial railing reporting unit and at its 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.

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

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.

As a result, the Company recognized an impairment charge at its commercial railing reporting unit and at its 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.

The Company also considered the income tax effects from any tax-deductible

goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss.

For additional information regarding impairments of goodwill in the year ended December 31, 2021, see Note 5, “ Goodwill and Other Intangible Assets, Net

The Company uses assumptions that are consistent with those it believes a market participant would use.

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Product Warranty

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

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

With respect to Trex Signature ®

Railing, the warranty period is 25 years for both residential and commercial use.

With respect to the Company’s Transcend ®

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

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

The Company warrants that for the applicable warranty period its Trex Residential products, when properly installed, used and maintained, will be free from material defects in workmanship and materials and its 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 ®

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

The Company further warrants

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, the Company has 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 one to three years .

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

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.

The Company further warrants 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, for the warranty period referred to above.

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

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

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Trex Commercial Products.

Trex Commercial generates revenue from the manufacture and sale of its 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 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 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

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.

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

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.

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.

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Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU No.

“ Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes

The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries.

The guidance also simplifies aspects of accounting for franchise taxes and enacted changes

in tax laws or rates and clarifies the accounting for transactions that result in a step-up

in the tax basis of goodwill.

The Company adopted the standard on a prospective basis on January 1, 2021.

Adoption did not have a material effect on its consolidated financial statements.

New Accounting Standards Not Yet Adopted

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 transactions with a government they account for by analogizing to a grant or contribution accounting model, such as IAS 20, ASC 958-605.

The annual disclosure requirements include:

the nature of the transactions, the entities 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 could 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 was effective for fiscal years beginning after December 15, 2021, with early application permitted.

Adoption of the guidance did not have a material effect on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No.

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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 IAS 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.

The guidance did not have a material effect on the Company’s consolidated financial statements.

SALE OF TREX COMMERCIAL PRODUCTS, INC.

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

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

With the sale complete, the Company will dedicate its resources to accelerating conversion to composites from wood and further strengthen its 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.

The divestiture did not represent a strategic shift with a major effect on the Company’s operations and financial results and therefore is not reported as a discontinued operation.

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.

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

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There was no inventory reduction during 2022 or 2021.

Inventories valued at lower of cost (FIFO method) and net realizable value as of December 31, 2021 and December 31, 2020, were $ 5.4 million and $ 1.5 million, respectively, consisting primarily of raw materials.

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

Inventories valued at lower of cost (FIFO method) and net realizable value as of December 31, 2021, were $ 5.4 million consisting primarily of raw materials.

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

PREPAID EXPENSES AND OTHER ASSETS

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GOODWILL AND OTHER INTANGIBLE ASSETS, NET

The carrying amount of goodwill by reportable segment at December 31, 2021 and 2020 was as follows (in thousands):

Trex Residential

Trex Commercial Segment

Reporting Unit

Railing Reporting

Reporting Unit

Balance, December 31, 2020

Impairment Charge

Balance, December 31, 2021

The carrying amount of goodwill at December 31, 2022, and December 31, 2021, was $ 14.2 million for Trex Residential.

For fiscal years 2022, 2021 and 2020, the Company completed its annual impairment test of goodwill for its residential reporting unit in Trex Residential utilizing the qualitative assessment and concluded it was not more likely than not that the fair value of the residential reporting unit was less than its carrying amount.

For fiscal years 2020 and 2019, the Company completed its annual impairment test of goodwill for its commercial railing reporting unit and its staging reporting unit in Trex Commercial utilizing the qualitative assessment and concluded that it was not more likely than not that the fair value of the respective reporting unit was less than its carrying amount.

For fiscal year 2020, the Company completed its annual impairment test of goodwill for its commercial railing reporting unit and its staging reporting unit in Trex Commercial utilizing the qualitative assessment and concluded that it was not more likely than not that the fair value of the respective reporting unit was less than its carrying amount.

For fiscal year 2021, the Company elected to perform the impairment test of goodwill for its commercial railing reporting unit and its staging reporting unit utilizing the quantitative assessment.

The Company 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

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.

In performing the quantitative assessment, the Company employed a combination of the Income Approach (i.e., Discounted Cash Flow Method) and the Market Approach.

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The Market Approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets and liabilities, such as a business.

Using these methodologies resulted in the recognition of an impairment loss of

$ 42.5 million and $ 11.8 million at its

commercial railing and staging reporting units, respectively.

Using these methodologies resulted in the recognition of an impairment loss of the total amount of goodwill of $ 42.5 million and $ 11.8 million at its commercial railing and staging reporting units, respectively.

The impairment loss was the amount by which the carrying amount exceeded the fair value of each reporting unit, not to exceed the amount of goodwill of each reporting unit.

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The use of different assumptions, estimates or judgments, including the estimated future cash flows, the discount rate used to discount estimated cash flows to their net present value, and the residual growth rate, could materially increase or decrease the fair value of the reporting unit and, accordingly, could materially increase or decrease related impairment charges.

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

At December 31, 2021 and 2020, intangible assets were $ 6.3 million, and accumulated amortization was $ 1.5 million and $ 1.1 million, respectively.

The Company’s intangible assets, purchased in 2018, consist of domain names for Trex Residential.

At December 31, 2022, and December 31, 2021, intangible assets were $ 6.3 million and accumulated amortization was $ 1.9 million and $ 1.5 million, respectively.

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

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

Intangible asset amortization expense for the years ended December 31, 2021, December 31, 2020, and December 31, 2019, was $ 0.4 million, $ 0.4 million, and $ 0.4 million, respectively.

Intangible asset amortization expense for the year ended December 31, 2022 and December 31, 2021, was $ 0.4 million and $ 0.4 million, respectively.

PROPERTY, PLANT AND EQUIPMENT

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Compensation and benefits

Operating lease liabilities

Op erating lease liabilities

Manufacturing costs

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Total accrued expenses and other liabilities

The Company’s debt consists of a revolving credit facility.

At December 31, 2021 and 2020, the Company had no outstanding indebtedness.

Available borrowing capacity at December 31, 2021, was $ 300 million.

Revolving Credit Facility

Indebtedness prior to May

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

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

The Company entered into the First Amendment, as borrower;

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’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

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

Trex Commercial Products, Inc.

(TCP), as guarantor;

(Trex Commercial), as guarantor;

Bank of America, N.A.

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

and certain other lenders including Wells Fargo Bank, N.A.

(Wells Fargo), who is also Syndication Agent;

Truist Bank (Truist);

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

as Sole Lead Arranger and Sole Bookrunner.

The First Amendment further provides that the New Credit Agreement is amended and restated by changing Schedule 2.01 to add applicable Lender percentages related to the Revolving B Commitment for BOA of 47.5 %, Wells Fargo of 28.0 % and Regions of 24.5 %.

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

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

Revolving B Loan Limit during the respective Revolving A Term and Revolving B Term.

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

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

Base Rate Loans (as defined in the Fourth Amended Credit Agreement) under the Revolving Loans and the Swing Line Loans accrue interest at the Base Rate plus the Applicable Rate (as defined in the Fourth Amended Credit Agreement) and Eurodollar Rate Loans for the Revolving Loans and Swing Line Loans accrue interest at the Adjusted London InterBank Offered Rate plus the Applicable Rate (as defined in the Fourth Amended Credit Agreement).

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

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

Consolidated Debt to

Eurodollar Rate

Loans / LIBOR

Base Rate Loans

Commitment Fee

< 2.50:1.00 but

< 2.00:1.00 but

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

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 between 1.20 % 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 %.

The Company had $ 222 million in borrowings outstanding under its revolving credit facility and available borrowing capacity of $ 328 million at December 31, 2022.

The weighted average interest rate on the revolving credit facility was 5.22 % as of December 31, 2022.

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 as of December 31, 2022.

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Basic weighted average shares outstanding

Year Ended December 31,

Effect of dilutive securities:

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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 of the Company’s outstanding common stock under the Stock Repurchase Program.

On July 29, 2020, the Company’s Board of Directors approved a two-for-one

stock split of the Company’s common stock, par value, $ 0.01 .

The stock split was in the form of a stock dividend distributed on September 14, 2020, to stockholders of record at the close of business on August 19, 2020.

The stock split entitled each stockholder to receive one additional share of common stock for each share they held as of the record date.

All common stock share and per share data for all periods presented in the accompanying consolidated financial statements and notes thereto have been retroactively adjusted to reflect the stock split.

During 2022, the Company repurchased 6.5 million shares of the Company’s outstanding common stock under the Stock Repurchase Program.

REVENUE FROM CONTRACTS WITH CUSTOMERS

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Any performance obligation that remains unsatisfied at the end of a reporting period is part of a contract that has an original expected duration of one year or less.

Any variable consideration related to the unsatisfied performance obligation is allocated wholly to the unsatisfied performance obligation and recognized when the product ships and the performance obligation is satisfied and is included in “Accrued expenses and other liabilities, Sales and marketing” in Note 7 to the Consolidated Financial Statements.

included in “Accrued expenses and other liabilities, Sales and marketing” in Note 8 to the Consolidated Financial Statements.

For each product shipped, the transaction price by product is specified in the purchase order.

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Trex Commercial Products

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

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

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

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

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

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

On December 30, 2022, the Company completed the sale of Trex Commercial.

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

Revenue and estimated profit was 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.