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TREX CO INC - Quarter Report: 2023 September (Form 10-Q)

Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from       to      
Commission File Number:
001-14649
 
 
 
Trex Company, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
54-1910453
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2500 Trex Way
Winchester, Virginia
 
22601
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(540) 542-6300
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock
 
TREX
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.:
 
Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule
12b-2
of the Exchange Act): Yes ☐ No ☒
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding at October 16, 2023 was 108,595,381 shares.
 
 
 


Table of Contents

TREX COMPANY, INC.

INDEX

 

         Page  
PART I FINANCIAL INFORMATION      2  

Item 1.

 

Condensed Consolidated Financial Statements

     2  
 

Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2023 and September 30, 2022 (unaudited)

     2  
 

Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (unaudited)

     3  
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2023 and September 30, 2022 (unaudited)

     4  
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and September 30, 2022 (unaudited)

     5  
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     6  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     30  

Item 4.

 

Controls and Procedures

     30  

PART II OTHER INFORMATION

     31  

Item 1.

 

Legal Proceedings

     31  

Item 1A.

 

Risk Factors

     31  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     31  

Item 5.

 

Other Information

     31  

Item 6.

 

Exhibits

     32  

 

1


Table of Contents
P10D
PART I
FINANCIAL INFORMATION
 
Item 1.
Condensed Consolidated Financial Statements
TREX COMPANY, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except share and per share data)
 
    
Three Months Ended

September 30,
    
Nine Months Ended

September 30,
 
    
2023
   
2022
    
2023
    
2022
 
Net sales
   $ 303,836     $ 188,472      $ 899,092      $ 913,950  
Cost of sales
     172,941       142,264        517,321        575,452  
  
 
 
   
 
 
    
 
 
    
 
 
 
Gross profit
     130,895       46,208        381,771        338,498  
Selling, general and administrative expenses
     44,532       26,857        133,694        106,387  
  
 
 
   
 
 
    
 
 
    
 
 
 
Income from operations
     86,363       19,351        248,077        232,111  
Interest (income) expense, net
     (734     —         2,555        (103
  
 
 
   
 
 
    
 
 
    
 
 
 
Income before income taxes
     87,097       19,351        245,522        232,214  
Provision for income taxes
     21,831       4,928        62,089        57,665  
  
 
 
   
 
 
    
 
 
    
 
 
 
Net income
   $ 65,266     $ 14,423      $ 183,433      $ 174,549  
  
 
 
   
 
 
    
 
 
    
 
 
 
Basic earnings per common share
   $ 0.60     $ 0.13      $ 1.69      $ 1.55  
  
 
 
   
 
 
    
 
 
    
 
 
 
Basic weighted average common shares outstanding
     108,583,009       110,140,496        108,707,699        112,609,684  
  
 
 
   
 
 
    
 
 
    
 
 
 
Diluted earnings per common share
   $ 0.60     $ 0.13      $ 1.69      $ 1.55  
  
 
 
   
 
 
    
 
 
    
 
 
 
Diluted weighted average common shares outstanding
     108,702,495       110,300,017        108,829,374        112,787,994  
  
 
 
   
 
 
    
 
 
    
 
 
 
Comprehensive income
   $ 65,266     $ 14,423      $ 183,433      $ 174,549  
  
 
 
   
 
 
    
 
 
    
 
 
 
See Notes to Condensed Consolidated Financial Statements (Unaudited).
 
2

Table of Contents
TREX COMPANY, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
 
    
September 30,

2023
   
December 31,
2022
 
              
    
(Unaudited)
 
ASSETS
    
Current assets
    
Cash and cash equivalents
   $ 4,644     $ 12,325  
Accounts receivable, net
     200,909       98,057  
Inventories
     60,384       141,355  
Prepaid expenses and other assets
     7,130       35,105  
  
 
 
   
 
 
 
Total current assets
     273,067       286,842  
Property, plant and equipment, net
     671,035       589,892  
Operating lease assets
     27,286       30,991  
Goodwill and other intangible assets, net
     18,267       18,582  
Other assets
     7,157       7,398  
  
 
 
   
 
 
 
Total assets
  
$
996,812
 
 
$
933,705
 
  
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
Current liabilities
    
Accounts payable
   $ 31,795     $ 19,935  
Accrued expenses and other liabilities
     88,919       44,064  
Accrued warranty
     5,092       4,600  
Line of credit
     56,500       222,000  
  
 
 
   
 
 
 
Total current liabilities
     182,306       290,599  
Deferred income taxes
     68,224       68,224  
Operating lease liabilities
     20,197       23,974  
Non-current
accrued warranty
     17,874       20,999  
Other long-term liabilities
     16,560       11,560  
  
 
 
   
 
 
 
Total liabilities
     305,161       415,356  
  
 
 
   
 
 
 
Commitments and contingencies
     —        —   
Stockholders’ equity
    
Preferred stock, $0.01 par value, 3,000,000 shares authorized; none issued and outstanding
     —        —   
Common stock, $0.01 par value, 360,000,000 shares authorized; 140,958,411 and 140,841,833 shares issued and 108,595,105 and 108,743,423 share outstanding, at September 30, 2023 and December 31, 2022, respectively
     1,410       1,408  
Additional
paid-in
capital
     137,088       131,539  
Retained earnings
     1,314,107       1,130,674  
Treasury stock, at cost, 32,363,306 shares at September 30, 2023 and 32,098,410 shares at December 31, 2022
     (760,954     (745,272
  
 
 
   
 
 
 
Total stockholders’ equity
     691,651       518,349  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
  
$
996,812
 
 
$
933,705
 
  
 
 
   
 
 
 
See Notes to Condensed Consolidated Financial Statements (Unaudited).
 
3

TREX COMPANY, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
(In thousands, except share data)
 
    
Common Stock
    
Additional
Paid-In

Capital
   
Retained
Earnings
    
Treasury Stock
   
Total
 
    
Shares
   
Amount
    
Shares
    
Amount
 
Balance, December 31, 2022
  
 
108,743,423
 
 
$
1,408
 
  
$
131,539
 
 
$
1,130,674
 
  
 
32,098,410
 
  
$
(745,272
 
$
518,349
 
Net income
     —        —         —        41,131        —         —        41,131  
Employee stock plans
     8,504       —         316       —         —         —        316  
Shares withheld for taxes on awards
     (28,773     —         (1,592     —         —         —        (1,592
Stock-based compensation
     80,362       1        1,972       —         —         —        1,973  
  
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
Balance, March 31, 2023
  
 
108,803,516
 
 
$
1,409
 
  
$
132,235
 
 
$
1,171,805
 
  
 
32,098,410
 
  
$
(745,272
 
$
560,177
 
Net income
     —        —         —        77,036        —         —        77,036  
Employee stock plans
     7,971       —         323       —         —         —        323  
Shares withheld for taxes on awards
     (15,663     —         (855     —         —         —        (855
Stock-based compensation
     36,888       —         2,590       —         —         —        2,590  
Repurchases of common stock
     (264,896     —         —        —         264,896        (15,746     (15,746
  
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
Balance, June 30, 2023
  
 
108,567,816
 
 
$
1,409
 
  
$
134,293
 
 
$
1,248,841
 
  
 
32,363,306
 
  
$
(761,018
 
$
623,525
 
Net Income
     —        —         —        65,266      —         —        65,266  
Employee stock plans
     5,448       —         286       —         —         —        286  
Shares withheld for taxes on awards
     (4,140     —         (312     —         —         —        (312
Stock-based compensation
     25,981       1      2,821       —         —         —        2,822  
Repurchases of common stock
     —        —         —        —         —         64       64  
  
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
Balance, September 30, 2023
  
 
108,595,105
 
 
$
1,410
 
  
$
137,088
 
 
$
1,314,107
 
  
 
32,363,306
 
  
$
(760,954
 
$
691,651
 
  
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
 
    
Common Stock
    
Additional
Paid-In

Capital
   
Retained
Earnings
    
Treasury Stock
   
Total
 
    
Shares
   
Amount
    
Shares
    
Amount
 
Balance, December 31, 2021
  
 
115,148,152
 
 
$
1,407
 
  
$
127,787
 
 
$
946,048
 
  
 
25,586,601
 
  
$
(350,208
 
$
725,034
 
Net income
     —        —         —        71,211        —         —        71,211  
Employee stock plans
     9,081       —         523       —         —         —        523  
Shares withheld for taxes on awards
     (35,856     —         (2,912     —         —         —        (2,912
Stock-based compensation
     79,926       1        2,225       —         —         —        2,226  
Repurchases of common stock
     (833,963     —         —        —         833,963        (75,017     (75,017
  
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
Balance, March 31, 2022
  
 
114,367,340
 
 
$
1,408
 
  
$
127,623
 
 
$
1,017,259
 
  
 
26,420,564
 
  
$
(425,225
 
$
721,065
 
Net income
     —        —         —        88,916        —         —        88,916  
Employee stock plans
     8,834       —         429       —         —         —        429  
Stock-based compensation
     2,024       —         1,057       —         —         —        1,057  
Repurchases of common stock
     (2,814,817     —         —        —         2,814,817        (169,992     (169,992
  
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
Balance, June 30, 2022
  
 
111,563,381
 
 
$
1,408
 
  
$
129,109
 
 
$
1,106,175
 
  
 
29,235,381
 
  
$
(595,217
 
$
641,475
 
Net income
     —        —         —        14,423        —         —        14,423  
Employee stock plans
     11,003       —         429       —         —         —        429  
Shares withheld for taxes on awards
     (57     —         (3     —         —         —        (3
Stock-based compensation
     10,520       —         249       —         —         —        249  
Repurchases of common stock
     (1,710,676     —         —        —         1,710,676        (100,035     (100,035
  
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
Balance, September 30, 2022
  
 
109,874,171
 
 
$
1,408
 
  
$
129,784
 
 
$
1,120,598
 
  
 
30,946,057
 
  
$
(695,252
 
$
556,538
 
  
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
See Notes to Condensed Consolidated Financial Statements (Unaudited).
 
4
TREX COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
    
Nine Months Ended
September 30,
 
    
2023
   
2022
 
OPERATING ACTIVITIES
    
Net income
   $ 183,433     $ 174,549  
Adjustments to reconcile net income to net cash provided by operating activities:
    
Depreciation and amortization
     37,194       33,269  
Stock-based compensation
     7,384       3,531  
Loss (gain) on disposal of property, plant and equipment
     1,081       (43
Other
non-cash
adjustments
     (169     (171
Changes in operating assets and liabilities:
    
Accounts receivable
     (102,852     62,343  
Inventories
     80,971       (48,362
Prepaid expenses and other assets
     4,376       7,125  
Accounts payable
     10,678       (3,769
Accrued expenses and other liabilities
     39,039       8,842  
Income taxes receivable/payable
     27,090       7,079  
  
 
 
   
 
 
 
Net cash provided by operating activities
  
 
288,225
 
 
 
244,393
 
  
 
 
   
 
 
 
INVESTING ACTIVITIES
    
Expenditures for property, plant and equipment
     (112,920     (108,163
Proceeds from sales of property, plant and equipment
     —        45  
  
 
 
   
 
 
 
Net cash used in investing activities
  
 
(112,920
 
 
(108,118
  
 
 
   
 
 
 
FINANCING ACTIVITIES
    
Borrowings under line of credit
     509,500       156,000
Principal payments under line of credit
     (675,000     (80,000
Repurchases of common stock
     (18,441     (347,957
Proceeds from employee stock purchase and option plans
     925       1,381  
Financing costs
     30       (867
  
 
 
   
 
 
 
Net cash used in financing activities
  
 
(182,986
 
 
(271,443
  
 
 
   
 
 
 
Net decrease in cash and cash equivalents
  
 
(7,681
 
 
(135,168
Cash and cash equivalents, beginning of period
     12,325       141,053  
  
 
 
   
 
 
 
Cash and cash equivalents, end of period
  
$
4,644
 
 
$
5,885
 
  
 
 
   
 
 
 
Supplemental Disclosure:
    
Cash paid for interest, net of capitalized interest
   $ 4,165     $ —   
Cash paid for income taxes, net
   $ 35,106     $ 50,585  
Supplemental
non-cash
investing and financing disclosure:
    
Capital expenditures in accounts payable
   $ 1,183     $ 787  
See Notes to Condensed Consolidated Financial Statements (Unaudited).
 
5

TREX COMPANY, INC.
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2023 and September 30, 2022
(Unaudited)
 
1.
BUSINESS AND ORGANIZATION
Trex Company, Inc. (Trex, Company), a Delaware corporation, was incorporated on September 4, 1998. As of December 30, 2022, the Company operates in one reportable segment, Trex Residential Products (Trex Residential). Through December 30, 2022, Trex had one wholly-owned subsidiary, Trex Commercial Products, Inc. (Trex Commercial) and operated in two reportable segments, Trex Residential and Trex Commercial.
Trex Residential, the Company’s principal business based on net sales, 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 its products are manufactured in a proprietary process that combines reclaimed wood fibers and scrap polyethylene. The principal executive offices are located at 2500 Trex Way, Winchester, Virginia 22601, and the telephone number at that address is
(540) 542-6300.
 
2.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form
10-Q
and Article 10 of Regulation
S-X
and, accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments, except as otherwise described herein) considered necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements. Certain reclassifications have been made to prior period balances to conform to current year presentation. The unaudited condensed consolidated financial statements include the accounts of the Company for all periods presented. Intercompany accounts and transactions have been eliminated in consolidation.
The unaudited consolidated results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023. 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 global health pandemics and geopolitical conflicts. Towards the end of June 2022, the Company experienced a reduction in demand from its distribution partners, which the Company believed was primarily 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 of 2022 the Company’s channel partners met demand partially through inventory drawdown rather than reordering products and maintaining current inventories. This inventory recalibration was completed by year end.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2022, and December 31, 2021, and for each of the three years in the period ended December 31, 2022, included in the Annual Report of Trex Company, Inc. on Form
10-K,
as filed with the U.S. Securities and Exchange Commission.
 
3.
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. The divestiture reflected 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. The divestiture did not represent a strategic shift with a major effect on the Company’s operations. The results of operations of Trex Commercial are consolidated in the Company’s results of operations for the three months and nine months ended September 30, 2022.
 
6

4.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In December 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2022-06
“Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” The amendments in this update defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. In March 2020, the FASB issued ASU
No. 2020-04
“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. ASU
No. 2020-04
provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The FASB included a sunset provision within Topic 848 based on the expectations of when the LIBOR would cease being published intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2024 and can be adopted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The amendments did not have a material effect on the Company’s consolidated financial statements.
 
5.
INVENTORIES
Inventories valued at LIFO
(last-in,
first-out),
consist of the following (in thousands):
 
    
September 30,
2023
    
December 31,
2022
 
Finished goods
   $ 43,180      $ 107,114  
Raw materials
     52,255        69,292  
  
 
 
    
 
 
 
Total FIFO
(first-in,
first-out)
inventories
     95,435        176,406  
Reserve to adjust inventories to LIFO value
     (35,051      (35,051
  
 
 
    
 
 
 
Total LIFO inventories
   $ 60,384      $ 141,355  
  
 
 
    
 
 
 
The Company utilizes the LIFO method of accounting related to its Trex Residential wood-alternative decking and residential railing products, which generally provides for the matching of current costs with current revenues. However, under the LIFO method, reductions in annual inventory balances cause a portion of the Company’s cost of sales to be based on historical costs rather than current year costs (LIFO liquidation). Reductions in interim inventory balances expected to be replenished by
year-end
do not result in a LIFO liquidation. Accordingly, interim LIFO calculations are based, in part, on management’s estimates of expected
year-end
inventory levels and costs and may differ from actual results. Since inventory levels and costs are subject to factors beyond management’s control, interim results are subject to the final
year-end
LIFO inventory valuation.
In the nine months ended September 30, 2023, the Company had a reduction in inventory that it does not expect will be replenished by year end. However, the Company estimates that the LIFO liquidation will not have a material impact on cost of sales for the year ended December 31, 2023 and, accordingly, it did not impact the cost of sales for the nine months ended September 30, 2023.
 
6.
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following (in thousands):
 
    
September 30,

2023
    
December 31,
2022
 
Prepaid expenses
   $  6,859      $ 10,787  
Income tax receivable
     —         23,979  
Other
     271        339  
  
 
 
    
 
 
 
Total prepaid expenses and other assets
   $ 7,130      $ 35,105  
  
 
 
    
 
 
 
 
7.
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The carrying amount of goodwill at September 30, 2023, and December 31, 2022, was $14.2 million for Trex Residential. The Company’s intangible assets, purchased in 2018, consist of domain names for Trex Residential. At September 30, 2023, and December 31, 2022, intangible assets were $6.3 million and accumulated amortization was $2.2 million and $1.9 million, respectively. Intangible asset amounts were determined based on the
 
7

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 nine months ended September 30, 2023, and September 30, 2022, was $0.3 million and $0.3 million, respectively.
 
8.
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in thousands):
 
    
September 30,

2023
    
December 31,
2022
 
Sales and marketing
   $ 45,374      $  19,194  
Compensation and benefits
     24,470        8,646  
Operating lease liabilities
     7,409        7,488  
Manufacturing costs
     3,507        3,425  
Income taxes
     3,111        —   
Other
     5,048        5,311  
  
 
 
    
 
 
 
Total accrued expenses and other liabilities
   $  88,919      $ 44,064  
  
 
 
    
 
 
 
 
9.
DEBT
Revolving Credit Facility
Indebtedness on and after May
 18, 2022 and prior to December
 22, 2022
. On May 18, 2022, the Company, as borrower; Trex Commercial, as guarantor; BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; Wells Fargo, as lender and Syndication Agent; Regions Bank, PNC Bank, National Association (PNC), and TD Bank, N.A. (TD)(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 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.
 
8

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; BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; TD as lender and Syndication Agent; Regions Bank, PNC, and Wells Fargo (each, a Lender and collectively, the Lenders), arranged by BofA Securities 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”). The First Amendment removes Trex Commercial as a guarantor to any and all indebtedness under 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 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 $56.5 million in borrowings outstanding under its revolving credit facility and available borrowing capacity of $493.5 million at September 30, 2023. The weighted average interest rate on the revolving credit facility was 6.11% as of September 30, 2023.
Compliance with Debt Covenants and Restrictions
Pursuant to the terms of the Credit Agreement, the Company is subject to certain loan compliance covenants. The Company was in compliance with all covenants as of September 30, 2023. Failure to comply with the financial covenants could be considered a default of repayment obligations and, among other remedies, could accelerate payment of any amounts outstanding.
 
10.
LEASES
The Company leases office space, storage warehouses, training and manufacturing facilities, and certain plant equipment under various operating leases. The Company’s operating leases have remaining lease terms of 1 year to 6 years. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
For the nine months ended September 30, 2023, and September 30, 2022, total operating lease expense was $6.1 million and $6.3 million, respectively. The weighted average remaining lease term at September 30, 2023 and December 31, 2022 was 4.6 years and 5.2 years, respectively. The weighted average discount rate at September 30, 2023 and December 31, 2022 was 2.25% and 2.10%, respectively.
 
9

The following table includes supplemental cash flow information for the nine months ended September 30, 2023, and September 30, 2022, and supplemental balance sheet information at September 30, 2023 and December 31, 2022 related to operating leases (in thousands):
 
    
Nine months Ended

September 30,
 
Supplemental cash flow information
  
2023
    
2022
 
Cash paid for amounts included in the measurement of operating lease liabilities
   $ 6,236      $ 6,532  
Operating ROU assets obtained in exchange for lease liabilities
   $  1,882      $ 7,332  
 
Supplemental balance sheet information
  
September 30,

2023
    
December 31,
2022
 
Operating lease ROU assets
   $ 27,286      $ 30,991  
Operating lease liabilities:
     
Accrued expenses and other current liabilities
   $ 7,409      $ 7,488  
Operating lease liabilities
     20,197        23,974  
  
 
 
    
 
 
 
Total operating lease liabilities
   $ 27,606      $ 31,462  
  
 
 
    
 
 
 
The following table summarizes maturities of operating lease liabilities at September 30, 2023 (in thousands):
 
Maturities of operating lease liabilities
      
2023
   $ 1,893  
2024
     7,386  
2025
     5,552  
2026
     4,851  
2027
     4,446  
Thereafter
     4,845  
  
 
 
 
Total lease payments
     28,973  
Less imputed interest
     (1,367
  
 
 
 
Total operating lease liabilities
   $ 27,606  
  
 
 
 
 
11.
FINANCIAL INSTRUMENTS
The Company considers the recorded value of its financial assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, other current liabilities, and debt to approximate the fair value of the respective assets and liabilities on the Condensed Consolidated Balance Sheets at September 30, 2023 and December 31, 2022.
 
12.
STOCKHOLDERS’ EQUITY
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):
 
    
Three Months Ended

September 30,
    
Nine Months Ended

September 30,
 
    
2023
    
2022
    
2023
    
2022
 
Numerator:
           
Net income available to common shareholders
   $ 65,266      $ 14,423      $ 183,433      $ 174,549  
  
 
 
    
 
 
    
 
 
    
 
 
 
Denominator:
           
Basic weighted average shares outstanding
     108,583,009        110,140,496        108,707,699        112,609,684  
Effect of dilutive securities:
           
Stock appreciation rights and options
     80,256        85,396        72,580        101,967  
Restricted stock
     39,230        74,125        49,095        76,343  
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted weighted average shares outstanding
     108,702,495        110,300,017        108,829,374        112,787,994  
  
 
 
    
 
 
    
 
 
    
 
 
 
Basic earnings per share
   $ 0.60      $ 0.13      $ 1.69      $ 1.55  
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted earnings per share
   $ 0.60      $ 0.13      $ 1.69      $ 1.55  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
10

Diluted earnings per share is computed using the weighted average number of shares determined for the basic earnings per share computation plus the dilutive effect of common stock equivalents using the treasury stock method. The computation of diluted earnings per share excludes the following potentially dilutive securities because the effect would be anti-dilutive:
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2023
    
2022
    
2023
    
2022
 
Stock appreciation rights
     86,250        47,303        95,467        41,627  
Restricted stock
     —         68,008        69,764        48,552  
Stock Repurchase Program
On February 16, 2018, the Trex Board of Directors adopted a stock repurchase program of up to 11.6 million shares of its outstanding common stock (Stock Repurchase Program). From January 1, 2023 through May 3, 2023, Trex did not repurchase shares of its outstanding common stock under the Stock Repurchase Program. On May 4, 2023, the Trex Board of Directors adopted a new stock repurchase program (2023 Stock Repurchase Program) of up to 10.8 million shares of its outstanding common stock, and terminated the existing Stock Repurchase Program. This repurchase program has no set expiration date. During the quarterly period ended September 30, 2023, Trex did not repurchase shares of its outstanding common stock under the 2023 Stock Repurchase Program.
 
13.
REVENUE FROM CONTRACTS WITH CUSTOMERS
Trex Residential Products
Trex Residential principally generates revenue from the manufacture and sale of its high-performance,
low-maintenance,
eco-friendly
wood-alternative composite decking and residential railing products and accessories. Substantially all of its revenues are from contracts with customers, which are purchase orders of short-term duration of less than one year. Its customers, in turn, sell primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products. Trex Residential satisfies its performance obligations at a point in time. The shipment of each product is a separate performance obligation as the customer is able to derive benefit from each product shipped and no performance obligation remains after shipment. Upon shipment of the product, the customer obtains control over the distinct product and Trex Residential satisfies its performance obligation. 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, is 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 8 to the Condensed Consolidated Financial Statements.
Trex Commercial Products
On December 30, 2022, the Company completed the sale of its wholly-owned subsidiary and reportable segment, Trex Commercial. Prior to December 30, 2022, 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 were not separately identifiable from other promises in the contract and was, therefore, not distinct.
For the three months and nine months ended September 30, 2023, and September 30, 2022, net sales were disaggregated in the following tables by (1) market, (2) timing of revenue recognition, and (3) type of contract. The tables also include a reconciliation of the respective disaggregated net sales with the Company’s reportable segments (in thousands).
 
1
1

Three Months Ended September 30, 2023
      
    
Trex
Residential
and
Consolidated
 
Timing of Revenue Recognition and Type of Contract
  
Products transferred at a point in time and variable consideration contracts
   $ 303,836  
  
 
 
 
   $ 303,836  
  
 
 
 
 
Three Months Ended September 30, 2022
  
Reportable Segment
 
    
Trex
Residential
    
Trex
Commercial
    
Total
 
Timing of Revenue Recognition and Type of Contract
        
Products transferred at a point in time and variable consideration contracts
   $ 177,776      $ —       $ 177,776  
Products transferred over time and fixed price contracts
     —         10,696        10,696  
  
 
 
    
 
 
    
 
 
 
   $ 177,776      $ 10,696      $ 188,472  
  
 
 
    
 
 
    
 
 
 
 
Nine months Ended September 30, 2023
      
    
Trex
Residential
and
Consolidated
 
Timing of Revenue and Type of Contract
  
Products transferred at a point in time and variable consideration contracts
   $ 899,092  
  
 
 
 
   $ 899,092  
  
 
 
 
 
Nine Months Ended September 30, 2022
  
Reportable Segment
 
    
Trex
Residential
    
Trex
Commercial
    
Total
 
Timing of Revenue Recognition and Type of Contract
        
Products transferred at a point in time and variable consideration contracts
   $ 878,892      $ —       $ 878,892  
Products transferred over time and fixed price contracts
     —         35,058        35,058  
  
 
 
    
 
 
    
 
 
 
   $ 878,892      $ 35,058      $ 913,950  
  
 
 
    
 
 
    
 
 
 
 
14.
STOCK-BASED COMPENSATION
At the annual meeting of stockholders of the Company held on May 4, 2023, the Company’s stockholders approved the Trex Company, Inc. 2023 Stock Incentive Plan (Plan). The Company’s board of directors unanimously approved the Plan on April 10, 2023, subject to stockholder approval. The Plan amends and restates in its entirety the Trex Company, Inc. 2014 Stock Incentive Plan (2014 Plan), which was last approved by the Company’s stockholders at the annual meeting held on April 30, 2014. The Plan, which will be administered by the compensation committee of the board of directors, provides for the grant of stock options, restricted stock, restricted stock units, stock appreciation rights and unrestricted stock, which are referred to collectively as “awards.” Awards may be granted under the Plan to officers, directors (including
non-employee
directors) and other employees of the Company or any subsidiary thereof, to any adviser, consultant or other provider of services to the Company (and any employee thereof), and to any other individuals who are approved by the board of directors as eligible to participate in the Plan. Only employees of the Company or any subsidiary thereof are eligible to receive incentive stock options. Subject to certain adjustments as provided in the Plan, the total number of shares of common stock permitted to be granted under the Plan was 4,000,000 shares at the time of adoption, and as of September 30, 2023, the total number of shares available for future grants was 3,984,956.
 
1
2

The following table summarizes the Company’s stock-based compensation grants for the nine months ended September 30, 2023:
 
    
Stock Awards Granted
    
Weighted-Average

Grant Price

Per Share
 
Time-based restricted stock units
     91,742      $ 58.67  
Performance-based restricted stock units (a)
     96,103      $ 56.79  
Stock appreciation rights
     51,916      $ 56.80  
 
(a)
Includes 85,044 of target performance-based restricted stock unit awards granted during the nine months ended September 30, 2023, and adjustments of 1,413 and 9,646 to grants due to the actual performance level achieved for restricted stock and restricted stock units awarded in 2021 and 2020, respectively.
The fair value of each SAR is estimated on the date of grant using a Black-Scholes option-pricing formula. For SARs issued in the nine months ended September 30, 2023, and September 30, 2022, the data and assumptions shown in the following table were used:
 
    
Nine Months Ended

September 30, 2023
   
Nine Months Ended

September 30, 2022
 
Weighted-average fair value of grants
   $ 27.19     $ 33.9  
Dividend yield
     0     0
Average risk-free interest rate
     4.0     1.9
Expected term (years)
     5       5  
Expected volatility
     49.50     44.85
The Company recognizes stock-based compensation expense ratably over the period from the grant date to the earlier of: (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For performance-based restricted stock and performance-based restricted stock units, expense is recognized ratably over the performance and vesting period of each tranche based on management’s judgment of the ultimate award that is likely to be paid out based on the achievement of the predetermined performance measures. For the employee stock purchase plan, compensation expense is recognized related to the discount on purchases. Stock-based compensation expense is included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Comprehensive Income. The following table summarizes the Company’s stock-based compensation expense (in thousands):
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2023
    
2022
    
2023
    
2022
 
Stock appreciation rights
   $ 248      $ 196      $ 660      $ 547  
Time-based restricted stock and restricted stock units
     1,098        1,012        2,904        2,818  
Performance-based restricted stock and restricted stock units
     1,425        (1,012      3,470        (5
Employee stock purchase plan
     50        52        350        171  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total stock-based compensation
   $ 2,821      $ 248      $ 7,384      $ 3,531  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total unrecognized compensation cost related to unvested awards as of September 30, 2023, was $12.5 million. The cost of these unvested awards is being recognized over the requisite vesting period of each award.
 
15.
INCOME TAXES
The Company’s effective tax rate for the nine months ended September 30, 2023, was 25.3% and was comparable to the effective tax rate for the nine months ended September 30, 2022, of 24.8%, which resulted in income tax expense of $62.1 million and $57.7 million, respectively.
 
1
3

During the nine months ended September 30, 2023 and September 30, 2022, the Company realized $0.4 million and $0.1 million, respectively, of excess tax benefits from stock-based awards and recorded a corresponding benefit to income tax expense.
The Company analyzes its deferred tax assets each reporting period, considering all available positive and negative evidence in determining the expected realization of those deferred tax assets. As of September 30, 2023, the Company maintains a valuation allowance of $3.0 million against deferred tax assets primarily related to state tax credits it estimates will expire before they are realized.
The Company operates in multiple tax jurisdictions, and, in the normal course of business, its tax returns are subject to examination by various taxing authorities. Such examinations may result in future assessments by these taxing authorities, and the Company accrues a liability when it believes that it is more likely than not that benefits of tax positions will not be realized. The Company believes that adequate provisions have been made for all tax returns subject to examination. As of September 30, 2023, for certain tax jurisdictions tax years 2019 through 2022 remain subject to examination. Sales made to foreign distributors are not taxable in any foreign jurisdiction as the Company does not have a taxable presence in any foreign jurisdiction.
 
16.
SEGMENT INFORMATION
Through December 30, 2022, the Company operated in two reportable segments. On December 30, 2022, the Company completed the sale of its wholly-owned subsidiary and reportable segment, Trex Commercial. Subsequent to the sale of Trex Commercial, the Company operates in one reportable segment, Trex Residential:
 
   
Trex Residential manufactures wood-alternative decking and residential railing and related products marketed under the brand name Trex
®
. Trex Residential products are sold to distributors and home centers for final resale primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products.
 
   
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. Trex Commercial products were marketed to architects, specifiers, contractors, and others doing business within the commercial and multi-family market.
The Company’s reportable segments are determined in accordance with its internal management structure, which, through December 30, 2022, was based on residential and commercial sales activities and, subsequent to December 30, 2022, is based on its residential sales activities. The Company evaluates performance of each segment primarily based on net sales and earnings before interest, income taxes, depreciation and amortization (EBITDA). The Company uses net sales to assess performance and allocate resources as this measure represents the amount of business the segment engaged in during a given period of time, is an indicator of market growth and acceptance of segment products and represents the segment’s customers’ spending habits along with the amount of product the segment sells relative to its competitors. The Company uses EBITDA to assess performance and allocate resources because it believes that EBITDA facilitates performance comparison between the segments by eliminating interest, income taxes, and depreciation and amortization charges to income. The below segment data for the three months and nine months ended September 30, 2023 and September 30, 2022 includes data for its reportable segments (in thousands):
 
1
4

Segment Data:
 
    
Three Months

Ended

September 30, 2023
    
Three Months Ended September 30, 2022
 
    
Trex Residential
and Consolidated
    
Trex
Residential
    
Trex
Commercial
    
Consolidated
 
Net sales
   $ 303,836      $ 177,776      $ 10,696      $ 188,472  
Net Income (loss)
   $ 65,266      $ 15,287      $ (864    $ 14,423  
EBITDA
   $ 99,359      $ 31,692      $ (876    $ 30,816  
Depreciation and amortization
   $ 12,996      $ 11,194      $ 271      $ 11,465  
Income tax expense (benefit)
   $ 21,831      $ 5,211      $ (283    $ 4,928  
Capital expenditures
   $ 30,563      $ 41,403      $ 154      $ 41,557  
Total assets
   $ 996,812      $ 802,926      $ 38,972      $ 841,898  
Reconciliation of Net Income to EBITDA:
 
    
Three Months

Ended

September 30, 2023
   
Three Months Ended September 30, 2022
 
    
Trex Residential
and Consolidated
   
Trex
Residential
    
Trex
Commercial
   
Consolidated
 
Net Income (loss)
   $ 65,266     $ 15,287      $ (864   $ 14,423  
Interest (income), net
     (734     —         —        —   
Income tax expense (benefit)
     21,831       5,211        (283     4,928  
Depreciation and amortization
     12,996       11,194           271       11,465  
  
 
 
   
 
 
    
 
 
   
 
 
 
EBITDA
   $  99,359     $  31,692      $ (876   $  30,816  
  
 
 
   
 
 
    
 
 
   
 
 
 
Segment Data:
 
    
Nine months

Ended

September 30, 2023
    
Nine months Ended September 30, 2022
 
    
Trex Residential
and Consolidated
    
Trex
Residential
    
Trex
Commercial
    
Consolidated
 
Net sales
   $ 899,092      $ 878,892      $ 35,058      $ 913,950  
Net Income (loss)
   $ 183,433      $ 176,939      $ (2,390    $ 174,549  
EBITDA
   $ 285,271      $ 267,725      $ (2,344    $ 265,381  
Depreciation and amortization
   $ 37,194      $ 32,435      $ 835      $ 33,270  
Income tax expense (benefit)
   $ 62,089      $ 58,454      $ (789    $ 57,665  
Capital expenditures
   $ 112,920      $ 107,937      $ 226      $ 108,163  
Total assets
   $ 996,812      $ 802,926      $ 38,972      $ 841,898  
 
1
5

Reconciliation of Net Income to EBITDA:
 
    
Nine months
Ended

September 30, 2023
    
Nine months Ended September 30, 2022
 
    
Trex Residential
and Consolidated
    
Trex
Residential
    
Trex
Commercial
    
Consolidated
 
Net Income (loss)
   $ 183,433      $ 176,939      $ (2,390    $ 174,549  
Interest expense (income), net
     2,555        (103      —         (103
Income tax expense (benefit)
     62,089        58,454        (789      57,665  
Depreciation and amortization
     37,194        32,435        835        33,270  
  
 
 
    
 
 
    
 
 
    
 
 
 
EBITDA
   $ 285,271      $ 267,725      $ (2,344    $ 265,381  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
17.
SEASONALITY
The operating results for Trex Residential have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift demand for its products to a later period. As part of its normal business practice and consistent with industry practice, Trex Residential has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of its product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs.
 
18.
COMMITMENTS AND CONTINGENCIES
Product Warranty
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
®
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. 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.
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.
Trex Residential 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. Estimating the warranty reserve for surface flaking claims requires management to estimate (1) the number of claims to be settled with payment and (2) the average cost to settle each claim.
To estimate the number of claims to be settled with payment, the Company utilizes actuarial techniques to determine a reasonable possible range of claims to be received and the percentage of those claims that will ultimately require payment (collectively, elements). Estimates for these elements are quantified using a range of assumptions derived from claim count history and the identification of factors influencing the claim counts to determine its best estimate of future claims for which to record a related liability. The cost per claim varies due to a number of factors, including the size of affected decks, the availability and type of replacement material used, the cost of production of replacement material and the method of claim settlement.
 
1
6

The Company monitors surface flaking claims activity each quarter for indications that its estimates require revision. Typically, a majority of surface flaking claims received in a year are received during the summer outdoor season, which spans the second and third quarters. It has been the Company’s 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.
Average cost per claim experienced in the nine months ended September 30, 2023 was lower than that experienced in the nine months ended September 30, 2022, which was elevated due to the closure of three large claims, and lower than the Company’s expectations for 2023. The number of incoming claims received in the nine months ended September 30, 2023 was lower than the number of claims received in the nine months ended September 30, 2022, and lower than the Company’s expectations for 2023. After evaluating the declining trend in incoming claims in its actuarial analysis, the Company decreased its estimate of the number of future claims to be settled with payment. As a result of the decrease in estimated future claims, in the three-month period ended September 30, 2023, the Company recorded a reduction of $3.8 million to its warranty reserve for the future settlement of surface flaking claims. The Company believes the reserve at September 30, 2023 is sufficient to cover future surface flaking obligations.
The Company’s analysis is based on currently known facts and a number of assumptions, as discussed above, and current expectations. Projecting future events such as the number of claims to be received, the number of claims that will require payment and the average cost of claims could cause the actual warranty liabilities to be higher or lower than those projected, which could materially affect the Company’s financial condition, results of operations or cash flows. The Company estimates that the annual number of claims received will continue to decline over time and that the average cost per claim will increase slightly, primarily due to inflation. If the level of claims received or average cost per claim differs materially from expectations, it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flows in future periods. The Company estimates that a 10% change in the expected number of remaining claims to be settled with payment or the expected cost to settle claims may result in approximately a $1.1 million change in the surface flaking warranty reserve.
The Company also maintains a warranty reserve for the settlement of other residential product warranty claims and records the provision at the time of product sale.
The following is a reconciliation of the Company’s residential product warranty reserve (in thousands):
 
    
Nine months Ended September 30, 2023
 
    
Surface
Flaking
    
Other
Residential
    
Total
 
Beginning balance, January 1
   $ 15,905      $ 9,694      $ 25,599  
Provisions (changes in estimates)
     (3,800      4,824        1,024  
Settlements made during the period
     (1,522      (2,135      (3,657
  
 
 
    
 
 
    
 
 
 
Ending balance, September 30
   $ 10,583      $ 12,383      $ 22,966  
  
 
 
    
 
 
    
 
 
 
 
    
Nine months Ended September 30, 2022
 
    
Surface
Flaking
    
Other
Residential
    
Total
 
Beginning balance, January 1
   $ 18,542      $ 10,053      $ 28,595  
Provisions (changes in estimates)
     —         3,098        3,098  
Settlements made during the period
     (2,243      (1,901      (4,144
  
 
 
    
 
 
    
 
 
 
Ending balance, September 30
   $ 16,299      $ 11,250      $ 27,549  
  
 
 
    
 
 
    
 
 
 
Legal Matters
The Company has lawsuits, as well as other claims, pending against it which are ordinary routine litigation and claims incidental to the business. Management has evaluated the merits of these lawsuits and claims and believes that their ultimate resolution will not have a material effect on the Company’s consolidated financial condition, results of operations, liquidity or competitive position.
Arkansas Facility
In October 2021, the Company 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 on the new facility in the second quarter of 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.
 
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Table of Contents
Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management discussion should be read in conjunction with the Trex Company, Inc. (Trex, Company, we or our) Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (SEC) and the condensed consolidated financial statements and notes thereto included in Part I, Item 1. “Financial Statements” of this quarterly report.

NOTE ON FORWARD-LOOKING STATEMENTS

This management’s discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements regarding our expected financial position and operating results, our business strategy, our financing plans, forecasted demographic and economic trends relating to our industry and similar matters are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” “intend” or similar expressions. We cannot promise you that our expectations in such forward-looking statements will turn out to be correct. Our actual results could be materially different from our expectations because of various factors, including the factors discussed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC. These statements are also subject to risks and uncertainties that could cause the Company’s actual operating results to differ materially. Such risks and uncertainties include, but are not limited to: the extent of market acceptance of the Company’s current and newly developed products; the costs associated with the development and launch of new products and the market acceptance of such new products; the sensitivity of the Company’s business to general economic conditions; the impact of seasonal and weather-related demand fluctuations on inventory levels in the distribution channel and sales of the Company’s products; the availability and cost of third-party transportation services for the Company’s products and raw materials; the Company’s ability to obtain raw materials, including scrap polyethylene, wood fiber, and other materials used in making our products, at acceptable prices; increasing inflation in the macro-economic environment; the Company’s ability to maintain product quality and product performance at an acceptable cost; the Company’s ability to increase throughput and capacity to adequately match supply with demand; the level of expenses associated with warranty claims, product replacement and consumer relations expenses related to product quality; the highly competitive markets in which the Company operates; cyber-attacks, security breaches or other security vulnerabilities; the impact of current and 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, geopolitical conflicts; and material adverse impacts related to labor shortages or increases in labor costs.

OVERVIEW

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 Condensed Consolidated Financial Statements and the accompanying notes thereto contained in “Item 1. Condensed Consolidated Financial Statements” of this report. MD&A includes the following sections:

 

   

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

 

   

Highlights and Financial Performance – a summary of financial performance and highlights for the three months and nine months ended September 30, 2023, a general discussion of factors that may affect our operations, and a description of relevant financial statement line items.

 

   

Results of Operations — an analysis of our consolidated results of operations for the three months and nine months ended September 30, 2023 compared to three months and nine months ended September 30, 2022, respectively.

 

   

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

OPERATIONS AND PRODUCTS

Prior to December 30, 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). Subsequent to December 30, 2022, the Company currently operates in one reportable segment, Trex Residential. Refer to Note 16, Segments, in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1. Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information. The Company is focused on using renewable resources within our Trex Residential segment.

 

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Table of Contents

Trex Residential is the world’s largest manufacturer of high-performance composite decking and residential railing products, which are marketed under the brand name Trex® and manufactured in the United States. With more than 30 years of product experience, we offer a comprehensive set of aesthetically appealing and durable, low-maintenance product offerings in the decking, residential railing, fencing and outdoor lighting categories. A majority of the products are eco-friendly and leverage recycled and reclaimed materials to the extent possible. Trex Residential decking is made in a proprietary process that combines reclaimed wood fibers and recycled polyethylene film, making Trex Residential one of the largest recyclers of plastic film in North America. In addition to resisting fading and surface staining, Trex Residential products require no sanding and sealing, resist moisture damage, provide a splinter-free surface and do not require chemical treatment against rot or insect infestation. Combined, these aspects yield significant aesthetic advantages and lower maintenance than wood decking and railing and ultimately render Trex Residential products less costly than wood over the life of the deck. Special characteristics (including resistance to splitting, the ability to bend, and ease and consistency of machining and finishing) facilitate installation, reduce contractor call-backs and afford consumers a wide range of design options. Trex Residential products are sold to distributors and home centers for final resale primarily to the residential market.

Trex offers the following products through Trex Residential:

 

   

Decking and Accessories

  

Our principal decking products are Trex Transcend® Lineage, Trex Transcend®, Trex Signature®, Trex Select®, and Trex Enhance®. In addition, our Trex Transcend decking product can also be used as cladding. Our high-performance, low-maintenance, eco-friendly composite decking products are comprised of a blend of 95 percent reclaimed wood fibers and recycled polyethylene film and feature a protective polymer shell for enhanced protection against fading, staining, mold and scratching. Trex Transcend Lineage is the next generation of design and performance in composite decking and is available in four luxurious, on-trend hues inspired by some of the most picturesque locales in the United States. Our Trex Transcend decking provides elevated aesthetics paired with the highest level of performance and is available in eight multi-tonal monochromatic classical earth tones and premium tropical colors. Trex Signature decking offers realistic woodgrain aesthetics that raises the bar for beauty, performance and sustainability and is available in two luxurious hues inspired by stunning natural settings. Trex Select decking offers the perfect pairing of price and minimal maintenance and is available in five nature-inspired earth tone colors. Our Trex Enhance boards pair the beauty of authentic wood-grain appearance with the durability of composite with minimal maintenance and the affordability of wood and is available in natural and basic colors.

 

We also offer accessories to our decking products. Trex Hideaway®, a self-gapping universal hidden fastener designed to give a seamless finish to every project. Trex DeckLighting, an outdoor lighting system, is a line of energy-efficient LED dimmable deck lighting designed to use 75% less energy compared to incandescent lighting. It can be installed into the railing, stair risers or the deck itself. The line includes a post cap light, deck rail light, riser light, a soffit light and a recessed deck light. Pre-assembled stair panels that allow for easier installation and are designed to save time on the jobsite.

 

 

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Table of Contents

Railing

  

Our railing products are Trex Transcend Railing, Trex Select Railing, Trex Select T-Rail and Trex Signature aluminum railing. Our high-performance composite and aluminum deck railing kits and systems are sustainably manufactured, easy to install and durable. Trex railing systems are built with the same durability as Trex decking and will not rot, warp, peel or splinter and resist fading and corrosion. Trex Transcend Railing, made from approximately 40 percent recycled content, is available in the colors of Trex Transcend decking and finishes that make it appropriate for use with Trex decking products as well as other decking materials, which we believe enhances the sales prospects of our railing products. Trex Select Railing, made from approximately 40 percent recycled content, is offered in a white finish and is ideal for consumers who desire a simple clean finished look for their deck. Trex Select T-Rail, made from a minimum of 40 percent recycled materials, is available in square composite balusters in Classic White for a cohesive, coordinated look, or round aluminum balusters in Charcoal Black for a more modern contrast. Trex Signature aluminum railing, made from a minimum of 40 percent recycled content, is available in three colors and designed for consumers who want a sleek, contemporary look.

 

   

Fencing

  

Our Trex Seclusions® composite fencing product is offered through two specialty distributors. This product consists of structural posts, bottom rails, pickets, top rails and decorative post caps. The top and bottom rails of Trex fencing are designed to provide a “picture frame’ element and the deep rich colors have a matte surface to prevent harsh sunlight reflections.

 

We are a licensor in a number of licensing agreements with third parties to manufacture and sell products under the Trex trademark. Our licensed products are:

 

Trex® Outdoor Furniture

 

   A line of outdoor furniture products manufactured and sold by PolyWood, Inc.
   
Trex® RainEscape® and Trex® Protect®   

An above joist deck drainage system manufactured and sold by DriDeck Enterprises, LLC. Trex Protect Joist, Beam and Rim tape is a self-adhesive butyl tape that protects wooden deck framing/substructure elements.

 

   
Trex® Pergola   

Pergolas made from low maintenance cellular PVC and all-aluminum product, manufactured by Home & Leisure, Inc. dba Structureworks Fabrication.

 

   
Trex® Latticeworks   

Outdoor lattice boards manufactured and sold by Structureworks Fabrication.

 

Trex® Cornhole   

Cornhole boards manufactured and sold by IPC Global Marketing LLC.

 

   
Trex® Blade   

A specialty saw blade for wood-alternative composite decking manufactured and sold by Freud America, Inc.

 

Trex® SpiralStairs   

A staircase alternative for use with all deck substructures manufactured and sold by M. Cohen and Sons, Inc. dba The Iron Shop.

 

   
Trex® Outdoor Kitchens   

Outdoor kitchen cabinetry manufactured and sold by Danver Stainless Outdoor Kitchens.

 

Trex Commercial designed and engineered custom solutions prevalent in professional and collegiate sports facilities, commercial and high-rise applications, performing arts, sports, and event production and rentals. Trex Commercial marketed to architects, specifiers, contractors, and building owners.

Trex offered the following products through Trex Commercial through December 30, 2022:

 

   

Architectural railing systems;

 

   

Aluminum railing systems; and

 

   

Staging equipment and accessories.

 

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Table of Contents

HIGHLIGHTS AND FINANCIAL PERFORMANCE

Highlights:

 

   

Trex Named a 2023 Eco Leader by Green Builder Media. Trex earned highest honors awarded by Green Builder Media in the Eco Leader category. This is the second time Trex has earned this prestigious honor having previously been recognized in 2019. Trex is the only decking brand ever to be awarded Eco Leader status, which signifies companies across the building products arena that are working to quantify ESG concepts in meaningful ways.

 

   

Trex and Keep Arkansas Beautiful Awarded “Recycling Education Program of the Year.” A joint initiative by Trex Company and Keep Arkansas Beautiful was celebrated in September as the “2023 Recycling Education Program of the Year” by the Arkansas Recycling Coalition (ARC). The annual ARC Awards honors organizations that have made significant contributions to the education and advancement of waste reduction, recycling, and sustainability in Arkansas over the previous year.

 

   

Trex Hosts Investor Day in New York. In September, Bryan Fairbanks, President and CEO laid out the company’s five-year financial targets for organic growth.

 

   

Trex Launches New Community Recycling Challenge. The updated NexTrex Recycling Challenge combines the company’s award-winning community and school recycling programs and moves from competition-driven model to self-initiated challenge. Additionally, Trex has made the process easier and more equitable, so more participants have the opportunity to earn recognition and rewards for their recycling efforts. Under the new structure, any participating organization that collects at least 1,000 pounds of recycled plastic film during a 12-month period qualifies to receive a composite bench from the Trex Outdoor Furniture Collection.

 

   

Trex Transcend Lineage Recognized in Good Housekeeping’s Renovation Awards. Trex Transcend Lineage has been recognized in Good Housekeeping’s 2023 Home Renovation Awards in the Exterior Enhancements category. Enhancing its appeal, Trex Transcend Lineage offers the look and feel of real wood, but without the environmental impact of deforestation.

Financial Performance:

The following table presents highlights of our financial performance:

 

     Three Months Ended
September 30,
               
     2023      2022      $ Change      % Change  
($000s omitted, except per share data)                            

Net sales

   $ 303,836      $ 188,472      $ 115,364        61.2

Gross profit

   $ 130,895      $ 46,208      $ 84,687        183.3

Net income

   $ 65,266      $ 14,423      $ 50,843        352.5

EBITDA

   $ 99,359      $ 30,816      $ 68,543        222.4

Diluted earnings per share

   $ 0.60      $ 0.13      $ 0.47        361.5

 

     Nine months Ended
September 30,
               
     2023      2022      $ Change      % Change  
($000s omitted, except per share data)                            

Net sales

   $ 899,092      $ 913,950      $ (14,858      (1.6 )% 

Gross profit

   $ 381,771      $ 338,498      $ 43,273        12.8

Net income

   $ 183,433      $ 174,549      $ 8,884        5.1

EBITDA

   $ 285,271      $ 265,381      $ 19,890        7.5

Diluted earnings per share

   $ 1.69      $ 1.55      $ 0.14        9.0

Capital expenditures. During the nine months ended September 30, 2023, our capital expenditures were $112.9 million primarily related to $65.1 million for the Arkansas manufacturing facility, $17.9 million in cost reduction initiatives, $12.2 million for our new corporate headquarters, and $9.5 million related to other capacity expansion, safety, environmental and general support.

Repurchases of common shares. During the nine months ended September 30, 2023, we repurchased 264,896 shares of our outstanding common stock under the 2023 Stock Repurchase Program.

 

21


Table of Contents

RESULTS OF OPERATIONS

General. 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.

Towards the end of June 2022, 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 of 2022 Trex Residential’s channel partners met demand partially through inventory drawdown. The drawdown negatively impacted third quarter and fourth quarter 2022 sales. In response to this changed environment, Trex Residential immediately took measures to manage a production slowdown, including labor force reductions, production organization, as well as other cost actions.

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. 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 three months and nine months ended September 30, 2022.

Net Sales. Net sales consist of sales, net of discounts. The level of net sales is principally affected by sales volume and the prices paid for Trex products. Trex Residential operating results have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home and commercial improvement and residential and commercial construction and can shift demand for our products to a later period. As part of our normal business practice and consistent with industry practice, we have historically provided our distributors and dealers of our Trex Residential products incentives to build inventory levels before the start of the prime deck-building season to ensure adequate availability of our product to meet anticipated seasonal consumer demand and to enable production planning. These incentives include payment discounts, favorable payment terms, price discounts, or volume rebates on specified products and other incentives based on increases in purchases as part of specific promotional programs. The timing of our incentive programs can significantly impact sales, receivables and inventory levels during the offering period.

Gross Profit. Gross profit represents the difference between net sales and cost of sales. Cost of sales consists of raw material costs, direct labor costs, manufacturing costs, subcontract costs and freight. Raw material costs generally include the costs to purchase and transport reclaimed wood fiber, reclaimed polyethylene, pigmentation for coloring our products, and commodities used in the production of railing and staging. Direct labor costs include wages and benefits of personnel engaged in the manufacturing process. Manufacturing costs consist of costs of depreciation, utilities, maintenance supplies and repairs, indirect labor, including wages and benefits, and warehouse and equipment rental activities.

Selling, General and Administrative Expenses. The largest component of selling, general and administrative expenses is personnel related costs, which includes salaries, commissions, incentive compensation, and benefits of personnel engaged in sales and marketing, accounting, information technology, corporate operations, research and development, and other business functions. Another component of selling, general and administrative expenses is branding and other sales and marketing costs, which are used to build brand awareness. These costs consist primarily of advertising, merchandising, and other promotional costs. Other general and administrative expenses include professional fees, office occupancy costs attributable to the business functions previously referenced, and consumer relations expenses. As a percentage of net sales, selling, general and administrative expenses may vary from quarter to quarter due, in part, to the seasonality of our business.

Below is the discussion and analysis of our operating results and material changes in our operating results for the three months ended September 30, 2023 (2023 quarter) compared to the three months ended September 30, 2022 (2022 quarter), and for the nine months ended September 30, 2023 (2023 nine-month period) compared to the nine months ended September 30, 2022 (2022 nine-month period).

 

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Table of Contents

Three Months Ended September 30, 2023 Compared To The Three Months Ended September 30, 2022

Net Sales

 

     Three Months Ended September 30,      $ Change      % Change  
     2023      2022  
                             
     (dollars in thousands)  

Total net sales

   $  303,836      $  188,472      $  115,364        61.2

Trex Residential net sales

   $ 303,836      $ 177,776      $ 126,060        70.9

Trex Commercial net sales

     N/A      $ 10,696        N/A        N/A  

Total net sales in the 2023 quarter were higher compared to net sales in the 2022 quarter resulting in an increase of $115.4 million, or 61.2%. The increase in net sales was substantially all due to increased volume which was the result of strong secular trends in the outdoor living category and by the non-recurrence of the channel inventory drawdown that occurred during the 2022 quarter.

Gross Profit

 

     Three Months Ended September 30,     $ Change      % Change  
     2023     2022  
                           
     (dollars in thousands)  

Cost of sales

   $  172,941     $ 142,264     $  30,677        21.6

% of total net sales

     56.9     75.5     

Gross profit

   $ 130,895     $ 46,208     $ 84,687        183.3

Gross margin

     43.1     24.5     

Gross profit as a percentage of net sales, gross margin, was 43.1% in the 2023 quarter compared to 24.5% in the 2022 quarter. Excluding the $3.8 million dollar benefit from a reduction of the surface flaking warranty reserve, gross margin for the 2023 quarter was 41.8%. Excluding Trex Commercial, gross margin for the 2022 quarter was 25.4%. The increase in gross margin in the 2023 quarter was the result of higher volume, cost out initiatives, and positive plant performance. The 2022 quarter was negatively impacted by our channel partners inventory drawdown to rightsize their inventories and additional costs as we restructured our operations for reduced production levels.

Selling, General and Administrative Expenses

 

     Three Months Ended September 30,     $ Change      % Change  
     2023     2022  
                           
     (dollars in thousands)  

Selling, general and administrative expenses

   $  44,532     $ 26,857     $  17,675        65.8

% of total net sales

     14.7     14.2     

Selling, general and administrative expenses increased $17.7 million in the 2023 quarter. The increase was primarily related to a $10.6 million increase in personnel related expenses including incentive compensation. The 2022 quarter included a $2.9 million reduction in incentive compensation related to restructuring of our operations to support our channel partner inventory drawdown. Other changes to the 2023 quarter included a $5.8 million increase in branding expenses and a $1.5 million increase to other expenses.

Provision for Income Taxes

 

     Three Months Ended September 30,     $ Change      % Change  
     2023     2022  
                           
     (dollars in thousands)  

Provision for income taxes

   $  21,831     $ 4,928     $  16,903        343.0

Effective tax rate

     25.1     25.5     

The effective tax rate for the 2023 quarter of 25.1% was comparable to the effective tax rate of 25.5% for the 2022 quarter.

 

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Table of Contents

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):

 

     Three Months
Ended

September 30,
2023
     Three Months Ended September 30, 2022  
     Trex Residential
and Consolidated
     Trex
Residential
     Trex
Commercial
     Consolidated  

Net Income (loss)

   $  65,266      $  15,287      $ (864    $  14,423  

Interest (income), net

     (734      —         —         —   

Income tax expense (benefit)

     21,831        5,211        (283      4,928  

Depreciation and amortization

     12,996        11,194        271        11,465  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 99,359      $ 31,692      $ (876    $ 30,816  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended September 30,      $ Change      % Change  
     2023      2022  
                             
     (dollars in thousands)  

Total EBITDA

   $  99,359      $  30,816      $  68,543        222.4

Trex Residential EBITDA

   $ 99,359      $ 31,692      $ 67,667        213.5

Trex Commercial EBITDA

     N/A      $ (876      N/A        N/A  

Total EBITDA increased 222.4% to $99.4 million for the 2023 quarter compared to $30.8 million for the 2022 quarter. The increase in EBITDA was driven primarily by an increase in net sales and gross profit.

Nine Months Ended September 30, 2023 Compared To The Nine Months Ended September 30, 2022

Net Sales

 

     Nine months Ended September 30,      $ Change      % Change  
     2023      2022  
                             
     (dollars in thousands)  

Total net sales

   $  899,092      $  913,950      $  (14,858      (1.6 )% 

Trex Residential net sales

   $ 899,092      $ 878,892      $ 20,200        2.3

Trex Commercial net sales

     N/A      $ 35,058        N/A        N/A  

Total net sales decreased by $14.9 million, or 1.6%, in the 2023 nine-month period compared to the 2022 nine-month period. The reduction in total net sales was the result of the divesture of Trex Commercial at the end of 2022. The $20.2 million, or 2.3%, increase in Trex Residential net sales was primarily due to the launch of premium performance products and their associated pricing designed to support the high end of the market.

 

1 

EBITDA represents net income before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP). We have included data with respect to EBITDA because management believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important information regarding the operating performance of the Company and its reportable segments. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP and are not meant to be considered superior to or a substitute for our GAAP results.

 

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Table of Contents

Gross Profit

 

     Nine months Ended September 30,     $ Change      % Change  
     2023     2022  
                           
     (dollars in thousands)  

Cost of sales

   $  517,321     $ 575,452     $  (58,131      (10.1 )% 

% of total net sales

     57.5     63.0     

Gross profit

   $ 381,771     $ 338,498     $ 43,273        12.8

Gross margin

     42.5     37.0     

Gross profit as a percentage of net sales, gross margin, was 42.5% in the 2023 nine-month period compared to 37.0% in the 2022 nine-month period. Excluding Trex Commercial, gross margin for the 2022 quarter was 38.1%. The increase in the 2023 nine-month period was primarily the result of cost efficiencies, positive plant performance and materials management. The increase was partially offset by lower absorption due to reduced production and higher depreciation and utilities.

Selling, General and Administrative Expenses

 

     Nine months Ended September 30,     $ Change      % Change  
     2023     2022  
                           
     (dollars in thousands)  

Selling, general and administrative expenses

   $  133,694     $  106,387     $  27,307        25.7

% of total net sales

     14.9     11.6     

Selling, general and administrative expenses increased $27.3 million in the 2023 nine-month period. The increase primarily related to a $19.9 million increase in personnel related expenses including incentive compensation, a $4.5 million increase in branding expenses, a $2.9 million increase in research and development expenses and other expenses.

Provision for Income Taxes

 

     Nine months Ended September 30,     $ Change      % Change  
     2023     2022  
                           
     (dollars in thousands)  

Provision for income taxes

   $  62,089     $ 57,665     $  4,424        7.7

Effective tax rate

     25.3     24.8     

The effective tax rate for the 2023 nine-month period of 25.3% was comparable to the effective tax rate of 24.8% for the 2022 nine-month period.

Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)2 (dollars in thousands)

 

2 

EBITDA represents net income before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP). We have included data with respect to EBITDA because management believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important information regarding the operating performance of the Company and its reportable segments. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP and are not meant to be considered superior to or a substitute for our GAAP results.

 

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Table of Contents

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

 

     Nine months Ended
September 30, 2023
     Nine months Ended September 30, 2022  
     Trex Residential
and Consolidated
     Trex
Residential
     Trex
Commercial
     Consolidated  

Net Income (loss)

   $ 183,433      $ 176,939      $ (2,390    $ 174,549  

Interest expense (income), net

     2,555        (103      —         (103

Income tax expense (benefit)

     62,089        58,454        (789      57,665  

Depreciation and amortization

     37,194        32,435        835        33,270  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 285,271      $ 267,725      $ (2,344    $ 265,381  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine months Ended September 30,      $ Change      % Change  
     2023      2022  
                             
     (dollars in thousands)  

Total EBITDA

   $ 285,271      $ 265,381      $ 19,890        7.5

Trex Residential EBITDA

   $ 285,271      $ 237,725      $ 47,546        20.0

Trex Commercial EBITDA

     N/A      $ (2,344      N/A        N/A  

Total EBITDA increased 7.5% to $285.3 million for the 2023 nine-month period compared to $265.4 million for the 2022 nine-month period. The increase in EBITDA was driven primarily by an increase in gross profit.

LIQUIDITY AND CAPITAL RESOURCES

We finance operations and growth primarily with cash flows from operations, borrowings under our revolving credit facilities, operating leases and normal trade credit terms from operating activities. As of September 30, 2023 we had $4.6 million of cash and cash equivalents.

Sources and Uses of Cash. The following table summarizes our cash flows from operating, investing and financing activities (in thousands):

 

     Nine Months Ended September 30,  
     2023      2022  

Net cash provided by operating activities

   $ 288,225      $ 244,393  

Net cash used in investing activities

     (112,920      (108,118

Net cash used in financing activities

     (182,986      (271,443
  

 

 

    

 

 

 

Net decrease in cash and cash equivalents

   $ (7,681)      $ (135,168
  

 

 

    

 

 

 

Operating Activities

Cash provided by operating activities was $288.2 million during the 2023 nine-month period compared to cash provided by operations of $244.4 million during the 2022 nine-month period. In general, the $43.8 million increase in cash provided by operating activities reflects higher earnings and reduced investment in working capital in the 2023 period. Specifically, cash provided by operating activities was impacted significantly by two offsetting factors, an increase in accounts receivable and a decrease in inventory.

The increase in accounts receivable in the 2023 period was primarily due to increased sales in the three months ended September 2023 compared to sales in the three months ended September 2022, and, to a lesser extent, a result of differences in payment terms offered to customers in 2023 compared to those offered in 2022. We expect substantially all of the accounts receivables balances as of September 30, 2023 will be collected during the fourth quarter of 2023.

The effect of the increase in accounts receivable was offset, in part, by a decrease in inventory in the 2023 nine-month period compared to an increase in inventory in the 2022 nine-month period. The increase in inventory in the 2022 period was a result of the decline in sales that occurred as our distribution partners met demand partially through inventory drawdowns. The decrease in inventory in the 2023 period reflects a return to more normal purchase patterns from our distribution partners.

 

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Table of Contents

Investing Activities

Capital expenditures in the 2023 nine-month period were $112.9 million primarily related to $65.1 million for the Arkansas manufacturing facility, $17.9 million in cost reduction initiatives, $12.2 million for our new corporate headquarters, and $9.5 million related to other capacity expansion, safety, environmental and general support.

Financing Activities

Net cash used in financing activities in the 2023 nine-month period consisted primarily of net borrowings under our line of credit and repurchases of our outstanding common stock.

Stock Repurchase Program. On February 16, 2018, the Trex Board of Directors adopted a stock repurchase program of up to 11.6 million shares of its outstanding common stock (Stock Repurchase Program). The Company has repurchased 10.1 million shares under the Stock Repurchase Program. On May 4, 2023, the Trex Board of Directors adopted a new stock repurchase program (2023 Stock Repurchase Program) of up to 10.8 million shares of its outstanding common stock, and terminated the existing Stock Repurchase Program. The 2023 Stock Repurchase Program has no set expiration date and 264,896 shares were repurchased under the 2023 Stock Repurchase Program as of September 30, 2023.

Indebtedness on and after May 18, 2022 and prior to December 22, 2022. On May 18, 2022, the Company, as borrower; Trex Commercial, as guarantor; BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; Wells Fargo, as lender and Syndication Agent; Regions Bank, PNC Bank, National Association (PNC), and TD Bank, N.A. (TD)(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 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).

 

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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; BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; TD as lender and Syndication Agent; Regions Bank, PNC, and Wells Fargo (each, a Lender and collectively, the Lenders), arranged by BofA Securities 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”). The First Amendment removes Trex Commercial as a guarantor to any and all indebtedness under 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 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%.

At September 30, 2023, we had $56.5 million in outstanding borrowings under the revolving credit facility and borrowing capacity under the facility of $493.5 million.

Compliance with Debt 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 September 30, 2023. Failure to comply with the financial covenants could be considered a default of repayment obligations and, among other remedies, could accelerate payment of any amounts outstanding.

We believe that cash on hand, cash from operations and borrowings expected to be available under our revolving credit facilities will provide sufficient funds to fund planned capital expenditures, make scheduled principal and interest payments, fund warranty payments, and meet other cash requirements. We currently expect to fund future capital expenditures from operations and financing activities. The actual amount and timing of future capital requirements may differ materially from our estimate depending on the demand for Trex products and new market developments and opportunities.

Capital Requirements. In 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.

Our capital expenditure guidance for 2023 is $145 million to $155 million. In addition to the construction of our third facility located in Arkansas, our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, upgrading equipment and support systems, and acquisitions which fit our long-term growth strategy as we continue to evaluate opportunities that would be a good strategic fit for Trex, and return of capital to shareholders.

 

 

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Table of Contents

Inventory in Distribution Channels. We sell our Trex Residential decking and railing products through a tiered distribution system. We have over 50 distributors worldwide and two national retail merchandisers to which we sell our products. The distributors in turn sell the products to dealers and retail locations who in turn sell the products to end users. Significant increases in inventory levels in the distribution channel without a corresponding change in end-use demand could have an adverse effect on future sales.

Product Warranty. 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® 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. 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.

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.

Trex Residential 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. Estimating the warranty reserve for surface flaking claims requires management to estimate (1) the number of claims to be settled with payment and (2) the average cost to settle each claim.

To estimate the number of claims to be settled with payment, the Company utilizes actuarial techniques to determine a reasonable possible range of claims to be received and the percentage of those claims that will ultimately require payment (collectively, elements). Estimates for these elements are quantified using a range of assumptions derived from claim count history and the identification of factors influencing the claim counts to determine its best estimate of future claims for which to record a related liability. The cost per claim varies due to a number of factors, including the size of affected decks, the availability and type of replacement material used, the cost of production of replacement material and the method of claim settlement.

The Company monitors surface flaking claims activity each quarter for indications that its estimates require revision. Typically, a majority of surface flaking claims received in a year are received during the summer outdoor season, which spans the second and third quarters. It has been the Company’s 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.

Average cost per claim experienced in the nine months ended September 30, 2023 was lower than that experienced in the nine months ended September 30, 2022, which was elevated due to the closure of three large claims, and lower than the Company’s expectations for 2023. The number of incoming claims received in the nine months ended September 30, 2023 was lower than the number of claims received in the nine months ended September 30, 2022, and lower than the Company’s expectations for 2023. After evaluating the declining trend in incoming claims in its actuarial analysis, the Company decreased its estimate of the number of future claims to be settled with payment. As a result of the decrease in estimated future claims, in the three-month period ended September 30, 2023, the Company recorded a reduction of $3.8 million to its warranty reserve for the future settlement of surface flaking claims. The Company believes the reserve at September 30, 2023 is sufficient to cover future surface flaking obligations.

 

 

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Table of Contents

The Company’s analysis is based on currently known facts and a number of assumptions, as discussed above, and current expectations. Projecting future events such as the number of claims to be received, the number of claims that will require payment and the average cost of claims could cause the actual warranty liabilities to be higher or lower than those projected, which could materially affect the Company’s financial condition, results of operations or cash flows. The Company estimates that the annual number of claims received will continue to decline over time and that the average cost per claim will increase slightly, primarily due to inflation. If the level of claims received or average cost per claim differs materially from expectations, it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flows in future periods. The Company estimates that a 10% change in the expected number of remaining claims to be settled with payment or the expected cost to settle claims may result in approximately a $1.1 million change in the surface flaking warranty reserve.

The Company also maintains a warranty reserve for the settlement of other residential product warranty claims and records the provision at the time of product sale.

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

 

     Nine Months Ended September 30,  
     2023      2022  

Claims open, beginning of period

     1,729        1,759  

Claims received (1)

     451        507  

Claims resolved (2)

     (453      (506
  

 

 

    

 

 

 

Claims open, end of period

     1,727        1,760  
  

 

 

    

 

 

 

Average cost per claim (3)

   $ 3,977      $ 5,200  

 

(1)

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

(2)

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

(3)

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

Seasonality. The operating results for Trex Residential have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift demand for its products to a later period. As part of its normal business practice and consistent with industry practice, Trex Residential has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of its product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There were no material changes to the Company’s market risk exposure during the nine months ended September 30, 2023.

 

Item 4.

Controls and Procedures

The Company’s management, with the participation of its President and Chief Executive Officer (the Company’s principal executive officer) and its Acting Chief Financial Officer (the Company’s principal financial officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2023. Based on this evaluation, the President and Chief Executive Officer and the Acting Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective. There have been no changes in the Company’s internal control over financial reporting during the three-month period ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

The Company has lawsuits, as well as other claims, pending against it which are ordinary routine litigation and claims incidental to the business. Management has evaluated the merits of these lawsuits and claims and believes that their ultimate resolution will not have a material effect on the Company’s consolidated financial condition, results of operations, liquidity or competitive position.

 

Item 1A.

Risk Factors

Since December 31, 2022, there have been no material changes to the risk factors previously disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. You should carefully consider the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2022 and our other filings made with the SEC. You should be aware that such risk factors and other information may not describe every risk we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table provides information relating to the purchases of our common stock during the three months ended September 30, 2023 in accordance with Item 703 of Regulation S-K:

 

Period

   (a)
Total Number of
Shares (or Units)
Purchased (1)
     (b)
Average Price Paid
per Share (or Unit)

($)
     (c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
     (d)
Maximum number of
Shares (or Units) that
May Yet Be
Purchased Under the
Plan or Program
 

July 1, 2023 – July 31, 2023

     —         —         —         10,535,104  

August 1, 2023 – August 31, 2023

     3,454      $ 75.95        —         10,535,104  

September 1, 2023 – September 30, 2023

     686      $ 72.75        —         10,535,104  
  

 

 

    

 

 

    

 

 

    

 

 

 

Quarterly period ended September 30, 2022

     4,140           —      
  

 

 

       

 

 

    

 

(1)

During the three months ended September 30, 2023, 4,140 shares were withheld by, or delivered to, the Company pursuant to provisions in agreements with recipients of restricted stock granted under the Trex 2014 and 2023 Stock Incentive Plan allowing the Company to withhold, or the recipient to deliver to the Company, the number of shares having the fair value equal to tax withholding due.

On May 4, 2023, the Trex Board of Directors adopted a new stock repurchase program (2023 Stock Repurchase Program) of up to 10.8 million shares of its outstanding common stock, and terminated the existing Stock Repurchase Program. The 2023 Stock Repurchase Program has no set expiration date and 264,896 shares were repurchased under the 2023 Stock Repurchase Program as of September 30, 2023.

 

Item 5.

Other Information

Amended and Restated By-Laws of the Company dated October 25, 2023. On October 25, 2023 the Board of Directors of the Company approved and adopted amendments to Article IV, Section 1 and Article V, Section 2.(b) of the Company’s Amended and Restated By-laws, effective immediately, to grant authority to the Chief Executive Officer to appoint officers of the Corporation at the level of Vice-President or below and to fill any vacancy among such officers, any such appointment to be reported to the Board of Directors no later than the next regular meeting of the Board of Directors after such action is taken.

 

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A copy of the Amended and Restated By-Laws, as amended October 25, 2023, is attached as Exhibit 3.3 hereto and is incorporated by reference.

Appointment of Adam D. Zambanini as Executive Vice President and Chief Operating Officer. On October 25, 2023, our Board of Directors appointed Adam Zambanini to serve as our Executive Vice President and Chief Operating Officer. Mr. Zambanini, age 46, previously served as President of Trex Residential Products since July 2018. There was no change to Mr. Zambanini’s compensation, and the information related to Mr. Zambanini’s compensation set forth in our definitive proxy statement filed on Schedule 14A on March 21, 2023 is incorporated herein by reference.

 

Item 6.

Exhibits

See Exhibit Index at the end of the Quarterly Report on Form 10-Q for the information required by this Item which is incorporated by reference.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    TREX COMPANY, INC.
Date: October 30, 2023     By:   /s/ Bryan H. Fairbanks
      Bryan H. Fairbanks
      President and Chief Executive Officer
      (Duly Authorized Officer and Principal Financial Officer)


Table of Contents

EXHIBIT INDEX

 

        

Incorporated by reference

 

Exhibit

Number

 

Description

  

Form

    

Exhibit

    

Filing Date

    

File No.

 
  3.1   Restated Certificate of Incorporation of Trex Company, Inc. dated July 28, 2021.      10-Q        3.6        August 2, 2021        001-14649  
  3.2   First Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated May 5, 2022.      10-Q        3.2        May 9, 2022        001-14649  
  3.3*   Amended and Restated By-Laws of the Company dated October 25, 2023.            
 10.1**   Trex Company, Inc. 2023 Stock Incentive Plan.      10-Q        10.1        May 8, 2023        001-14649  
10.2**   Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors as amended on July 26, 2023.      10-Q        10.2        July 31, 2023        001-14649  
10.3**   Form of Trex Company, Inc. 2023 Stock Incentive Plan Stock Appreciation Rights Agreement.      10-Q        10.3        July 31, 2023        001-14649  
10.4**   Form of Trex Company, Inc. 2023 Stock Incentive Plan Time-Based Restricted Stock Unit Agreement.      10-Q        10.4        July 31, 2023        001-14649  
10.5**   Form of Trex Company, Inc. 2023 Stock Incentive Plan Performance-Based Restricted Stock Unit Agreement.      10-Q        10.5        July 31, 2023        001-14649  
10.6**   Form of Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors Restricted Stock Unit Agreement.      10-Q        10.6        July 31, 2023        001-14649  
10.7**   Amended and Restated Severance Agreement dated July 31, 2023 by and between Trex Company, Inc. and Bryan H. Fairbanks.      10-Q        10.7        July 31, 2023        001-14649  
10.8**   Form of Severance Agreement between Trex Company, Inc. and Officers other than the Chief Executive Officer.      10-Q        10.8        July 31, 2023        001-14649  
 31.1*   Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.            
 31.2*   Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.            
 32***   Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350).            
101.INS*   Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.            
101.SCH*   Inline XBRL Taxonomy Extension Schema Document.            
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase Document.            
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase Document.            
101.LAB*   Inline XBRL Taxonomy Extension Label Linkbase Document.            
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase Document.            


Table of Contents
         

Incorporated by reference

 

Exhibit

Number

  

Description

  

Form

    

Exhibit

    

Filing Date

    

File No.

 
104.1    Cover Page Interactive Data File—The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.            

 

*

Filed herewith.

**

Management contract or compensatory plan or agreement.

***

Furnished herewith.