☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		54-1910453
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
160 Exeter Drive Winchester, Virginia		22603-8605
(Address of principal executive offices)		(Zip Code)

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

		Three Months Ended March 31,
		2021				2020
Net sales		$	245,524			$	200,395
Cost of sales			149,723				110,699
Gross profit			95,801				89,696
Selling, general and administrative expenses			31,312				34,561
Income from operations			64,489				55,135
Interest income, net			(3	)			(522	)
Income before income taxes			64,492				55,657
Provision for income taxes			15,947				13,255
Net income		$	48,545			$	42,402
Basic earnings per common share		$	0.42			$	0.37
Basic weighted average common shares outstanding			115,663,366				116,259,058
Diluted earnings per common share		$	0.42			$	0.36
Diluted weighted average common shares outstanding			116,017,400				116,647,442
Comprehensive income		$	48,545			$	42,402

		March 31, 2021				December 31, 2020
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	8,221			$	121,701
Accounts receivable, net			309,527				106,748
Inventories			75,012				68,238
Prepaid expenses and other assets			17,322				25,310
Total current assets			410,082				321,997
Property, plant and equipment, net			378,167				336,537
Goodwill and other intangible assets, net			73,560				73,665
Operating lease assets			33,672				34,382
Other assets			4,809				3,911
Total assets		$	900,290			$	770,492
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	39,167			$	38,622
Accrued expenses and other liabilities			55,058				62,331
Accrued warranty			5,400				5,400
Line of credit			136,000				—
Total current liabilities			235,625				106,353
Operating lease liabilities			27,420				28,579
Non-current accrued warranty			24,145				24,073
Deferred income taxes			22,956				22,956
Total liabilities			310,146				181,961
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, 180,000,000 shares authorized; 140,643,173 and140,577,005 shares issued and 115,361,396 and 115,799,503 shares outstanding at March 31, 2021 and December 31, 2020, respectively			1,406				1,406
Additional paid-in capital			124,678				126,087
Retained earnings			785,856				737,311
Treasury stock, at cost, 25,281,777 and 24,777,502 shares at March 31, 2021 and December 31, 2020, respectively			(321,796	)			(276,273	)
Total stockholders’ equity			590,144				588,531
Total liabilities and stockholders’ equity		$	900,290			$	770,492

		Common Stock								Additional Paid-In Capital				Retained Earnings				Treasury Stock								Total
		Shares				Amount												Shares				Amount
Balance, December 31, 2020			115,799,503			$	1,406			$	126,087			$	737,311				24,777,502			$	(276,273	)		$	588,531
Net income			—				—				—				48,545				—				—				48,545
Employee stock plans			28,286				—				460				—				—				—				460
Shares withheld for taxes on award s			(38,212	)			—				(4,045	)			—				—				—				(4,045	)
Stock-based compensation			76,094				—				2,176				—				—				—				2,176
Repurchases of common stock			(504,275	)			—				—				—				504,275				(45,523	)			(45,523	)
Balance, March 31, 202 1			115,361,396			$	1,406			$	124,678			$	785,856				25,281,777			$	(321,796	)		$	590,144

		Common Stock								Additional Paid-In Capital				Retained Earnings				Treasury Stock								Total
		Shares				Amount												Shares				Amount
Balance, December 31, 2019			116,481,442			$	1,404			$	123,294			$	561,680				23,893,484			$	(237,203	)		$	449,175
Net incom e			—				—				—				42,402				—				—				42,402
Employee stock plans			32,772				—				299				—				—				—				299
Shares withheld for taxes on awards			(76,284	)			—				(3,856	)			—				—				—				(3,856	)
Stock-based compensation			152,408				—				2,775				—				—				—				2,775
Repurchases of common stock			(884,018	)			—				—				—				884,018				(39,072	)			(39,072	)
Balance, March 31, 2020			115,706,320			$	1,404			$	122,512			$	604,082				24,777,502			$	(276,275	)		$	451,723

		Three Months Ended March 31,
		2021				2020
Operating Activities
Net incom e		$	48,545			$	42,402
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			6,423				3,851
Stock-based compensation			2,176				2,775
Gain on disposal of property, plant and equipment			(98	)			(123	)
Other non-cash adjustments			77				32
Changes in operating assets and liabilities:
Accounts receivable			(202,781	)			(162,780	)
Inventories			(6,774	)			(2,610	)
Prepaid expenses and other assets			(809	)			1,059
Accounts payable			10,494				8,865
Accrued expenses and other liabilities			(14,453	)			(14,089	)
Income taxes receivable/payable			14,626				11,850
Net cash used in operating activities			(142,574	)			(108,768	)
Investing Activities
Expenditures for property, plant and equipment			(58,093	)			(22,733	)
Proceeds from sales of property, plant and equipment			293				2,136
Net cash used in investing activities			(57,800	)			(20,597	)
Financing Activities
Borrowings under line of credit			142,000				36,500
Principal payments under line of credit			(6,000	)			(8,000	)
Repurchases of common stock			(49,566	)			(42,929	)
Proceeds from employee stock purchase and option plans			460				300
Net cash provided by (used in) financing activities			86,894				(14,129	)
Net decrease in cash and cash equivalents			(113,480	)			(143,494	)
Cash and cash equivalents, beginning of period			121,701				148,833
Cash and cash equivalents, end of period		$	8,221			$	5,339
Supplemental Disclosure:
Cash paid for interest		$	92			$	1
Cash paid for income taxes, net		$	1,319			$	1,405

1.	BUSINESS AND ORGANIZATION

Trex Company, Inc. (Company) is the world’s largest manufacturer of high-performance,

low-maintenance

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

®

, with more than 25 years of product experience. A majority of its products are manufactured in a proprietary process that combines reclaimed wood fibers and scrap polyethylene. Also, the Company is a leading national provider of custom-engineered railing a

n

d staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues. The Company operates in two reportable segments, Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). The Company is incorporated in Delaware. The principal executive offices are located at 160 Exeter Drive, Winchester, Virginia 22603, 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. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Trex Commercial Products, Inc., for all periods presented.

The unaudited consolidated results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. As of the date of this report, the Company has not experienced any material disruptions to its operations, production or its supply chain and has not experienced any material reduction in demand for its products due to the

COVID-19

pandemic. However, even though a vaccine has been approved, the pandemic remains an evolving situation due to the continuation of the outbreak and any future measures that may be taken to contain the spread of the virus. The Company is actively managing its business to respond to the impact and continuing to ensure the safety of its employees.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020 included in the Annual Report of Trex Company, Inc. on Form

10-K,

as filed with the U.S. Securities and Exchange Commission.

3.	RECENTLY ADOPTED ACCOUNTING STANDARDS

In December 2019, the FASB issued ASU

No. 2019-12,

“

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

”. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a

step-up

in the tax basis of goodwill. The Company adopted the standard on a prospective basis on January 1, 2021. Adoption did not have a material effect on its consolidated financial statements.

Table of Contents 

The Company’s intangible assets consist of domain names. At March 31, 2021 and December 31, 2020, intangible assets were $6.3 million and accumulated amortization was $1.2 million and $1.1 million, respectively. Intangible asset amounts were determined based on the estimated economics of the asset and are amortized over the estimated useful lives on a straight-line basis over 15 years, which approximates the pattern in which the economic benefits are expected to be received. The Company evaluates the recoverability of intangible assets periodically and considers events or circumstances that may warrant revised estimates of useful lives or that may indicate an impairment. Intangible asset amortization expense for the three months ended March 31, 2021 and March 31, 2020 was $0.1 million and $0.1 million, respectively.

8.	ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following (in thousands):

 

		March 31, 2021				December 31, 2020
Sales and marketing		$	19,861			$	22,938
Compensation and benefits			10,902				21,156
Income taxes			7,193				389
Operating lease liabilities			7,130				6,708
Manufacturing costs			2,813				3,641
Billings in excess of revenues			1,189				1,244
Customer deposits			1,086				1,174
Other			4,884				5,081
Total accrued expenses and other liabilities		$	55,058			$	62,331

9.

DEBT

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

 had

 

$136 million in outstanding borrowings under its revolving credit facility and remaining available borrowing capacity of $214 million at March 31, 2021.

Revolving Credit Facility

On November 5, 2019, the Company entered into a Fourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) as borrower, Trex Commercial Products, Inc., as guarantor; Bank of America, N.A. as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; and certain other lenders including Wells Fargo Bank, N.A., who is also Syndication Agent, and Truist Bank, arranged by BOA Securities, Inc., as Sole Lead Arranger and Sole Bookrunner, to amend and restate the Third Amended and Restated Credit Agreement (Third Amended Credit Agreement), dated as of January 12, 2016, as amended. The Fourth Amended Credit Agreement provides the Company with one or more Revolving Loans in a collective maximum principal amount of $250 million from January 1 through June 30 of each year and a maximum principal amount of $200 million from July 1 through December 31 of each year throughout the term, which ends November 5, 2024.

On May 26, 2020, the Company entered into a First Amendment to the Original Credit Agreement (the First Amendment) to provide for an additional $100 million line of credit through May 26, 2022. The purpose of the additional $100 million line of credit is primarily to reduce risk associated with the

COVID-19

pandemic should the Company need to secure additional capital to continue its strategy of accelerating the conversion of wood decking to Trex composite decking and expanding its addressable market. As a matter of convenience, the parties incorporated the amendments to the Original Credit Agreement made by the First Amendment into a new Fourth Amended and Restated Credit Agreement (New Credit Agreement). In the New Credit Agreement, the revolving commitments under the Original Credit Agreement are referred to as Revolving A Commitments and the new $100 million line of credit is referred to as Revolving B Commitments. In the New Credit Agreement, all of the material terms and conditions related to the original line of credit (Revolving A Commitments) remain unchanged from the Original Credit Agreement.

Compliance with Debt Covenants and Restrictions

Pursuant to the terms of the Fourth Amended Credit Agreement, the Company is subject to certain loan compliance covenants. The Company was in compliance with all covenants as of March 31, 2021. 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 and certain plant equipment under various operating leases. The Company’s operating leases have remaining lease terms of less than 1 year to 8 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 three months ended March 31, 2021 and March 31, 2020, total operating lease expense was $2.0 million and $2.1 million, respectively. The weighted average remaining lease term at March 31, 2021 and December 31, 2020 was 5.4 years and 5.6 years, respectively. The weighted average discount rate at March 31, 2021 and December 31, 2020 was 3.42% and 3.47%, respectively.

The following table includes supplemental cash flow information for the three months ended March 31, 2021 and March 31, 2020 and supplemental balance sheet information at March 31, 2021 and December 31, 2020 related to operating leases (in thousands):

 

		Three Months Ended March 31,
Supplemental cash flow information		2021				2020
Cash paid for amounts included in the measurement of operating lease liabilities		$	2,056			$	2,143
Operating ROU assets obtained in exchange for lease liabilities		$	1,038			$	—
Supplemental balance sheet information		March 31, 2021				December 31, 2020
Operating lease ROU assets		$	33,672			$	34,382
Operating lease liabilities:
Accrued expenses and other current liabilities		$	7,130			$	6,708
Operating lease liabilities			27,420				28,579
Total operating lease liabilities		$	34,550			$	35,287

The following table summarizes maturities of operating lease liabilities at March 31, 2021 (in thousands):

 

Maturities of operating lease liabilities
2021		$	6,163
2022			7,723
2023			6,748
2024			6,390
2025			4,483
Thereafter			6,599
Total lease payments			38,106
Less imputed interest			(3,556	)
Total operating lease liabilities		$	34,550

 

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 March 31, 2021 and December 31, 2020.

 

 

		Three Months Ended March 31,
		2021				2020
Numerator:
Net income available to common shareholders		$	48,545			$	42,402
Denominator:
Basic weighted average shares outstanding			115,663,366				116,259,058
Effect of dilutive securities:
Stock appreciation rights and options			207,060				181,446
Restricted stock			146,974				206,938
Diluted weighted average shares outstanding			116,017,400				116,647,442
Basic earnings per share		$	0.42			$	0.37
Diluted earnings per share		$	0.42			$	0.36

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 March 31,
		2021				2020
Stock appreciation rights			7,181				18,270
Restricted stock			23,079				—

Stock Repurchase Program

On February 16, 2018, the Board of Directors adopted a stock repurchase program of up to 11.6 million shares of the Company’s outstanding common stock (Stock Repurchase Program). On March 12, 2020, the Company suspended repurchases of its common stock under the Stock Repurchase Program due to the volatility and uncertainty in the stock market associated with the

COVID-19

pandemic. On October 30, 2020, the Company lifted the suspension of repurchases of its common stock under the Stock Repurchase Program. As of March 31, 2021, the Company has repurchased 3.3 million shares of the Company’s outstanding common stock under the Stock Repurchase Program.

Stock Split

On July 29, 2020, the Company’s Board of Directors approved a

two-for-one stock split of the Company’s common stock, par value, $

0.01. The stock split was in the form of a stock dividend distributed on September 14, 2020, to stockholders of record at the close of business on August 19, 2020. The stock split entitled each stockholder to receive one additional share of common stock for each share they held as of the record date. All common stock share and per share data for all periods presented in the accompanying unaudited condensed consolidated financial statements and notes thereto have been retroactively adjusted to reflect the stock split.

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

Trex Commercial generates revenue from the manufacture and sale of its modular and architectural railing and staging systems. All of its revenues are from fixed-price contracts with customers. Trex Commercial contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and is, therefore, not distinct. The transaction price allocated to remaining performance obligations on contracts with an original duration greater than one year was $59.1 million as of March 31, 2021. The Company will recognize this revenue as contracts are completed, which is expected to occur within the next 24 months.

For the three months ended March 31, 2021 and March 31, 2020, 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).

 

Three Months Ended March 31, 2021		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		$	233,070			$	—			$	233,070
Products transferred over time and fixed price contracts			—				12,454				12,454
		$	233,070			$	12,454			$	245,524
Three Months Ended March 31, 2020		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		$	186,874			$	—			$	186,874
Products transferred over time and fixed price contracts			—				13,521				13,521
		$	186,874			$	13,521			$	200,395

14.	STOCK-BASED COMPENSATION

The Company has one stock-based compensation plan, the 2014 Stock Incentive Plan (Plan), approved by the Company’s stockholders in April 2014. The Plan amended and restated in its entirety the Trex Company, Inc. 2005 Stock Incentive Plan. The Plan was subsequently amended and restated by the Company’s Board of Directors in May 2014 and May 2018. The Plan is administered by the Compensation Committee of the Company’s Board of Directors. Stock-based compensation is granted to officers, directors and certain key employees in accordance with the provisions of the Plan. The Plan provides for grants of stock options, restricted stock, restricted stock units, stock appreciation rights (SARs), and unrestricted stock. The total aggregate number of shares of the Company’s common stock that may be issued under the Plan is 25,680,000 and as of March 31, 2021, the total number of shares available for future issuance is 11,193,906.

The following table summarizes the Company’s stock-based compensation grants for the three months ended March 31, 2021:

 

		Stock Awards Granted				Weighted-Average Grant Price Per Share
Time-based restricted stock units			23,330			$	103.89
Performance-based restricted stock units (a)			36,522			$	86.26
Stock appreciation rights			15,029			$	104.56

 

(a)

Includes 26,511 of target performance-based restricted stock unit awards granted during the three months ended March 31, 2021, and adjustments of 4,813, (887), and 6,085 to grants due to the actual performance level achieved for restricted stock and restricted stock units awarded in 2020, 2019, and 2018, 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 three months ended March 31, 2021 and March 31, 2020 the data and assumptions shown in the following table were used:

 

		Three Months Ended March 31, 2021				Three Months Ended March 31, 2020
Weighted-average fair value of grants		$	51.84			$	17.83
Dividend yield			0	%			0	%
Average risk-free interest rate			0.6	%			1.4	%
Expected term (years)			5				5
Expected volatility			58.7	%			37.8	%

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 March 31
		2021				2020
Stock appreciation rights		$	114			$	354
Time-based restricted stock and restricted stock units			687				1,256
Performance-based restricted stock and restricted stock units			1,275				1,135
Employee stock purchase plan			100				30
Total stock-based compensation		$	2,176			$	2,775

Total unrecognized compensation cost related to unvested awards as of March 31, 2021 was $12.6 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 three months ended March 31, 2021 and March 31, 2020 was 24.7% and 23.8%, respectively, which resulted in expense of $15.9 million and $13.3 million, respectively. The increase of 0.9% in the effective tax rate was primarily due to a current year decrease in excess tax benefits from the exercise of share-based payments and an increase in

non-deductible

executive compensation.

During the three months ended March 31, 2021 and March 31, 2020, the Company realized $0.8 million and $1.0 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 March 31, 2021, the Company maintains a valuation allowance of $2.8 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 March 31, 2021, for certain tax jurisdictions tax years 2017 through 2020 remain subject to examination. The Company believes that adequate provisions have been made for all tax returns 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

The Company operates in two reportable segments:

 

•

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 designs, engineers, and markets modular and architectural railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues. Trex Commercial products are marketed to architects, specifiers, contractors, and others doing business within the commercial and multi-family market.

The Company’s reportable segments have been determined in accordance with its internal management structure, which is organized based on residential and commercial 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 ended March 31, 2021 and March 31, 2020 includes data for Trex Residential and Trex Commercial (in thousands):

Segment Data:

 

		Three Months Ended March 31, 2021												Three Months Ended March 31, 2020
		Trex   Residential				Trex Commercial				Total				Trex Residential				Trex Commercial				Total
Net sales		$	233,070			$	12,454			$	245,524			$	186,874			$	13,521			$	200,395
Net income (loss)		$	48,745			$	(200	)		$	48,545			$	41,020			$	1,382			$	42,402
EBITDA		$	70,964			$	(52	)		$	70,912			$	56,950			$	2,036			$	58,986
Depreciation and amortization		$	6,210			$	213			$	6,423			$	3,664			$	187			$	3,851
Income tax expense (benefit)		$	16,012			$	(65	)		$	15,947			$	12,788			$	467			$	13,255
Capital expenditures		$	56,563			$	1,530			$	58,093			$	22,416			$	317			$	22,733
Total assets		$	808,864			$	91,426			$	900,290			$	539,352			$	91,504			$	630,856

Reconciliation of Net Income to EBITDA:

 

		Three Months Ended March 31, 2021												Three Months Ended March 31, 2020
		Trex Residential				Trex Commercial				Total				Trex Residential				Trex Commercial				Total
Net income (loss)		$	48,745			$	(200	)		$	48,545			$	41,020			$	1,382			$	42,402
Interest income, net			(3	)			—				(3	)			(522	)			—				(522	)
Income tax expense (benefit)			16,012				(65	)			15,947				12,788				467				13,255
Depreciation and amortization			6,210				213				6,423				3,664				187				3,851
EBITDA		$	70,964			$	(52	)		$	70,912			$	56,950			$	2,036			$	58,986

Table of Contents 

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. The operating results for Trex Commercial have not historically varied from quarter to quarter as a result of seasonality. However, they are driven by the timing of individual projects, which may vary each quarterly period.

18.	COMMITMENTS AND CONTINGENCIES

Product Warranty

The Company warrants that its decking and residential railing products will be free from material defects in workmanship and materials for warranty periods ranging from 10 years to 25 years, depending on the product and its use. If there is a breach of such warranties, the Company has an obligation either to replace the defective product or refund the purchase price. Depending on the product and its use, the Company also warrants its Trex Commercial products will be free of manufacturing defects for one to three years.

The Company continues to receive and settle claims for 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 quantify both the expected number 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. 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.

The number of incoming claims received in the three months ended March 31, 2021, was higher than the number of claims received in the three months ended March 31, 2020 and exceeded the Company’s expectations for the first quarter of 2021. Average cost per claim experienced in the three months ended March 31, 2021 was higher than that experienced in the three months ended March 31, 2020 but was consistent with the Company’s expectations for the current year. The Company estimates that average cost per claim will increase in future years, primarily due to inflation. The Company believes its reserve at March 31, 2021 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 actual warranty liabilities to be higher or lower than those projected, which could materially affect the Company’s consolidated financial condition, results of operations or cash flows. The Company estimates that the annual number of claims received will decline over time and that the average cost per claim will increase, 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 an 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 $2.1 million change in the surface flaking warranty

 reserve.

 

14

The following is a reconciliation of the Company’s residential product warranty reserve (in thousands):

 

		Three Months Ended March 31, 2021
		Surface Flaking				Other Residential				Total
Beginning balance, January 1		$	21,325			$	8,148			$	29,473
Provisions and changes in estimates			—				1,092				1,092
Settlements made during the period			(604	)			(416	)			(1,020	)
Ending balance, March 31		$	20,721			$	8,824			$	29,545

 

		Three Months Ended March 31, 2020
		Surface Flaking				Other Residential				Total
Beginning balance, January 1		$	19,024			$	6,470			$	25,494
Provisions and changes in estimates			—				321				321
Settlements made during the period			(557	)			(168	)			(725	)
Ending balance, March 31		$	18,467			$	6,623			$	25,090

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.

Fire at Virginia Facility

On March 13, 2021, an electrical fire occurred at one of the Company’s manufacturing buildings in its Virginia complex. No injuries occurred from the event. The building was off-line while damage to the building’s electrical systems was addressed. Repairs were substantially completed at the end of March 2021. The Company has insurance coverage for repairs, incremental direct costs to serve its customers, and losses in operating income from the loss in net sales. 

No

proceeds from the insurance recovery were received during the three months ended March 31, 2021.

  

On July 29, 2020, the Board of Directors of the Company approved a stock split of the Company’s common stock, par value $0.01. The stock split was in the form of a stock dividend distributed on September 14, 2020, to stockholders of record at the close of business on August 19, 2020. The stock split entitled each stockholder to receive one additional share of common stock, par value $0.01, for each share they held as of the record date. All common stock share and per share data for all periods presented have been retroactively adjusted to reflect the stock split.

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 for the year ended December 31, 2019 filed with the SEC, and the factor discussed under “Item 1A. Risk Factors” in this Quarterly Report on Form 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; 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 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 upcoming data privacy laws and the EU General Data Protection Regulation and the related actual or potential costs and consequences; material adverse impacts from global public health pandemics, including the strain of coronavirus known as and material adverse impacts related to labor shortages or increases in labor costs.

Trex Company, Inc. currently operates in two reportable segments: Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). Refer to Note 16, , in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1. of this Quarterly Report on Form for additional information. The Company is focused on using renewable resources within both our Trex Residential and Trex Commercial segments.

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. We offer a comprehensive set of aesthetically appealing and durable, product offerings in the decking, residential railing, fencing and outdoor lighting categories. A majority of the products are and leverage recycled 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 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 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.

is a leading national provider of custom-engineered railing and staging systems. Trex Commercial designs and engineers custom solutions, which are prevalent in professional and collegiate sports facilities, commercial and high-rise applications, performing arts, sports, and event production and rentals. With a team of devoted engineers, and industry-leading reputation for quality and dedication to customer service, Trex Commercial markets to architects, specifiers, contractors, and building owners.

. Net sales consist of sales and freight, 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. In addition, the operating results for Trex Commercial are driven by the timing of individual projects, which may vary each quarterly period.

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.

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.

We warrant that our Trex Residential products will be free from material defects in workmanship and materials for warranty periods ranging from 10 years to 25 years, depending on the product and its use. If there is a breach of such warranties, we have an obligation either to replace the defective product or refund the purchase price. Depending on the product and its use, we also warrant our Trex Commercial products will be free of manufacturing defects for periods ranging from 1 year to 3 years.

We believe the reserve at March 31, 2021 is sufficient to cover future surface flaking obligations. Refer to Note 18, , in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1. of this Quarterly Report on Form for additional information.

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence. The pandemic increased the level of volatility and uncertainty globally and created macroeconomic disruption. We are actively managing our business to respond to this health crisis, and we continue to evaluate the nature and extent of its impact. We have not experienced any material disruptions to our operations, production, supply chain, or any material reduction in demand for our products due to the pandemic. Even though vaccines have been approved and are being distributed, the pandemic remains an evolving situation. The extent and duration of the economic fallout from remains unclear. We are actively managing our business to respond to the impact, such as engaging with our distributor network regarding market demand, ongoing communications with our suppliers, and continuing to ensure the safety of our employees. Our commitment to stakeholders is to take the appropriate actions to ensure the safety and well-being of our employees and partners, comply with any governmental orders relating to which may result in a period of disruption to our business, while at the same time leveraging our strengths and ensuring financial flexibility.