SEC Info - Trex Co. Inc. - ‘10-Q’ for 6/30/20

Three Months Ended

Trex

Residential

Trex

Commercial

Total

Trex

Residential

Trex

Commercial

Total

Net sales

i 208,877

i 11,771

i 220,648

i 193,468

i 12,985

i 206,453

Net income

i 45,912

i 1,306

i 47,218

i 35,223

i 487

i 35,710

EBITDA

i 65,495

i 1,964

i 67,459

i 50,353

i 785

i 51,138

Depreciation and amortization

i 3,865

i 198

i 4,063

i 3,258

i 141

i 3,399

Income tax expense

i 15,789

i 460

i 16,249

i 11,866

i 164

i 12,030

Capital expenditures

i 39,610

i 270

i 39,880

i 10,124

i 290

i 10,414

Total assets

i 577,684

i 93,306

i 670,990

i 447,725

i 88,473

i 536,198

Reconciliation of Net Income to EBITDA:

Three Months Ended

Three Months Ended

Trex

Residential

Trex

Commercial

Total

Trex

Residential

Trex

Commercial

Total

Net income

i 45,912

i 1,306

i 47,218

i 35,223

i 487

i 35,710

Interest (income)

expense

, net

( i 71

)

—

( i 71

)

i 6

( i 7

)

( i 1

)

Income tax expense

i 15,789

i 460

i 16,249

i 11,866

i 164

i 12,030

Depreciation and amortization

i 3,865

i 198

i 4,063

i 3,258

i 141

i 3,399

EBITDA

i 65,495

i 1,964

i 67,459

i 50,353

i 785

i 51,138

Segment Data:

Six Months Ended

Six Months Ended

Trex

Residential

Trex

Commercial

Total

Trex

Residential

Trex

Commercial

Total

Net sales

i 395,751

i 25,292

i 421,043

i 358,947

i 27,077

i 386,024

Net income

i 86,932

i 2,688

i 89,620

i 66,478

i 787

i 67,265

EBITDA

i 122,445

i 4,001

i 126,446

i 92,419

i 1,312

i 93,731

Depreciation and amortization

i 7,529

i 386

i 7,915

i 6,525

i 268

i 6,793

Income tax expense

i 28,577

i 927

i 29,504

i 19,466

i 264

i 19,730

Capital expenditures

i 62,026

i 587

i 62,613

i 17,818

i 1,243

i 19,061

Total assets

i 577,684

i 93,306

i 670,990

i 447,725

i 88,473

i 536,198

Reconciliation of Net Income to EBITDA:

Six Months Ended

Six Months Ended

Incorporated by reference

Trex

Residential

Trex

Commercial

Total

Trex

Residential

Trex

Commercial

Total

Net income

i 86,932

i 2,688

i 89,620

i 66,478

i 787

i 67,265

Interest income, net

( i 593

)

—

( i 593

)

( i 50

)

( i 7

)

( i 57

)

Income tax expense

i 28,577

i 927

i 29,504

i 19,466

i 264

i 19,730

Depreciation and amortization

i 7,529

i 386

i 7,915

i 6,525

i 268

i 6,793

EBITDA

i 122,445

i 4,001

i 126,446

i 92,419

i 1,312

i 93,731

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 i 10 years to i 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. 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 six months ended June 30, 2020, was higher than the number of claims received in the six months ended June 30, 2019 and exceeded the Company’s expectations for the current year. Average settlement cost per claim experienced in the six months ended June 30, 2020, was considerably higher than that experienced in the six months ended June 30, 2019, due to an increase in larger claims settled

and changes in the mix of settlement methods that occurred in the second half of 2019, but was consistent with the Company’s expectations for the current year and, and lower than that experienced for the full year ended December 31, 2019. The Company believes its reserve at June 30, 2020 is sufficient to cover future surface flaking obligations and no adjustments were required in the current period.

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 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 i 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 $ i 1.7 million change in the surface flaking warranty reserve.

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

Six Months Ended June 30, 2020

Surface
Flaking

Other
Residential

Total

Beginning balance, January 1

i 19,024

i 6,470

i 25,494

Provisions and changes in estimates

—

i 946

Settlements made during the period

( i 1,700

)

( i 611

)

( i 2,311

)

Ending balance, June 30

i 17,324

i 6,805

i 24,129

Six Months Ended June 30, 2019

Surface
Flaking

Other
Residential

Total

Beginning balance, January 1

i 23,951

i 6,803

i 30,754

Provisions and changes in estimates

—

i 1,312

Settlements made during the period

( i 2,064

)

( i 666

)

( i 2,730

)

Ending balance, June 30

i 21,887

i 7,449

i 29,336

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.

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. (Company, we or our) Annual Report on Form

10-K

for the year ended December 31, 2019 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, 2019 filed with the SEC, and the factor discussed under “Item 1A. Risk Factors” in this quarterly report on form

10-Q.

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; and material adverse impacts from global public health pandemics, including the strain of coronavirus known as

COVID-19.

OVERVIEW

COVID-19:

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

COVID-19

pandemic has increased the level of volatility and uncertainty globally and has created economic disruption. We are actively managing our business to respond to this health crisis and will continue to evaluate the nature and extent of its impact. As of the date of this report, we have not experienced any material disruptions to our operations due to the

COVID-19

remains unclear. 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

COVID-19,

which may result in a period of disruption to our business, while at the same time leveraging our strengths and ensuring financial flexibility.

As of June 30, 2020, our facilities continue to operate at output levels similar to those prior to the

COVID-19

pandemic and we are following or exceeding all Centers for Disease Control and Prevention (CDC) and public officials’ guidelines. We have also adopted a business continuity plan and local emergency response plans at each location. We continue to take precautionary measures, make contingency plans and improve our response to the developing situation. We have assembled a cross-functional team whose chief charge is to oversee our efforts to ensure the health and safety of all employees and supply product to our customers. That team constantly monitors the latest CDC, Federal, state and other regulatory guidance, works to secure personal protective equipment, finds new ways to help mitigate risk, and identifies opportunities for us to exceed recommendations.

We have implemented preventative or protective actions at our facilities, our corporate headquarters and with field sales personnel. In order to mitigate the spread of the virus, we instructed our employees to practice social distancing. Efforts for social distancing included employees working from home, where possible, revising our production processes to allow for compliance with our social distancing efforts, suspending air travel and enabling technologies to allow employees to effectively perform their functions remotely. Our sales force worked from home and conducted training sessions with our channel partners by utilizing online audio and visual technologies. Late in the second quarter, our employees began transitioning back to the workplace and conducting customer visits on a voluntary basis. In addition, face masks and other protective equipment have been distributed to employees across all of our facilities, handwashing and hand sanitizing stations have been installed, and automated temperature scanners have been provided at the entrances to our manufacturing facilities and corporate office. We have installed air purifier systems for all enclosed areas in every one of our buildings. Our internal cleaning crew sanitizes an extensive checklist of high-touch items and areas across work facilities, and our facilities are cleaned repeatedly throughout each shift with

CDC-recommended

chemicals and disinfectants by internal and external groups. In addition, we fabricated face shields, donated the proceeds from decking sample sales to Feeding America, and supported the

COVID-19

Relief Fund of our local United Way, supplementing our annual fund-raising campaign.

Since we cannot predict the duration or scope of the pandemic, we cannot fully anticipate or reasonably estimate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future. During the latter part of the first quarter and continuing into the first two months of the second quarter, some jurisdictions into which we sell had deemed the construction industry as

non-essential

and ordered the closure of those businesses. In addition, we experienced areas where the availability of our products was limited due to the closure of certain of our channel partners. However, during the latter part of the second quarter, jurisdictions began to lift their respective closure restrictions and certain of our channel partners that were closed reopened. As a result, the slowdown in net sales that we experienced early in the second quarter was offset by the pickup of those sales in the latter part of the quarter when jurisdictions began to lift their closure restrictions. As of June 30, 2020 we have no significant supply issues and maintain inventories of materials sourced from diversified geographies, allowing us to better tolerate short-term supply chain disruptions.

In May 2020, we amended and restated our revolving credit agreement to provide us with an additional Revolving Line of Credit for Aggregate Revolving B Commitments in the amount of $100 million. The purpose of the additional $100 million is primarily to reduce risk, if necessary, 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 of June 30, 2020, we had no outstanding indebtedness under our revolving credit facilities and $350 million in available borrowing capacity. As the impact of

COVID-19

evolves, we will continue to evaluate our financial position and liquidity needs in light of future developments.

Operations and Products:

Trex Company, Inc. currently operates in two reportable segments: Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). The Company is focused on using renewable resources within both our Trex Residential and Trex Commercial segments.

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. We offer a comprehensive set of aesthetically appealing and durable,

low-maintenance

product offerings in the decking, residential railing, fencing, steel deck framing, and outdoor lighting categories. A majority of the products are

eco-friendly

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.

Trex offers the following products through Trex Residential:



Decking and Accessories		Our principal decking products are Trex Transcend ® , Trex Select ® and Trex Enhance ® . Differentiating the Enhance collection is a scalloped profile that is lighter weight for easier handling and installation. 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. We also offer Trex Hideaway ® , a hidden fastening system for grooved boards, and Trex DeckLighting ™ , an outdoor lighting system. Trex DeckLighting is a line of energy-efficient LED dimmable deck lighting, which is designed for use on posts, floors and steps. The line includes a post cap light, deck rail light, riser light and a recessed deck light.




Railing		Our residential railing products are Trex Transcend Railing, Trex Select Railing, Trex Enhance Railing and Trex Signature ® aluminum railing. 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 Enhance, made from approximately 40 percent recycled content, is available in three colors and is offered through home improvement retailers in kits that contain the complete railing system. Trex Signature aluminum railing, made from a minimum of 50 percent recycled content, is available in three colors and designed for consumers who want a sleek, contemporary look.

Fencing		Our Trex Seclusions ® fencing product is offered through two specialty distributors. This product consists of structural posts, bottom rail, pickets, top rail and decorative post caps.

Steel Deck Framing		Our triple-coated steel deck framing system called Trex Elevations ® leverages the strength and dimensional stability of steel to create a flat surface for our decking. Trex Elevations provides consistency and reliability that wood does not and is fire resistant.

Trex Commercial

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

Trex offers the following products through Trex Commercial:




Architectural Railing Systems		Our architectural railing systems are pre-engineered guardrails with options to accommodate styles ranging from classic and elegant wood top rail combined with sleek stainless components and glass infill, to modern and minimalist stainless cable and rod infill choices. Trex Commercial can also design, engineer and manufacture custom railing systems tailored to the customer’s specific material, style and finish. Many railing styles are achievable, including glass, mesh, perforated railing and cable railing.

Aluminum Railing Systems		Trex Signature ® aluminum railing collection, made from a minimum of 50 percent recycled content, combines superior styling with the unparalleled strength of aluminum – making it an ideal railing choice for a variety of commercial settings. Its straightforward, unobtrusive design features traditional balusters and contemporary vertical rods, and can be installed with continuously graspable rail options for added safety, comfort and functionality. Trex Signature is available in three colors – charcoal black, bronze and classic white – and is available in a variety of stock lengths.

Staging Equipment and Accessories		Our advanced modular, lightweight custom staging systems include portable platforms, orchestra shells, guardrails, stair units, barricades, camera platforms, VIP viewing decks, ADA infills, DJ booths, pool covers, and other custom applications. Our systems provide superior staging product solutions for facilities and venues with custom needs. Our modular stage equipment is designed to appear seamless, feel permanent, and maximize the functionality of the space.

Highlights for the three months ended June 30, 2020:

•

Increase in net sales of 6.9%, or $14.2 million, to $220.6 million for the three months ended June 30, 2020 compared to $206.5 million for the three months ended June 30, 2019.

•

Increase in gross profit of 10.7%, or $9.0 million, to $92.4 million for the three months ended June 30, 2020 compared to $83.4 million for the three months ended June 30, 2019.

•

Increase in net income to $47.2 million, or $0.81 per diluted share, for the three months ended June 30, 2020 compared to $35.7 million, or $0.61 per diluted share, for the three months ended June 30, 2019.

•

Capital expenditures of $39.9 million primarily to increase production capacity at the Trex Residential facilities in Virginia and Nevada and for general plan cost reduction initiatives and other production improvements.

Net Sales

. 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. However, the timing and terms of the majority of our programs are generally consistent from year to year. In addition, the operating results for Trex Commercial are driven by the timing of individual projects, which may vary each quarterly 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.

Product Warranty.

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. We also warrant our Trex Commercial products for periods ranging from 1 year to 3 years.

We continue to receive and settle claims for decking products manufactured at our Nevada facility prior to 2007 that exhibit surface flaking and maintain a warranty reserve to provide for the settlement of these claims. We monitor surface flaking claims activity each quarter for indications that our estimates require revision. Typically, a majority of surface flaking claims received in a fiscal year are received during the summer outdoor season, which spans the second and third fiscal quarters. It has been our practice to utilize actuarial techniques 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. Our actuarial analysis is based on currently known facts and a number of assumptions. 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 our financial condition, results of operations or cash flows. The number of incoming claims received in the six months ended June 30, 2020 was higher than the number of claims received in the six months ended June 30, 2019 and exceeded our expectations for the current year. Average settlement cost per claim experienced in the six months ended June 30, 2020 was considerably higher than the average settlement cost per claim experienced in the six months ended June 30, 2019, due to an increase in larger claims settled and changes in the mix of settlement methods that occurred in the second half of 2019, but was consistent with our expectations for the current year, and lower than that experienced for the full year ended December 31, 2019. We believe that our reserve at June 30, 2020 is sufficient to cover future surface flaking obligations.

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


	Six Months Ended June 30,
	2020			2019
Claims open, beginning of period		1,724			2,021
Claims received (1)		782			700
Claims resolved (2)		(572	)		(716	)

Claims open, end of period		1,934			2,005

Average cost per claim (3)	$	3,263		$	2,992

(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.

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.

RESULTS OF OPERATIONS

Below is our discussion and analysis of our operating results and material changes in our operating results for the three months ended June 30, 2020 (2020 quarter) compared to the three months ended June 30, 2019 (2019 quarter), and for the six months ended June 30, 2020 (2020

six-month

period) compared to the six months ended June 30, 2019 (2019

six-month

period).

Three Months Ended June 30, 2020 Compared To The Three Months Ended June 30, 2019

Net Sales


	Three Months Ended June 30,				$ Change			% Change
	2020		2019		$ Change			% Change
	(dollars in thousands)
Total net sales	$	220,648	$	206,453	$	14,195			6.9	%
Trex Residential net sales	$	208,877	$	193,468	$	15,409			8.0	%
Trex Commercial net sales	$	11,771	$	12,985	$	(1,214	)		(9.4	)%

Total net sales increased by 6.9% in the 2020 quarter compared to the 2019 quarter reflecting an increase in Trex Residential net sales, offset by a small decrease in Trex Commercial net sales. The increase of 8.0% in Trex Residential net sales was primarily driven by volume growth of our residential decking and railing products, strong demand for our outdoor living products, a strong residential repair and remodeling sector and our initiatives to accelerate conversion from wood. The 9.4% decrease in Trex Commercial net sales during the 2020 quarter was due primarily to fewer large projects compared to the 2019 quarter.

Gross Profit


	Three Months Ended June 30,						$ Change		% Change
	2020			2019			$ Change		% Change
	(dollars in thousands)
Cost of sales	$	128,243		$	123,009		$	5,234		4.3	%
% of total net sales		58.1	%		59.6	%
Gross profit	$	92,405		$	83,444		$	8,961		10.7	%
Gross margin		41.9	%		40.4	%

Gross profit as a percentage of net sales, gross margin, was 41.9% in the 2020 quarter compared to 40.4% in the 2019 quarter and reflects the increase in gross margin for Trex Residential and Trex Commercial to 42.5% and 30.7%, respectively, in the 2020 quarter compared to 41.7% and 21.4%, respectively, in the 2019 quarter. The increase in Trex Residential gross margin in the 2020 quarter compared to the 2019 quarter was primarily due to the

non-recurrence

of Enhance startup costs related to reduced throughput, equipment failures and other inefficiencies at Trex Residential manufacturing facilities in 2019. Also, a number of manufacturing lines were retrofitted to allow production of the reduced weight Enhance profile. We expect to be essentially at the original design target for Enhance by the end of the third quarter of 2020. The increase in Trex Residential gross margin was offset by startup costs associated with the expansion of capacity at our Nevada facility. The increase in gross margin at Trex Commercial was primarily due to

non-recurrence

of legacy low margin contracts coupled with a mix of higher margin contracts in the 2020 quarter, and initiatives aimed at improving project estimating, project management, and manufacturing cost savings initiatives.

Selling, General and Administrative Expenses


	Three Months Ended June 30,						$ Change			% Change
	2020			2019			$ Change			% Change
	(dollars in thousands)
Selling, general and administrative expenses	$	29,009		$	35,705		$	(6,696	)		(18.8	)%
% of total net sales		13.2	%		17.3	%

The $6.7 million decrease in selling, general and administrative expenses in the 2020 quarter compared to the 2019 quarter resulted primarily from a decrease of $4.9 million in branding and advertising spend and a $2.0 million decrease in personnel related expenses. The decrease in personnel related expenses included a decrease in executive severance benefits compared to 2019, a decrease in meals and entertainment expenses and a reduction in medical claims, offset primarily by an increase in incentive compensation.

Provision for Income Taxes


	Three Months Ended June 30,						$ Change		% Change
	2020			2019			$ Change		% Change
	(dollars in thousands)
Provision for income taxes	$	16,249		$	12,030		$	4,219		35.1	%
Effective tax rate		25.6	%		25.2	%

The effective tax rate for the 2020 quarter of 25.6% was relatively unchanged compared to the effective tax rate of 25.2% for the 2019 quarter.

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

(in thousands)

Reconciliation of net income (GAAP) to EBITDA

(non-GAAP):


	Three Months Ended June 30, 2020
	Trex Residential			Trex Commercial		Total
Net income	$	45,912		$	1,306	$	47,218
Interest income, net		(71	)		—		(71	)
Income tax expense		15,789			460		16,249
Depreciation and amortization		3,865			198		4,063

EBITDA	$	65,495		$	1,964	$	67,459

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.


	Three Months Ended June 30, 2019
	Trex Residential		Trex Commercial			Total
Net income	$	35,223	$	487		$	35,710
Interest expense (income), net		6		(7	)		(1	)
Income tax expense		11,866		164			12,030
Depreciation and amortization		3,258		141			3,399

EBITDA	$	50,353	$	785		$	51,138


	Three Months Ended June 30,				$ Change		% Change
	2020		2019		$ Change		% Change
	(dollars in thousands)
Total EBITDA	$	67,459	$	51,138	$	16,321		31.9	%
Trex Residential EBITDA	$	65,495	$	50,353	$	15,142		30.1	%
Trex Commercial EBITDA	$	1,964	$	785	$	1,179		150.2	%

Total EBITDA increased 31.9% to $67.5 million for the 2020 quarter compared to $51.1 million for the 2019 quarter. The increase was primarily driven by a 30.1% increase in Trex Residential EBITDA due to net sales and gross margin and by an increase in Trex Commercial EBITDA primarily related to an increase in gross margin.

Six Months Ended June 30, 2020 Compared To The Six Months Ended June 30, 2019

Net Sales


	Six Months Ended June 30,				$ Change			% Change
	2020		2019		$ Change			% Change
	(dollars in thousands)
Total net sales	$	421,043	$	386,024	$	35,019			9.1	%
Trex Residential net sales	$	395,751	$	358,947	$	36,804			10.3	%
Trex Commercial net sales	$	25,292	$	27,077	$	(1,785	)		(6.6	)%

The 9.1% increase in total net sales in the 2020

six-month

period compared to the 2019

six-month

period was due primarily to volume growth at Trex Residential for both our legacy and new decking and residential railing products. The increase of 10.3% in Trex Residential net sales during the 2020

six-month

period was primarily driven by volume growth, strong demand for our outdoor living products, a strong residential repair and remodeling sector and our initiatives to accelerate conversion from wood. The 6.6% decrease in Trex Commercial net sales during the 2020

six-month

period was due primarily to fewer large projects compared to the 2019

six-month

period.

Gross Profit


	Six Months Ended June 30,						$ Change		% Change
	2020			2019			$ Change		% Change
	(dollars in thousands)
Cost of sales	$	238,941		$	233,214		$	5,727		2.5	%
% of total net sales		56.8	%		60.4	%
Gross profit	$	182,102		$	152,810		$	29,292		19.2	%
Gross margin		43.3	%		39.6	%

Gross profit as a percentage of net sales, gross margin, was 43.3% in the 2020

six-month

period compared to 39.6% in the 2019

six-month

period. Gross margin for Trex Residential and Trex Commercial products in the 2020

six-month

period were 44.0% and 32.3%, respectively, compared to 41.0% and 21.0%, respectively, in the 2019

six-month

period. The increase in Trex Residential gross margin in the 2020

six-month

period compared to the 2019

six-month

period was primarily due to

non-recurrence

Selling, General and Administrative Expenses


	Six Months Ended June 30,						$ Change			% Change
	2020			2019			$ Change			% Change
	(dollars in thousands)
Selling, general and administrative expenses	$	63,571		$	65,872		$	(2,301	)		(3.5	)%
% of total net sales		15.1	%		17.1	%

The $2.3 million decrease in selling, general and administrative expenses in the 2020

six-month

period compared to the 2019

six-month

period resulted primarily from a decrease of $3.8 million in branding and advertising spend and a $1.4 million decrease in research and development expenses. The decreases were offset by a $1.3 million increase in personnel related expenses and an increase of $1.6 million in other operating expenses.

Provision for Income Taxes


	Six Months Ended June 30,						$ Change		% Change
	2020			2019			$ Change		% Change
	(dollars in thousands)
Provision for income taxes	$	29,504		$	19,730		$	9,774		49.5	%
Effective tax rate		24.8	%		22.7	%

The effective tax rate for the 2020

six-month

period increased by 2.1% compared to the effective tax rate for the 2019

six-month

period 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.

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

(in thousands)

Reconciliation of net income (GAAP) to EBITDA

(non-GAAP):


	Six Months Ended June 30, 2020
	Trex Residential			Trex Commercial		Total
Net income	$	86,932		$	2,688	$	89,620
Interest income, net		(593	)		—		(593	)
Income tax expense		28,577			927		29,504
Depreciation and amortization		7,529			386		7,915

EBITDA	$	122,445		$	4,001	$	126,446


	Six Months Ended June 30, 2019
	Trex Residential			Trex Commercial			Total
Net income	$	66,478		$	787		$	67,265
Interest income, net		(50	)		(7	)		(57	)
Income tax expense		19,466			264			19,730
Depreciation and amortization		6,525			268			6,793

EBITDA	$	92,419		$	1,312		$	93,731


	Six Months Ended June 30,				$ Change		% Change
	2020		2019		$ Change		% Change
	(dollars in thousands)
Total EBITDA	$	126,446	$	93,731	$	32,715		34.9	%
Trex Residential EBITDA	$	122,445	$	92,419	$	30,026		32.5	%
Trex Commercial EBITDA	$	4,001	$	1,312	$	2,689		205.0	%

Total EBITDA increased 34.9% to $126.4 million for the 2020

six-month

period compared to $93.7 million for the 2019

six-month

period. The increase was primarily driven by a 32.5% increase in Trex Residential EBITDA due to net sales and gross margin and by an increase in Trex Commercial EBITDA primarily related to an increase in gross margin.

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. At June 30, 2020 we had $12.2 million of cash and cash equivalents.

ources and Uses of Cash.

The following table summarizes our cash flows from operating, investing and financing activities (in thousands):


	Six Months Ended June 30,
	2020			2019
Net cash (used in) provided by operating activities	$	(32,332	)	$	43,058
Net cash used in investing activities		(60,467	)		(19,061	)
Net cash used in financing activities		(43,797	)		(23,612	)

Net (decrease) increase in cash and cash equivalents	$	(136,596	)	$	385

Operating Activities

Cash used in operations was $32.3 million during the 2020

six-month

period compared to cash provided by operations of $43.1 million during the 2019

six-month

period. The use of cash flows in operations was primarily due to higher working capital investment in accounts receivable as a result of the timing of sales within the period and related payment discounts offered to our Trex Residential decking and railing customers. The majority of the accounts receivable balance at June 30, 2020, will be collected in the third quarter. The decrease was primarily by offset increased net income, increase in accounts payable and the timing of payment for Federal income taxes.

Investing Activities

Capital expenditures in the 2020

six-month

period were $62.6 million, consisting primarily of $52.6 million for capacity expansion at our Virginia and Nevada facilities and $8.8 million for general plant cost reduction initiatives and other production improvements.

Financing Activities

Net cash used in financing activities was $43.8 million in the 2020

six-month

period primarily for repurchases of our common stock of $44.1 million.

Amendment of Restated Certificate of Incorporation.

At the annual meeting of stockholders of the Company held on April 29, 2020, the Company’s stockholders approved an amendment of the Company’s Restated Certificate of Incorporation (Amendment), effective as of April 29, 2020. The Company’s Board of Directors unanimously approved the Amendment on February 19, 2020, subject to stockholder approval. The Amendment increases the number of shares of common stock, par value $0.01 per share, that the Company is authorized to issue from 120 million shares to 180 million shares. The Amendment was filed with the Delaware Secretary of State on April 29, 2020.

Stock Repurchase Programs.

On February 16, 2018, the Board of Directors adopted a stock repurchase program of up to 5.8 million shares of the Company’s outstanding common stock (Stock Repurchase Program). As of the June 30, 2020, the Company has repurchased 1.4 million shares of the Company’s outstanding common stock under the Stock Repurchase Program.

Due to the volatility and uncertainty in the stock market associated with the

COVID-19

pandemic, we suspended repurchases of our common stock under the Stock Repurchase Program on March 12, 2020. As of the date of this report, the Stock Repurchase Program remains in effect with repurchases suspended. However, we may determine to resume repurchases at any time.

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 will be in the form of a stock dividend to be distributed on September 14, 2020, to stockholders of record at the close of business on August 19, 2020. The condensed consolidated financial statements presented in this Form

10-Q

appropriately do not reflect the effects of the stock split.

Indebtedness.

Our Fourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) provides us with revolving loan capacity in a collective maximum principal amount of $250 million from January 1 through June 30 of each year, and a maximum principal amount of $200 million from July 1 through December 31 of each year throughout the term, which ends November 5, 2024. At June 30, 2020, we had no outstanding indebtedness under the revolving credit facilities and borrowing capacity under the facilities of $350 million, and $300 million from July 1, 2020 through December 31, 2020.

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. The purpose of the additional $100 million line of credit is primarily to reduce risk associated with the

COVID-19

Compliance with Debt Covenants.

We believe that cash on hand, cash from operations and borrowings expected to be available under our revolving credit facilities, as amended, 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.

In addition, we believe our financial resources will allow us to manage the impact of the

COVID-19

pandemic on the Company’s business operations for the foreseeable future. However, as the impact of

COVID-19

evolves, we will continue to evaluate our financial position and liquidity needs in light of future developments.

Capital Requirements.

In June 2019, we announced a new capital expenditure program to increase production capacity at our Trex Residential facilities in Virginia and Nevada. The new multi-year capital expenditure program is projected at approximately $200 million through 2021, and involves the construction of a new decking facility at the existing Virginia site and the installation of additional production lines at the Nevada site. The investment will allow us to increase production output for future projected growth related to our strategy of converting wood demand to Trex Residential wood-alternative composite decking. When completed these investments will increase our Trex Residential production capacity by approximately 70 percent. Our capital expenditure guidance for 2020 is $150 million to $170 million. In addition to the above, our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, upgrading equipment, 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.

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. We cannot definitively determine the level of inventory in the distribution channels at any time. We are not aware of any significant increases in the levels of inventory in the distribution channels at June 30, 2020 compared to inventory levels at June 30, 2019.

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 significantly each quarterly period.

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, 2019. There were no material changes to the Company’s market risk exposure during the six months ended June 30, 2020.

Item 4.

Controls and Procedures

The Company’s management, with the participation of its President and Chief Executive Officer, who is the Company’s principal executive officer, and its Vice President and Chief Financial Officer, who is the Company’s principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2020. Based on this evaluation, the President and Chief Executive Officer and the Vice President and 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

six-month

period ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

The Company’s business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary from recent results or from anticipated future results. Other than the supplemental risk factor set forth below, there have been no material changes to the risk factors disclosed in Part I—Item 1A, Risk Factors of our Form

10-K

for the year ended December 31, 2019.


Risk				Discussion
Description: Our business, results of operations and financial condition may be disrupted and adversely affected by global public health pandemics, including the strain of coronavirus known as COVID-19. Impact: If our employees or the employees of our suppliers or transportation providers are unable to work because of illness related to the COVID-19 pandemic, or if we or our suppliers or transportation providers are forced to temporarily cease operations, either on a voluntary or mandatory basis, then we may have a period of reduced operations and be unable to supply our customers in a timely manner, which could have a material negative impact on our business. If the COVID-19 outbreak disrupts the operations of our distributors and retail outlets and negatively impacts economies in the United States, Canada and the rest of the world, our business, results of operations and financial condition may be adversely affected.				In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. It spread to other countries, including the United States, and efforts to contain COVID-19 have intensified. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Our business, results of operations and financial condition may be adversely affected if COVID-19 interferes with the ability of our employees, suppliers and other business partners to perform their respective responsibilities and obligations relative to the conduct of our business. We continue to monitor the outbreak of COVID-19 and evaluate its impact on our business, including new information as it emerges concerning its severity and the continuation and possible escalation of new cases, and any actions to prevent, contain or treat it, among others. The extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted.

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 June 30, 2020 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
April 1, 2020 – April 30, 2020		12,393	$	96.66		—		4,398,611
May 1, 2020 – May 31, 2020		—		—		—		4,398,611
June 1, 2020 – June 30, 2020		—		—		—		4,398,611

Quarterly period ended June 30, 2020		12,393				—

(1)

Includes shares withheld by, or delivered to, the Company pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s 2014 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.

(2)

On February 16, 2018, the Company’s Board of Directors authorized a common stock repurchase program of up to 5.8 million shares of the Company’s outstanding common stock (Stock Repurchase Program). The Stock Repurchase Program was publicly announced on February 21, 2018. The Company did not purchase any shares under the Stock Repurchase Program during the three months ended June 30, 2020.

Due to the volatility and uncertainty in the stock market associated with the

COVID-19

Item 5. Other Information

Stock Split

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

two-for-one

10-Q

appropriately do not reflect the effects of the stock split.

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.

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: August 3, 2020	By:	/s/ *Dennis C. Schemm*
		Dennis C. Schemm
		Vice President and Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

EXHIBIT INDEX


		Incorporated by reference
Exhibit No.	Description	Form		Exhibit		Filing Date		File No.

3.1	Restated Certificate of Incorporation of Trex Company, Inc.		S-1/A		3.1		March 24, 1999		333-63287

3.2	Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated April 30, 2014.		10-Q		3.2		May 5, 2014		001-14649

3.3	Second Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated May 2, 2018.		10-Q		3.3		May 7, 2018		001-14649

3.4	Third Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated May 1, 2019.		8-K		3.1		May 1, 2019		001-14649

3.5	Fourth Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated April 29, 2020.		10-Q		3.5		May 4, 2020		001-14649

3.6	Amended and Restated By-Laws of Trex Company, Inc.		8-K		3.2		May 1, 2019		001-14649

4.1	First Amendment to the Credit Agreement by and among Trex Company, Inc. 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; Truist Bank; and Regions Bank, arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner dated May 26, 2020.		8-K		4.1		May 28, 2020		001-14649

4.2	Fourth Amended and Restated Credit Agreement between the Company, 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, Truist Bank; and Regions Bank, arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner, dated May 26, 2020.		8-K		4.2		May 28, 2020		001-14649

4.3	Note dated November 5, 2019 payable by the Company to Bank of America, N.A.		8-K		4.2		November 6, 2019		001-14649

4.4	Note dated November 5, 2019 payable by the Company to Wells Fargo Bank, N.A.		8-K		4.3		November 6, 2019		001-14649

4.5	Note dated November 5, 2019 payable by the Company to Branch Banking and Trust Company (Truist Bank)		8-K		4.5		November 6, 2019		001-14649

Exhibit

No.

Description

Form

Exhibit

Filing

Date

File

No.

4.6

Note dated May 26, 2020 payable by the Company to Regions Bank

8-K

4.6

May 28, 2020

Fourth Amended and Restated Security and Pledge Agreement dated as of November 5, 2019 between the Company, as debtor, Trex Commercial Products, Inc., as additional obligor; and Bank of America, N.A. as Administrative Agent (including Notices of Grant of Security Interest in Copyrights and Trademarks).

4.7

8-K

4.6

November 6, 2019

Amended and Restated 1999 Incentive Plan for Outside Directors.

10.1***

8-K

10.1

February 25, 2020

Change-in-Control Severance Agreement, dated as of February 21, 2020, by and between Trex Company, Inc. and Bryan H. Fairbanks.

10.2***

8-K

10.2

February 25, 2020

Severance Agreement, dated as of February 21, 2020, by and between Trex Company, Inc. and Bryan H. Fairbanks.

10.3***

8-K

10.3

February 25, 2020