Results

Trex Company Inc.

11/08/2021 | Press release | Distributed by Public on 11/08/2021 16:14

Quarterly Report (Form 10-Q)

10-Q
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:
001-14649
Trex Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware
54-1910453
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
160 Exeter Drive
Winchester, Virginia
22603-8605
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:
(540) 542-6300
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange
on which registered
Common stock
TREX
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule
12b-2
of the Exchange Act.:
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer
☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule
12b-2
of the Exchange Act): Yes
☐
No ☒
The number of shares of the registrant's common stock, par value $0.01 per share, outstanding at October 2
5
, 2021 was 115,117,121 shares.
Table of Contents
TREX COMPANY, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
2
Item 1.
Condensed Consolidated Financial Statements
2
Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months ended September 30, 2021 and September 30, 2020 (unaudited)
2
Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (unaudited)
3
Condensed Consolidated Statements of Changes in Stockholders' Equity for the Nine Months ended September 30, 2021 and September 30, 2020 (unaudited)
4
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2021 and September 30, 2020 (unaudited)
5
Notes to Condensed Consolidated Financial Statements (unaudited)
6
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26
Item 4.
Controls and Procedures
26
PART II OTHER INFORMATION
27
Item 1.
Legal Proceedings
27
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
Item 5.
Other Information
27
Item 6.
Exhibits
27
1
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements
TREX COMPANY, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except share and per share data)
Three Months Ended

September 30,
Nine Months Ended

September 30,
2021
2020
2021
2020
Net sales
$ 335,872 $ 231,502 $ 892,991 $ 652,545
Cost of sales
207,622 146,538 550,668 385,479
Gross profit
128,250 84,964 342,323 267,066
Selling, general and administrative expenses
30,154 28,027 97,383 91,598
Income from operations
98,096 56,937 244,940 175,468
Interest income, net
(10 ) (208 ) - (801 )
Income before income taxes
98,106 57,145 244,940 176,269
Provision for income taxes
24,311 14,435 61,235 43,938
Net income
$ 73,795 $ 42,710 $ 183,705 $ 132,331
Basic earnings per common share
$ 0.64 $ 0.37 $ 1.59 $ 1.14
Basic weighted average common shares outstanding
115,344,015 115,773,030 115,455,543 115,921,463
Diluted earnings per common share
$ 0.64 $ 0.37 $ 1.59 $ 1.14
Diluted weighted average common shares outstanding
115,625,760 116,134,623 115,767,426 116,280,807
Comprehensive income
$ 73,795 $ 42,710 $ 183,705 $ 132,331
See Notes to Condensed Consolidated Financial Statements (Unaudited).
2
Table of Contents
TREX COMPANY, INC.
Condensed Consolidated Balance Sheets
(In thousands)
September 30,

2021
December 31,
2020
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
$ 54,042 $ 121,701
Accounts receivable, net
265,560 106,748
Inventories
73,636 68,238
Prepaid expenses and other assets
19,782 25,310
Total current assets
413,020 321,997
Property, plant and equipment, net
424,974 336,537
Goodwill and other intangible assets, net
73,351 73,665
Operating lease assets
36,137 34,382
Other assets
5,969 3,911
Total assets
$ 953,451 $ 770,492
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
$ 45,415 $ 38,622
Accrued expenses and other liabilities
105,193 62,331
Accrued warranty
5,400 5,400
Line of credit
- -
Total current liabilities
156,008 106,353
Operating lease liabilities
29,716 28,579
Non-current
accrued warranty
23,962 24,073
Deferred income taxes
22,956 22,956
Total liabilities
232,642 181,961
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; 140,703,442 and 140,577,005 shares issued and 115,349,226 and 115,799,503 shares outstanding at September 30, 2021 and December 31, 2020, respectively
1,407 1,406
Additional
paid-in
capital
126,956 126,087
Retained earnings
921,016 737,311
Treasury stock, at cost, 25,354,216 and 24,777,502 shares at September 30, 2021 and December 31, 2020, respectively
(328,570 ) (276,273 )
Total stockholders' equity
720,809 588,531
Total liabilities and stockholders' equity
$ 953,451 $ 770,492
See Notes to Condensed Consolidated Financial Statements (Unaudited).
3
Table of Contents
TREX COMPANY, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
(In thousands, except share data)
Common Stock
Additional
Paid-In

Capital
Retained
Earnings
Treasury Stock
Total
Shares
Amount
Shares
Amount
Balance, December 31, 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 awards
(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, 2021
115,361,396 $ 1,406 $ 124,678 $ 785,855 25,281,777 $ (321,796 ) $ 590,143
Net income
- - - 61,366 - - 61,366
Employee stock plans
20,341 - 400 - - - 400
Shares withheld for taxes on awards
(13,491 ) - (1,446 ) - - - (1,446 )
Stock-based compensation
17,210 1 2,132 - - - 2,133
Repurchases of common stock
(40,751 ) - - - 40,751 (3,820 ) (3,820 )
Balance, June 30, 2021
115,344,705 $ 1,407 $ 125,764 $ 847,221 25,322,528 $ (325,616 ) $ 648,776
Net income
- - - 73,795 - - 73,795
Employee stock plans
36,590 - 464 - - - 464
Shares withheld for taxes on awards
(10,946 ) - (1,159 ) - - - (1,159 )
Stock-based compensation
10,565 - 1,887 - - - 1,887
Repurchases of common stock
(31,688 ) - - - 31,688 (2,954 ) (2,954 )
Balance, September 30, 2021
115,349,226 $ 1,407 $ 126,956 $ 921,016 25,354,216 $ (328,570 ) $ 720,809
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 income
- - - 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
Net income
- - - 47,218 - - 47,218
Employee stock plans
16,412 - 391 - - - 391
Shares withheld for taxes on awards
(24,786 ) - (1,199 ) - - - (1,199 )
Stock-based compensation
58,060 1 1,527 - - - 1,528
Balance, June 30, 2020
115,756,006 $ 1,405 $ 123,231 $ 651,300 24,777,502 $ (276,275 ) $ 499,661
Net income
- - - 42,710 - - 42,710
Employee stock plans
6,559 - 390 - - - 390
Shares withheld for taxes on awards
(4,486 ) - (313 ) - - - (313 )
Stock-based compensation
27,594 1 1,615 - - - 1,616
Balance, September 30, 2020
115,785,673 $ 1,406 $ 124,923 $ 694,010 24,777,502 $ (276,275 ) $ 544,064
See Notes to Condensed Consolidated Financial Statements (Unaudited).
4
Table of Contents
TREX COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2021
2020
Operating Activities
Net income
$ 183,705 $ 132,331
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
25,604 12,450
Stock-based compensation
6,195 5,919
Gain on disposal of property, plant and equipment
(1,057 ) (138 )
Other
non-cash
adjustments
(40 ) (28 )
Changes in operating assets and liabilities:
Accounts receivable
(158,813 ) (174,954 )
Inventories
(5,399 ) 4,525
Prepaid expenses and other assets
(4,311 ) (694 )
Accounts payable
17,219 14,447
Accrued expenses and other liabilities
28,472 13,286
Income taxes receivable/payable
21,484 5,370
Net cash provided by operating activities
113,059 12,514
Investing Activities
Expenditures for property, plant and equipment
(124,451 ) (99,696 )
Proceeds from sales of property, plant and equipment
1,355 2,150
Net cash used in investing activities
(123,096 ) (97,546 )
Financing Activities
Borrowings under line of credit
416,000 235,000
Principal payments under line of credit
(416,000 ) (235,000 )
Repurchases of common stock
(58,945 ) (44,437 )
Financing costs
- (361 )
Proceeds from employee stock purchase and option plans
1,323 1,078
Net cash used in financing activities
(57,622 ) (43,720 )
Net decrease in cash and cash equivalents
(67,659 ) (128,752 )
Cash and cash equivalents, beginning of period
121,701 148,833
Cash and cash equivalents, end of period
$ 54,042 $ 20,081
Supplemental Disclosure:
Cash paid for interest, net of amounts capitalized
$ - $ 155
Cash paid for income taxes, net
$ 39,750 $ 38,567
See Notes to Condensed Consolidated Financial Statements (Unaudited).
5
Table of Contents
TREX COMPANY, INC.
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and September 30, 2020
(Unaudited)
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 nearly 30 years of product experience. A majority of its products are manufactured in a proprietary process that combines reclaimed wood fibers and recycled polyethylene. Also, the Company is a leading national provider of custom-engineered railing and 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 and nine months ended September 30, 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 due to the
COVID-19
pandemic. The pandemic remains an evolving situation and while macro-economic recovery seems likely, the duration and extent of the recovery remains uncertain. The Company is managing its business to ensure the continuity of its operations and the safety of its employees. Trex Residential has not experienced any decline in demand for its outdoor living products. Trex Commercial has not experienced any material reduction to its net sales as it has continued to execute on
pre-pandemic
projects. However, measures taken to contain the spread of the virus have influenced new project commitments. The Company continues to assess if the impact on project commitments will adversely affect Trex Commercial's financial condition and results of operations in future periods.
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.
6
Table of Contents
4.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In March 2020, the FASB issued ASU
No. 2020-04,
"
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
". The guidance provides temporary optional expedients and exceptions related to contract modifications and hedge accounting to ease entities' financial reporting burdens as the market transitions from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. The new guidance allows entities to elect not to apply certain modification accounting requirements, if certain criteria are met, to contracts affected by what the guidance calls reference rate reform. An entity that makes this election would consider changes in reference rates and other contract modifications related to reference rate reform to be events that do not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The ASU notes that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition. The guidance is effective upon issuance and generally can be applied as of March 12, 2020 through December 31, 2022. The Company does not expect adoption of the guidance to have a material effect on its consolidated financial statements.
5.
INVENTORIES
Inventories valued at LIFO
(last-in,
first-out),
consist of the following (in thousands):
September 30,
2021
December 31,
2020
Finished goods
$ 43,212 $ 39,048
Raw materials
43,882 44,475
Total FIFO
(first-in,
first-out)
inventories
87,094 83,523
Reserve to adjust inventories to LIFO value
(16,821 ) (16,821 )
Total LIFO inventories
$ 70,273 $ 66,702
The Company utilizes the LIFO method of accounting to its Trex Residential wood-alternative decking and residential railing products, which generally provides for the matching of current costs with current revenues. However, under the LIFO method, reductions in annual inventory balances cause a portion of the Company's cost of sales to be based on historical costs rather than current year costs (LIFO liquidation). Reductions in interim inventory balances expected to be replenished by
year-end
do not result in a LIFO liquidation. Accordingly, interim LIFO calculations are based, in part, on management's estimates of expected
year-end
inventory levels and costs, which may differ from actual results. Since inventory levels and costs are subject to factors beyond management's control, interim results are subject to the final
year-end
LIFO inventory valuation. As of September 30, 2021, there were no LIFO inventory liquidations or related impact on cost of sales in the nine months ended September 30, 2021.
Inventories valued at lower of cost (FIFO method) and net realizable value were $3.4 million at September 30, 2021 and $1.5 million at December 31, 2020, consisting primarily of raw materials. The Company utilizes the FIFO method of accounting to its Trex Commercial products.
6.
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following (in thousands):
September 30,

2021
December 31,
2020
Prepaid expenses
$ 9,195 $ 7,285
Revenues in excess of billings
10,094 8,879
Income tax receivable
- 7,823
Other
493 1,323
Total prepaid expenses and other assets
$ 19,782 $ 25,310
7.
GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill by reportable segment at September 30, 2021 and December 31, 2020 was $14.2 million for Trex Residential and $54.3 million for Trex Commercial.
The Company's intangible assets consist of domain names. At September 30, 2021 and December 31, 2020, intangible assets were $6.3 million and accumulated amortization was $1.4 million and $1.1 million, respectively. Intangible asse
t
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 nine months ended September 30, 2021 and September 30, 2020 was $0.3 million and $0.3 million, respectively.
7
Table of Contents
8.
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in thousands):
September 30,

2021
December 31,
2020
Sales and marketing
$ 51,596 $ 22,938
Compensation and benefits
21,421 21,156
Income taxes
14,050 389
Operating lease liabilities
7,221 6,708
Manufacturing costs
4,175 3,641
Billings in excess of revenues
1,923 1,244
Customer deposits
577 1,174
Other
4,230 5,081
Total accrued expenses and other liabilities
$ 105,193 $ 62,331
9.
DEBT
The Company's outstanding debt consists of a revolving credit facility. The Company had no outstanding borrowings under its revolving credit facility and remaining available borrowing capacity of $300 million at September 30, 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. 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 September 30, 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.
8
Table of Contents
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 nine months ended September 30, 2021 and September 30, 2020, total operating lease expense was $6.1 million and $6.3 million, respectively. The weighted average remaining lease term at September 30, 2021 and December 31, 2020 was 6 years and 5.6 years, respectively. The weighted average discount rate at September 30, 2021 and December 31, 2020 was 2.49% and 3.47%, respectively.
The following table includes supplemental cash flow information for the nine months ended September 30, 2021 and September 30, 2020 and supplemental balance sheet information at September 30, 2021 and December 31, 2020 related to operating leases (in thousands):
Nine Months Ended

September 30,
Supplemental cash flow information
2021
2020
Cash paid for amounts included in the measurement of operating lease liabilities
$ 6,196 $ 6,506
Operating ROU assets obtained in exchange for lease liabilities
$ 7,047 $ 2,254
Supplemental balance sheet information
September 30,

2021
December 31,
2020
Operating lease ROU assets
$ 36,137 $ 34,382
Operating lease liabilities:
Accrued expenses and other current liabilities
$ 7,221 $ 6,708
Operating lease liabilities
29,716 28,579
Total operating lease liabilities
$ 36,937 $ 35,287
The following table summarizes maturities of operating lease liabilities at September 30, 2021 (in thousands):
Maturities of operating lease liabilities
2021
$ 2,067
2022
7,808
2023
6,833
2024
6,475
2025
4,523
Thereafter
12,044
Total lease payments
39,750
Less imputed interest
(2,813 )
Total operating lease liabilities
$ 36,937
11.
FINANCIAL INSTRUMENTS
The Company considers the recorded value of its financial assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, other current liabilities, and debt to approximate the fair value of the respective assets and liabilities on the Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020.
9
Table of Contents
12.
STOCKHOLDERS' EQUITY
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):
Three Months Ended

September 30,
Nine Months Ended

September 30,
2021
2020
2021
2020
Numerator:
Net income available to common shareholders
$ 73,795 $ 42,710 $ 183,705 $ 132,331
Denominator:
Basic weighted average shares outstanding
115,344,015 115,773,030 115,455,543 115,921,463
Effect of dilutive securities:
Stock appreciation rights and options
171,514 202,113 190,680 187,767
Restricted stock
110,231 159,480 121,203 171,577
Diluted weighted average shares outstanding
115,625,760 116,134,623 115,767,426 116,280,807
Basic earnings per share
$ 0.64 $ 0.37 $ 1.59 $ 1.14
Diluted earnings per share
$ 0.64 $ 0.37 $ 1.59 $ 1.14
Diluted earnings per share is computed using the weighted average number of shares determined for the basic earnings per share computation plus the dilutive effect of common stock equivalents using the treasury stock method. The computation of diluted earnings per share excludes the following potentially dilutive securities because the effect would be anti-dilutive:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021
2020
2021
2020
Stock appreciation rights
14,409 390 12,206 19,415
Restricted stock
1,844 - 8,308 -
Stock Repurchase Program
On February 16, 2018, the Board of Directors adopted a stock repurchase program of up to 11.6 million shares of the Company's outstanding common stock (Stock Repurchase Program). As of September 30, 2021, the Company has repurchased 3.3 million shares of the Company's outstanding common stock under the Stock Repurchase Program.
13.
REVENUE FROM CONTRACTS WITH CUSTOMERS
Trex Residential Products
Trex Residential principally generates revenue from the manufacture and sale of its high-performance,
low-maintenance,
eco-friendly
wood-alternative composite decking and residential railing products and accessories. Substantially all of its revenues are from contracts with customers, which are purchase orders of short-term duration of less than one year. Its customers, in turn, sell primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products. Trex Residential satisfies its performance obligations at a point in time. The shipment of each product is a separate performance obligation as the customer is able to derive benefit from each product shipped and no performance obligation remains after shipment. Upon shipment of the product, the customer obtains control over the distinct product and Trex Residential satisfies its performance obligation. Any performance obligation that remains unsatisfied at the end of a reporting period is part of a contract that has an original expected duration of one year or less. Any variable consideration related to the unsatisfied performance obligation is allocated wholly to the unsatisfied performance obligation, is recognized when the product ships and the performance obligation is satisfied, and is included in "Accrued expenses and other liabilities, Sales and marketing" in Note 8 to the Condensed Consolidated Financial Statements.
Trex Commercial Products
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 $43.5 million as of September 30, 2021. The Company will recognize this revenue as contracts are completed, which is expected to occur within the next 24 months.
10
Table of Contents
For the three months and nine months ended September 30, 2021 and September 30, 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 September 30, 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
$ 319,207 $ - $ 319,207
Products transferred over time and fixed price contracts
- 16,665 16,665
$ 319,207 $ 16,665 $ 335,872
Three Months Ended September 30, 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
$ 218,435 $ - $ 218,435
Products transferred over time and fixed price contracts
- 13,067 13,067
$ 218,435 $ 13,067 $ 231,502
Nine Months Ended September 30, 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
$ 850,909 $ - $ 850,909
Products transferred over time and fixed price contracts
- 42,082 42,082
$ 850,909 $ 42,082 $ 892,991
Nine Months Ended September 30, 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
$ 614,187 $ - $ 614,187
Products transferred over time and fixed price contracts
- 38,358 38,358
$ 614,187 $ 38,358 $ 652,545
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 September 30, 2021, the total number of shares available for future issuance is 11,143,269.
11
Table of Contents
The following table summarizes the Company's stock-based compensation grants for the nine months ended September 30, 2021:
Stock Awards Granted
Weighted-Average

Grant Price

Per Share
Time-based restricted stock units
33,442 $ 101.28
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 nine months ended September 30, 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 nine months ended September 30, 2021 and September 30, 2020 the data and assumptions shown in the following table were used:
Nine Months Ended

September 30, 2021
Nine Months Ended

September 30, 2020
Weighted-average fair value of grants
$ 51.84 $ 17.81
Dividend yield
0 % 0 %
Average risk-free interest rate
0.6 % 1.3 %
Expected term (years)
5 5
Expected volatility
58.7 % 38.3 %
The Company recognizes stock-based compensation expense ratably over the period from the grant date to the earlier of: (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For performance-based restricted stock and performance-based restricted stock units, expense is recognized ratably over the performance and vesting period of each tranche based on management's judgment of the ultimate award that is likely to be paid out based on the achievement of the predetermined performance measures. For the employee stock purchase plan, compensation expense is recognized related to the discount on purchases. Stock-based compensation expense is included in "Selling, general and administrative expenses" in the Condensed Consolidated Statements of Comprehensive Income. The following table summarizes the Company's stock-based compensation expense (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021
2020
2021
2020
Stock appreciation rights
$ 94 $ 99 $ 352 $ 548
Time-based restricted stock and restricted stock units
692 663 2,133 2,590
Performance-based restricted stock and restricted stock units
1,047 774 3,487 2,471
Employee stock purchase plan
54 79 223 310
Total stock-based compensation
$ 1,887 $ 1,615 $ 6,195 $ 5,919
Total unrecognized compensation cost related to unvested awards as of September 30, 2021 was $8.8 million. The cost of these unvested awards is being recognized over the requisite vesting period of each award.
15.
INCOME TAXES
The Company's effective tax rate for the nine months ended September 30, 2021 was 25% and was comparable to the effective tax rate for the nine months ended September 30, 2020 of 24.9%. Income tax expense for the nine months ended September 30, 2021 and September 30, 2020 was $61.2 million and $43.9 million, respectively.
During the nine months ended September 30, 2021 and September 30, 2020, the Company realized $2.1 million and $1.4 million, respectively, of excess tax benefits from stock-based awards and recorded a corresponding benefit to income tax expense.
12
Table of Contents
The Company analyzes its deferred tax assets each reporting period, considering all available positive and negative evidence in determining the expected realization of those deferred tax assets. As of September 30, 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. As of September 30, 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 and nine months ended September 30, 2021 and September 30, 2020 includes data for Trex Residential and Trex Commercial (in thousands):
Segment Data:
Three Months Ended

September 30, 2021
Three Months Ended

September 30, 2020
Trex

Residential
Trex
Commercial
Total
Trex
Residential
Trex
Commercial
Total
Net sales
$ 319,207 $ 16,665 $ 335,872 $ 218,435 $ 13,067 $ 231,502
Net income
$ 72,603 $ 1,192 $ 73,795 $ 42,225 $ 485 $ 42,710
EBITDA
$ 106,135 $ 1,862 $ 107,997 $ 60,619 $ 853 $ 61,472
Depreciation and amortization
$ 9,643 $ 258 $ 9,901 $ 4,326 $ 209 $ 4,535
Income tax expense
$ 23,899 $ 412 $ 24,311 $ 14,276 $ 159 $ 14,435
Capital expenditures
$ 29,554 $ 66 $ 29,620 $ 36,887 $ 197 $ 37,084
Total assets
$ 858,330 $ 95,121 $ 953,451 $ 624,904 $ 93,331 $ 718,235
Reconciliation of Net Income to EBITDA:
Three Months Ended

September 30, 2021
Three Months Ended

September 30, 2020
Trex

Residential
Trex
Commercial
Total
Trex
Residential
Trex
Commercial
Total
Net income
$ 72,603 $ 1,192 $ 73,795 $ 42,225 $ 485 $ 42,710
Interest income, net
(10 ) - (10 ) (208 ) - (208 )
Income tax expense
23,899 412 24,311 14,276 159 14,435
Depreciation and amortization
9,643 258 9,901 4,326 209 4,535
EBITDA
$ 106,135 $ 1,862 $ 107,997 $ 60,619 $ 853 $ 61,472
13
Table of Contents
Segment Data:
Nine Months Ended

September 30, 2021
Nine Months Ended

September 30, 2020
Trex

Residential
Trex
Commercial
Total
Trex
Residential
Trex
Commercial
Total
Net sales
$ 850,909 $ 42,082 $ 892,991 $ 614,187 $ 38,358 $ 652,545
Net income
$ 182,437 $ 1,268 $ 183,705 $ 129,157 $ 3,174 $ 132,331
EBITDA
$ 268,107 $ 2,437 $ 270,544 $ 183,064 $ 4,854 $ 187,918
Depreciation and amortization
$ 24,873 $ 731 $ 25,604 $ 11,855 $ 595 $ 12,450
Income tax expense
$ 60,797 $ 438 $ 61,235 $ 42,853 $ 1,085 $ 43,938
Capital expenditures
$ 122,631 $ 1,820 $ 124,451 $ 98,913 $ 783 $ 99,696
Total assets
$ 858,330 $ 95,121 $ 953,451 $ 624,904 $ 93,331 $ 718,235
Reconciliation of Net Income to EBITDA:
Nine Months Ended

September 30, 2021
Nine Months Ended

September 30, 2020
Trex

Residential
Trex
Commercial
Total
Trex
Residential
Trex
Commercial
Total
Net income
$ 182,437 $ 1,268 $ 183,705 $ 129,157 $ 3,174 $ 132,331
Interest income, net
- - - (801 ) - (801 )
Income tax expense
60,797 438 61,235 42,853 1,085 43,938
Depreciation and amortization
24,873 731 25,604 11,855 595 12,450
EBITDA
$ 268,107 $ 2,437 $ 270,544 $ 183,064 $ 4,854 $ 187,918
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 oneto 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.
14
Table of Contents
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 nine months ended September 30, 2021, was lower than the number of claims received in the nine months ended September 30, 2020 and lower than the Company's expectations for 2021. Average cost per claim experienced in the nine months ended September 30, 2021 was higher than that experienced in the nine months ended September 30, 2020 but was consistent with the Company's expectations for the current year. The Company believes its reserve at September 30, 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 continue to 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 $1.9 million change in the surface flaking warranty reserve.
The following is a reconciliation of the Company's residential product warranty reserve (in thousands):
Nine Months Ended September 30, 2021
Surface
Flaking
Other
Residential
Total
Beginning balance, January 1
$ 21,325 $ 8,148 $ 29,473
Provisions and changes in estimates
- 3,743 3,743
Settlements made during the period
(2,315 ) (1,539 ) (3,854 )
Ending balance, September 30
$ 19,010 $ 10,352 $ 29,362
Nine Months Ended September 30, 2020
Surface
Flaking
Other
Residential
Total
Beginning balance, January 1
$ 19,024 $ 6,470 $ 25,494
Provisions and changes in estimates
6,479 1,932 8,411
Settlements made during the period
(3,078 ) (1,178 ) (4,256 )
Ending balance, September 30
$ 22,425 $ 7,224 $ 29,649
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.
15
Table of Contents
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 temporarily
off-line
while damage to the building's electrical systems was addressed. 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 and is currently working through the claim process with its insurance company. During the three months and nine months ended September 30, 2021, the Company received partial settlements from its insurance company of $3.7 million and $4.7 million, respectively, resulting in gains on insurance proceeds. The gains on insurance proceeds are reported as a reduction to selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income.
19.
SUBSEQUENT EVENT
On October 26, 2021, the Company announced its plan to add a third U.S.-based Trex Residential manufacturing facility in Little Rock, Arkansas. The new campus will sit on nearly 300 acres of land and will include buildings dedicated to decking and railing production, plastic film recycling and processing, reclaimed wood storage, warehousing, and administrative offices to address increased demand for Trex Residential outdoor living products. Construction is slated to begin in early 2022 with the first production output anticipated in 2024. Funded primarily through ongoing cash generation, the Company expects to invest
an estimated
$400 million over five years in the development of the new Arkansas site.
16
Table of Contents
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following management discussion should be read in conjunction with the Trex Company, Inc. (Company, we or our) Annual Report on
Form 10-K
for the year ended December 31, 2020 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, 2020 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; material adverse impacts from global public health pandemics, including the strain of coronavirus known as
COVID-19;
and material adverse impacts related to labor shortages or increases in labor costs.
OVERVIEW
Operations and Products:
Trex Company, Inc. currently operates in two reportable segments: Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). Refer to Note 16,
Segments
, in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1.
Condensed Consolidated Financial Statements
of this Quarterly Report on
Form 10-Q
for additional information. The Company is focused on using renewable resources within 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 and outdoor lighting categories. A majority of the products are
eco-friendly
and leverage recycled and reclaimed materials to the extent possible. Trex Residential decking is made in a proprietary process that combines reclaimed wood fibers and recycled polyethylene film, making Trex 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.
17
Table of Contents
Trex offers the following products through Trex Residential:
Decking and Accessories
Our principal decking products are Trex Transcend
®
, Trex Select
®
and Trex Enhance
®
. In addition, our Trex Transcend decking product can also be used as cladding. Our high-performance,
low-maintenance,
eco-friendly
composite decking products are comprised of a blend of 95 percent reclaimed wood fibers and recycled polyethylene film and feature a protective polymer shell for enhanced protection against fading, staining, mold and scratching.
We also offer accessories to our decking products, including Trex Hideaway
®
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.
Trex Commercial
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.
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 a variety of colors and stock lengths to accommodate project needs.
18
Table of Contents
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 September 30, 2021:
•
Increase in net sales of 45.1%, or $104.4 million, to $335.9 million for the three months ended September 30, 2021 compared to $231.5 million for the three months ended September 30, 2020.
•
Increase in gross profit of 50.9%, or $43.3 million, to $128.3 million for the three months ended September 30, 2021 compared to $85.0 million for the three months ended September 30, 2020.
•
Increase in net income to $73.8 million, or $0.64 per diluted share, for the three months ended September 30, 2021 compared to $42.7 million, or $0.37 per diluted share, for the three months ended September 30, 2020.
•
Increase in EBITDA (earnings before interest, income tax and depreciation and amortization) of 75.7%, or $46.5 million, to $108 million for the three months ended September 30, 2021 compared to $61.5 million for the three months ended September 30, 2020.
•
Capital expenditures of $29.6 million, primarily to increase production capacity at the Trex Residential facilities and for 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. 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.
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.
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. 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.
19
Table of Contents
We continue to receive and settle claims for decking products manufactured at our Trex Residential 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 nine months ended September 30, 2021 was lower than the number of claims received in the nine months ended September 30, 2020 and lower than our expectations for 2021. Average cost per claim experienced in the nine months ended September 30, 2021 was higher than that experienced in the nine months ended September 30, 2020 but was consistent with expectations for the current year.
We believe the reserve at September 30, 2021 is sufficient to cover future surface flaking obligations. Refer to Note 18,
Commitments and Contingencies, Product Warranty
, in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1.
Condensed Consolidated Financial Statements
of this Quarterly Report on
Form 10-Q
for additional information.
We estimate that the annual number of claims received will decline over time and that the average cost per claim will continue to 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 increase in earnings and cash flows in future periods. We estimate that a 10% change in the expected number of remaining claims to be settled with payment or the expected cost to settle claims may result in approximately a $1.9 million change in the surface flaking warranty reserve.
The following table details surface flaking claims activity related to our warranty:
Nine Months Ended September 30,
2021
2020
Claims open, beginning of period
1,799 1,724
Claims received (1)
788 1,263
Claims resolved (2)
(785 ) (1,042 )
Claims open, end of period
1,802 1,945
Average cost per claim (3)
$ 3,492 $ 3,396
(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.
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 increased the level of volatility and uncertainty globally and created macroeconomic disruption. As of the date of this report, we have not experienced any material disruptions to our operations, production, or supply chain due to the
COVID-19
pandemic. The pandemic remains an evolving situation and while macro-economic recovery seems likely, the duration and extent of the recovery remains uncertain. We are managing our business to ensure the continuity of operations and the safety of employees. Trex Residential has not experienced any decline in demand for its outdoor living products. Trex Commercial has not experienced any material reduction to its net sales as it has continued to execute on
pre-pandemic
projects. However, measures taken to contain the spread of the virus have influenced new project commitments. We continue to assess if the impact on project commitments will adversely affect Trex Commercial's financial condition and results of operations in future periods.
Fire at Virginia Facility
On March 13, 2021, an electrical fire occurred at one of our manufacturing buildings in its Virginia complex. No injuries occurred from the event. The building was temporarily
off-line
while damage to the building's electrical systems was addressed. We have insurance coverage for repairs, incremental direct costs to serve its customers, and losses in operating income from the loss in net sales and are currently working through the claim process with our insurance company. During the three months and nine months ended September 30, 2021, we received partial settlements from our insurance company of $3.7 million and $4.7 million, respectively, resulting in gains on insurance proceeds. The gains on insurance proceeds are reported as a reduction to selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income.
20
Table of Contents
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 September 30, 2021 (2021 quarter) compared to the three months ended September 30, 2020 (2020 quarter), and for the nine months ended September 30, 2021 (2021 nine-month period) compared to the nine months ended September 30, 2020 (2020 nine-month period).
Three Months Ended September 30, 2021 Compared To The Three Months Ended September 30, 2020
Net Sales
Three Months Ended September 30,
$ Change
% Change
2021
2020
(dollars in thousands)
Total net sales
$ 335,872 $ 231,502 $ 104,370 45.1 %
Trex Residential net sales
$ 319,207 $ 218,435 $ 100,772 46.1 %
Trex Commercial net sales
$ 16,665 $ 13,067 $ 3,598 27.5 %
Total net sales increased by 45.1% in the 2021 quarter compared to the 2020 quarter reflecting a 46.1% increase in Trex Residential net sales and a 27.5% increase in Trex Commercial net sales. The increase in net sales was substantially all due to volume growth across all Trex Residential product lines. However, labor shortages impacted the extent of the volume growth. The increase also reflects a price increase on certain product lines at Trex Residential that was realized in early September 2021 to address inflationary pressures in key raw materials and transportation. Volume growth in the 2021 quarter was a result of sustained broad-based demand, driven by continued strong, secular trends across Trex Residential's outdoor living products, continued market share gains from wood, and increased product availability as additional capacity came online. Trex Commercial contributed $16.7 million to consolidated net sales.
Gross Profit
Three Months Ended September 30,
$ Change
% Change
2021
2020
(dollars in thousands)
Cost of sales
$ 207,622 $ 146,538 $ 61,084 41.7 %
% of total net sales
61.8 % 63.3 %
Gross profit
$ 128,250 $ 84,964 $ 43,286 50.9 %
Gross margin
38.2 % 36.7 %
Gross profit as a percentage of net sales, gross margin, was 38.2% in the 2021 quarter compared to 36.7% in the 2020 quarter. Gross margin for Trex Residential and Trex Commercial was 38.9% and 24.0%, respectively, in the 2021 quarter compared to 37.4% and 24.4%, respectively, in the 2020 quarter. Excluding a $6.5 million provision during the 2020 quarter to the Trex Residential legacy warranty reserve, gross margin for the 2020 quarter was 39.5% compared to 38.2% in the 2021 quarter. Excluding the provision in the 2020 quarter, gross margin decreased as a result of inflationary pressures on key raw materials, higher transportation costs and labor shortages, partially offset by the price increase realized in September and increased production efficiencies.
Selling, General and Administrative Expenses
Three Months Ended September 30,
$ Change
% Change
2021
2020
(dollars in thousands)
Selling, general and administrative expenses
$ 30,154 $ 28,027 $ 2,127 7.6 %
% of total net sales
9.0 % 12.1 %
21
Table of Contents
Selling, general and administrative expenses in the 2021 quarter increased compared to the 2020 quarter primarily due to a $4.7 million increase in personnel related expenses and incentive compensation and a $1.1 million increase in research and development expenses, offset by a gain on insurance proceeds of $3.7 million related to the fire at the Virginia facility.
Provision for Income Taxes
Three Months Ended September 30,
$ Change
% Change
2021
2020
(dollars in thousands)
Provision for income taxes
$ 24,311 $ 14,435 $ 9,876 68.4 %
Effective tax rate
24.8 % 25.3 %
The effective tax rate for the 2021 quarter of 24.8% was relatively unchanged compared to the effective tax rate of 25.3% for the 2020 quarter.
Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
1
(in thousands)
Reconciliation of net income (GAAP) to EBITDA
(non-GAAP):
Three Months Ended September 30, 2021
Trex

Residential
Trex
Commercial
Total
Net income
$ 72,603 $ 1,192 $ 73,795
Interest income, net
(10 ) - (10 )
Income tax expense
23,899 412 24,311
Depreciation and amortization
9,643 258 9,901
EBITDA
$ 106,135 $ 1,862 $ 107,997
Three Months Ended September 30, 2020
Trex

Residential
Trex
Commercial
Total
Net income
$ 42,225 $ 485 $ 42,710
Interest income, net
(208 ) - (208 )
Income tax expense
14,276 159 14,435
Depreciation and amortization
4,326 209 4,535
EBITDA
$ 60,619 $ 853 $ 61,472
Three Months Ended September 30,
$ Change
% Change
2021
2020
(dollars in thousands)
Total EBITDA
$ 107,997 $ 61,472 $ 46,525 75.7 %
Trex Residential EBITDA
$ 106,135 $ 60,619 $ 45,516 75.1 %
Trex Commercial EBITDA
$ 1,862 $ 853 $ 1,009 118.3 %
Total EBITDA increased 75.7% to $108 million for the 2021 quarter compared to $61.5 million for the 2020 quarter. The increase was driven by a 75.1% increase in Trex Residential EBITDA, primarily due to the volume growth in net sales.
1
EBITDA represents net income before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP). We have included data with respect to EBITDA because management believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important information regarding the operating performance of the Company and its reportable segments.
22
Table of Contents
Nine Months Ended September 30, 2021 Compared To The Nine Months Ended September 30, 2020
Net Sales
Nine Months Ended September 30,
$ Change
% Change
2021
2020
(dollars in thousands)
Total net sales
$ 892,991 $ 652,545 $ 240,446 36.8 %
Trex Residential net sales
$ 850,909 $ 614,187 $ 236,722 38.5 %
Trex Commercial net sales
$ 42,082 $ 38,358 $ 3,724 9.7 %
The 36.8% increase in total net sales in the 2021 nine-month period compared to the 2020 nine-month period was substantially all due to volume growth at Trex Residential across all product lines. Our capacity expansion program was fully operational as of the end of May 2021 enabling our ability to capture additional growth. The increase in Trex Residential net sales was primarily driven by sustained broad-based demand, driven by continued strong, secular trends across Trex Residential's outdoor living products, and market share gains from wood. The increase in net sales at Trex Residential was also impacted by our price increases realized in September to address inflationary pressures across many key raw materials and transportation. Trex Commercial contributed $42.1 million to consolidated net sales.
Gross Profit
Nine Months Ended September 30,
$ Change
% Change
2021
2020
(dollars in thousands)
Cost of sales
$ 550,668 $ 385,479 $ 165,189 42.9 %
% of total net sales
61.7 % 59.1 %
Gross profit
$ 342,323 $ 267,066 $ 75,257 28.2 %
Gross margin
38.3 % 40.9 %
Gross profit as a percentage of net sales, gross margin, was 38.3% in the 2021 nine-month period compared to 40.9% in the 2020 nine-month period. Gross margin for Trex Residential and Trex Commercial products in the 2021 nine-month period were 39.2% and 21.2%, respectively, compared to 41.6% and 29.6%, respectively, in the 2020 nine-month period. Excluding a $6.5 million provision during the 2020 nine-month period to the Trex Residential legacy warranty reserve, gross margin for the 2020 nine-month period was 41.9% compared to 38.3% for the 2021 nine-month period. Gross margin at Trex Residential was unfavorably impacted by inflationary pressures on key raw materials and transportation, by
start-up
costs and increased depreciation related to the capacity expansion program at Trex Residential, labor shortages and reduced overhead absorption due to the fire at the Virginia facility. The decrease in gross margin was partially offset by the price increases realized in September 2021 on certain product lines at Trex Residential.
Selling, General and Administrative Expenses
Nine Months Ended September 30,
$ Change
% Change
2021
2020
(dollars in thousands)
Selling, general and administrative expenses
$ 97,383 $ 91,598 $ 5,785 6.3 %
% of total net sales
10.9 % 14.0 %
The $5.8 million increase in selling, general and administrative expenses in the 2021 nine-month period compared to the 2020 nine-month period resulted primarily from a $8.9 million increase in personnel related expenses and incentive compensation and a $2.0 million increase in research and development expenses, offset by $4.7 million in gains on insurance proceeds related to the fire at the Virginia facility.
Provision for Income Taxes
Nine Months Ended September 30,
$ Change
% Change
2021
2020
(dollars in thousands)
Provision for income taxes
$ 61,235 $ 43,938 $ 17,297 39.4 %
Effective tax rate
25.0 % 24.9 %
23
Table of Contents
The effective tax rate for the 2021 nine-month period was comparable to the effective tax rate for the 2020 nine-month period.
Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
2
(in thousands)
Reconciliation of net income (GAAP) to EBITDA
(non-GAAP):
Nine Months Ended September 30, 2021
Trex

Residential
Trex
Commercial
Total
Net income
$ 182,437 $ 1,268 $ 183,705
Interest income, net
- - -
Income tax expense
60,797 438 61,235
Depreciation and amortization
24,873 731 25,604
EBITDA
$ 268,107 $ 2,437 $ 270,544
Nine Months Ended September 30, 2020
Trex

Residential
Trex
Commercial
Total
Net income
$ 129,157 $ 3,174 $ 132,331
Interest income, net
(801 ) - (801 )
Income tax expense
42,853 1,085 43,938
Depreciation and amortization
11,855 595 12,450
EBITDA
$ 183,064 $ 4,854 $ 187,918
Nine Months Ended September 30,
$ Change
% Change
2021
2020
(dollars in thousands)
Total EBITDA
$ 270,544 $ 187,918 $ 82,626 44.0 %
Trex Residential EBITDA
$ 268,107 $ 183,064 $ 85,043 46.5 %
Trex Commercial EBITDA
$ 2,437 $ 4,854 $ (2,417 ) (49.8 )%
Total EBITDA increased 44% to $270.5 million for the 2021 nine-month period compared to $188 million for the 2020 nine-month period. The increase was driven by a 46.5% increase in Trex Residential EBITDA, primarily due to the volume growth in net sales.
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 September 30, 2021 we had $54 million of cash and cash equivalents.
2
EBITDA represents net income before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP). We have included data with respect to EBITDA because management believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important information regarding the operating performance of the Company and its reportable segments.
24
Table of Contents
S
ources and Uses of Cash.
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
Nine Months Ended September 30,
2021
2020
Net cash provided by operating activities
$ 113,059 $ 12,514
Net cash used in investing activities
(123,096 ) (97,546 )
Net cash used in financing activities
(57,622 ) (43,720 )
Net decrease in cash and cash equivalents
$ (67,659 ) $ (128,752 )
Operating Activities
Cash provided by operating activities was $113.1 million during the 2021 nine-month period primarily from an increase in gross profit and related increase in net income resulting from the increase in net sales volume growth at Trex Residential. Cash flows used in operations related to higher working capital investment in accounts receivable, the majority of which will be collected in the fourth quarter, offset by increases in accounts payable and accrued expenses.
Investing Activities
Capital expenditures in the 2021 nine-month period of $124.5 million consisted primarily of $56.7 million in capacity expansion at our Trex Residential facilities, $49.2 million in general plant cost reduction initiatives and other production improvements and $6.2 million in other
non-production
expenditures.
Financing Activities
Net cash used in financing activities of $57.6 million in the 2021 nine-month period consisted primarily of repurchases of our common stock of $59 million.
Stock Repurchase Program.
On February 16, 2018, the Board of Directors adopted a stock repurchase program of up to 11.6 million shares of the Company's outstanding common stock (Stock Repurchase Program). As of September 30, 2021, the Company has repurchased 3.3 million shares of the Company's outstanding common stock under the Stock Repurchase Program.
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 September 30, 2021, we had no outstanding borrowings under the revolving credit facilities and borrowing capacity under the facilities of $300 million.
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. 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.
The Company entered into the First Amendment, as borrower; Trex Commercial Products, Inc. (TCP), as guarantor; Bank of America, N.A. (BOA), as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; and certain other lenders including Wells Fargo Bank, N.A. (Wells Fargo), who is also Syndication Agent; Truist Bank (Truist); and Regions Bank (Regions) (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner. The First Amendment further provides that the New Credit Agreement is amended and restated by changing Schedule 2.01 to add applicable Lender percentages related to the Revolving B Commitment for BOA of 47.5%, Well Fargo of 28.0% and Regions of 24.5%.
Compliance with Debt Covenants.
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 September 30, 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.
25
Table of Contents
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.
Capital Requirements.
In June 2019, we announced a $200 million capital expenditure program to increase production capacity at our Trex Residential facilities in Virginia and Nevada. The program involved 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 allowed us to increase production output for future projected growth related to our strategy of converting wood demand to Trex Residential wood-alternative composite decking. Our capacity expansion program increased our Trex Residential production capacity by approximately 70 percent when compared to 2019 volume levels.
On October 26, 2021, we announced plans to add a third U.S.-based Trex Residential manufacturing facility in Little Rock, Arkansas. The new campus will sit on nearly 300 acres of land and will include buildings dedicated to decking and railing production, plastic film recycling and processing, reclaimed wood storage, warehousing, and administrative offices to address increased demand for Trex Residential outdoor living products. Construction is slated to begin in early 2022 with the first production output anticipated in 2024. Funded primarily through ongoing cash generation, we expect to invest an estimated $400 million over five years in the development of the new Arkansas site.
Our capital expenditure guidance for 2021 is $135 million to $155 million. In addition to our capital expenditure program, our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, upgrading equipment and support systems, and acquisitions which fit our long-term growth strategy as we continue to evaluate opportunities that would be a good strategic fit for Trex, and return of capital to shareholders.
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.
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, 2020. There were no material changes to the Company's market risk exposure during the nine months ended September 30, 2021.
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 Senior 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 September 30, 2021. Based on this evaluation, the President and Chief Executive Officer and the Senior 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 nine-month period ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
26
Table of Contents
PART II
OTHER INFORMATION
Item 1.
Legal Proceedings
The Company has lawsuits, as well as other claims, pending against it which are ordinary routine litigation and claims incidental to the business. Management has evaluated the merits of these lawsuits and claims and believes that their ultimate resolution will not have a material effect on the Company's consolidated financial condition, results of operations, liquidity or competitive position.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table provides information relating to the purchases of our common stock during the three months ended September 30, 2021 in accordance with Item 703 of Regulation
S-K:
Period
(a)

Total Number of
Shares (or Units)
Purchased (1)
(b)

Average Price Paid
per Share (or Unit)

($)
(c)

Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
(d)

Maximum number of
Shares (or Units) that
May Yet Be
Purchased Under the
Plan or Program
July 1, 2021 - July 31, 2021
408 $ 95.61 300 8,251,896
August 1, 2021 - August 31, 2021
42,226 $ 96.47 31,388 8,220,508
September 1, 2021 - September 30, 2021
- $ - - 8,220,508
Quarterly period ended September 30, 2021
42,634 31,688
(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 11.6 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 purchased 31,688 shares of its common stock under the Stock Repurchase Program during the three months ended September 30, 2021.
Item 5.
Other Information

On October 26, 2021, the Company announced its plan to add a third U.S.-based Trex Residential manufacturing facility in Little Rock, Arkansas. The new campus will sit on nearly 300 acres of land and will include buildings dedicated to decking and railing production, plastic film recycling and processing, reclaimed wood storage, warehousing, and administrative offices to address increased demand for Trex Residential outdoor living products. Construction is slated to begin in early 2022 with the first production output anticipated in 2024. Funded primarily through ongoing cash generation, the Company expects to invest an estimated $400 million over five years in the development of the new Arkansas site.
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.
27
Table of Contents
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: November 8, 2021 By:
/s/ Dennis C. Schemm
Dennis C. Schemm
Senior Vice President and Chief Financial Officer
(
Duly Authorized Officer and Principal Financial Officer
)
Table of Contents
EXHIBIT INDEX
Incorporated by reference
Exhibit
Number
Description
Form
Exhibit
Filing Date
File No.
3.1 Restated Certificate of Incorporation of Trex Company, Inc.
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 Restated Certificate of Incorporation of Trex Company, Inc. dated July 28, 2021.
10-Q
3.6 August 2, 2021
001-14649
3.7 Amended and Restated By-Laws of the Company.
8-K
3.2 May 1, 2019
001-14649
31.1* Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2* Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32*** Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350).
101.INS* Inline XBRL Instance Document-the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH* Inline XBRL Taxonomy Extension Schema Document.
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104.1 Cover Page Interactive Data File-The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
*
Filed herewith.
***
Furnished herewith.