The following management discussion and analysis should be read in conjunction
with the Trex Company, Inc. (Company, we or our) Annual Report on Form
10-K
for the year ended December 31, 2019 filed with the U.S. Securities and Exchange
Commission (SEC) and the condensed consolidated financial statements and notes
thereto included in Part I, Item 1. "Financial Statements" of this quarterly
report.
NOTE ON FORWARD-LOOKING STATEMENTS
This management's discussion and analysis contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements regarding our expected
financial position and operating results, our business strategy, our financing
plans, forecasted demographic and economic trends relating to our industry and
similar matters are forward-looking statements. These statements can sometimes
be identified by our use of forward-looking words such as "may," "will,"
"anticipate," "estimate," "expect," "intend" or similar expressions. We cannot
promise you that our expectations in such forward-looking statements will turn
out to be correct. Our actual results could be materially different from our
expectations because of various factors, including the factors discussed under
"Item 1A. Risk Factors" in our Annual Report on Form
10-K
for the year ended December 31, 2019 filed with the SEC, and the factor
discussed under "Item 1A. Risk Factors" in this quarterly report on Form
10-Q.
These statements are also subject to risks and uncertainties that could cause
the Company's actual operating results to differ materially. Such risks and
uncertainties include, but are not limited to: the extent of market acceptance
of the Company's current and newly developed products; the costs associated with
the development and launch of new products and the market acceptance of such new
products; the sensitivity of the Company's business to general economic
conditions; the impact of seasonal and weather-related demand fluctuations on
inventory levels in the distribution channel and sales of the Company's
products; the availability and cost of third-party transportation services for
our products and raw materials; the Company's ability to obtain raw materials at
acceptable prices; the Company's ability to maintain product quality and product
performance at an acceptable cost; the Company's ability to increase throughput
and capacity to adequately match supply with demand; the level of expenses
associated with product replacement and consumer relations expenses related to
product quality; the highly competitive markets in which the Company operates;
cyber-attacks, security breaches or other security vulnerabilities; the impact
of upcoming data privacy laws and the EU General Data Protection Regulation and
the related actual or potential costs and consequences; and material adverse
impacts from global public health pandemics, including the strain of coronavirus
known as
COVID-19.
OVERVIEW
COVID-19:
Our results of operations are affected by economic conditions, including
macroeconomic conditions and levels of business and consumer confidence. The
COVID-19
pandemic has increased the level of volatility and uncertainty globally and has
created economic disruption. We are actively managing our business to respond to
this health crisis and will continue to evaluate the nature and extent of its
impact. Our commitment to stakeholders is to take the appropriate actions to
ensure the safety and well-being of our employees and partners, comply with any
governmental orders relating to
COVID-19,
which may result in a period of disruption to our business, while at the same
time leveraging our strengths and ensuring financial flexibility.
As of March 31, 2020, our facilities continue to operate at output levels
similar to those prior to the
COVID-19
pandemic and we are following or exceeding all CDC and public officials'
guidelines. We have also adopted a business continuity plan and local emergency
response plans at each location. We continue to take precautionary measures,
make contingency plans and improve our response to the developing situation. We
have assembled a cross-functional team whose chief charge is to oversee our
efforts to ensure the health and safety of all employees and supply product to
our customers. That team constantly monitors the latest CDC, Federal, state and
other regulatory guidance, works to secure personal protective equipment, finds
new ways to help mitigate risk, and identifies opportunities for us to exceed
recommendations.
We have implemented preventative or protective actions at our facilities, our
corporate headquarters and with field sales personnel. In order to mitigate the
spread of the virus, we have instructed our employees to practice social
distancing. Efforts for social distancing include working from home, where
possible, revising our production processes to allow for compliance with our
social distancing efforts, suspending air travel and enabling technologies to
allow employees to effectively perform their functions remotely. Our sales force
is working from home and conducting training sessions with our channel partners
by utilizing online audio and visual technologies. Face masks and other
protective equipment have been distributed to employees across all of our
facilities, and handwashing and hand sanitizing stations have been installed. In
addition, we have made a donation of face masks to the local healthcare
community. We have installed air purifier systems for all enclosed areas in
every one of our buildings. In addition, our internal cleaning crew sanitizes an
extensive checklist of high-touch items and areas across work facilities, and
our facilities are cleaned repeatedly throughout each shift with
CDC-recommended
chemicals and disinfectants by internal and external groups.
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Since we cannot predict the duration or scope of the pandemic, we cannot fully
anticipate or reasonably estimate all the ways in which the current global
health crisis and financial market conditions could adversely impact our
business in the future. Some jurisdictions into which we sell have now deemed
the construction industry as
non-essential
and ordered the closure of those businesses. In addition, we have experienced
areas where the availability of our products is limited due to the closure of
certain of our channel partners. As of March 31, 2020 we have no significant
supply issues and maintain inventories of materials sourced from diversified
geographies, allowing us to better tolerate short-term supply chain disruptions.
The impact that the
COVID-19
 pandemic will have on our consolidated results of operations for fiscal year
2020 is uncertain. Although net sales increased considerably during the three
months ended March 31, 2020, due to a number of our channel partners on both the
distribution and consumer side closing or significantly curtailing operations in
their respective localities because of
COVID-19
restrictions, net sales for our second quarter may be impacted and this trend
could continue until the pandemic subsides and macro-economics, particularly in
the United States, return to normal. Also, we have stress tested our financials
and believe our available financial resources will allow us to manage the impact
of the
COVID-19
pandemic on the Company's business operations for the foreseeable future. As of
March 31, 2020, our revolving credit facility provides us with $221.5 million in
liquidity and we see no need to modify our current capital expansion program,
which can be adjusted if necessary. As the impact of
COVID-19
evolves, we will continue to evaluate our financial position and liquidity needs
in light of future developments.
Operations and Products:
Trex Company, Inc. currently operates in two reportable segments: Trex
Residential Products (Trex Residential) and Trex Commercial Products (Trex
Commercial). The Company is focused on using renewable resources within both our
Residential and Commercial segments.
Trex Residential is the world's largest manufacturer of high-performance,
low-maintenance,
eco-friendly
composite decking and residential railing products, which are marketed under the
brand name Trex
®
and manufactured in the United States. We offer a comprehensive set of
aesthetically appealing and durable,
low-maintenance
product offerings in the decking, residential railing, fencing, steel deck
framing, and outdoor lighting categories. A majority of the products are
eco-friendly
and leverage recycled materials to the extent possible. Trex Residential decking
is made in a proprietary process that combines reclaimed wood fibers and
recycled polyethylene film, making Trex one of the largest recyclers of plastic
film in North America. In addition to resisting fading and surface staining,
Trex Residential products require no sanding and sealing, resist moisture
damage, provide a splinter-free surface and do not require chemical treatment
against rot or insect infestation. Combined, these aspects yield significant
aesthetic advantages and lower maintenance than wood decking and railing and
ultimately render Trex products less costly than wood over the life of the deck.
Special characteristics (including resistance to splitting, the ability to bend,
and ease and consistency of machining and finishing) facilitate installation,
reduce contractor call-backs and afford consumers a wide range of design
options. Trex Residential products are sold to distributors and home centers for
final resale primarily to the residential market.
Trex offers the following products through Trex Residential:


Decking and   Our principal decking products are Trex Transcend
Accessories   ®
              , Trex Select
              ®
              and Trex Enhance
              ®
              . Differentiating the Enhance collection is a scalloped profile that
              is lighter weight for easier handling and installation. Our
              high-performance,
              low-maintenance,
              eco-friendly
              composite decking products are comprised of a blend of 95 percent
              reclaimed wood fibers and recycled plastic film and feature a
              protective polymer shell for enhanced protection against fading,
              staining, mold and scratching.

              We also offer Trex Hideaway
              ®
              , a hidden fastening system for grooved boards, and Trex
              DeckLighting
              ™
              , an outdoor lighting system. Trex DeckLighting is a line of
              energy-efficient LED dimmable deck lighting, which is designed for
              use on posts, floors and steps. The line includes a post cap light,
              deck rail light, riser light and a recessed deck light.




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Railing      Our residential railing products are Trex Transcend Railing, Trex
             Select Railing, Trex Enhance Railing and Trex Signature
             ®
             aluminum railing. Trex Transcend Railing, made from

approximately


             40 percent recycled content, is available in the colors of Trex
             Transcend decking and finishes that make it appropriate for use with
             Trex decking products as well as other decking materials, which we
             believe enhances the sales prospects of our railing products. Trex
             Select Railing, made from approximately 40 percent recycled content,
             is offered in a white finish and is ideal for consumers who desire a
             simple clean finished look for their deck. Trex Enhance, made from
             approximately 40 percent recycled content, is available in three
             colors and is offered through home improvement retailers in kits
             that contain the complete railing system. Trex Signature aluminum
             railing, made from a minimum of 50 percent recycled content, is
             available in three colors and designed for consumers who want a
             sleek, contemporary look.


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


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




Trex Commercial
is a leading national provider of custom-engineered railing and staging systems.
Trex Commercial 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 rental markets.
With a team of devoted engineers, and an 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   Our architectural railing systems are
Railing         pre-engineered
Systems         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        Trex Signature
Railing         ®
Systems         aluminum railing collection, made from a minimum of 50 percent
                recycled content, combines superior styling with the

unparalleled


                strength of aluminum - making it an ideal railing choice 

for a


                variety of commercial settings. Its straightforward, 

unobtrusive


                design features traditional balusters and contemporary 

vertical rods,


                and can be installed with continuously graspable rail options for
                added safety, comfort and functionality. Trex Signature is available
                in three colors - charcoal black, bronze and classic white - and is
                available in a variety of stock lengths.


Staging         Our advanced modular, lightweight custom staging systems include
Equipment and   portable platforms, orchestra shells, guardrails, stair units,
Accessories     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 March 31, 2020:

• Increase in net sales of 11.6%, or $20.8 million, to $200.4 million for

the three months ended March 31, 2020 compared to $179.6 million for the


        three months ended March 31, 2019.



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• Increase in gross profit of 29.3%, or $20.3 million, to $89.7 million for


        the three months ended March 31, 2020 compared to $69.4 million for the
        three months ended March 31, 2019.


• Increase in net income to $42.4 million, or $0.73 per diluted share, for

the three months ended March 31, 2020 compared to $31.6 million, or $0.54


        per diluted share, for the three months ended March 31, 2019.


• Capital expenditures of $22.7 million to increase production capacity at


        the Trex Residential facilities in Virginia and Nevada and general plant
        cost reduction initiatives and other production improvements.


• Repurchase of 442,009 shares of our outstanding common stock during the

three months ended March 31, 2020 under our Stock Repurchase Program, for

a total of 1.4 million shares repurchased under the program as March 31,


        2020.



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 and favorable payment terms. In addition, we offer 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 sales
incentive programs can significantly impact sales, receivables and inventory
levels during the offering period. However, the timing and terms of the majority
of our programs are generally consistent from year to year. In addition, the
operating results for Trex Commercial are driven by the timing of individual
projects, which may vary significantly each period.
Gross Profit.
Gross profit represents the difference between net sales and cost of sales. Cost
of sales consists of raw material costs, direct labor costs, manufacturing
costs, subcontract costs and freight. Raw material costs generally include the
costs to purchase and transport reclaimed wood fiber, reclaimed polyethylene,
pigmentation for coloring our products, and commodities used in the production
of railing and staging. Direct labor costs include wages and benefits of
personnel engaged in the manufacturing process. Manufacturing costs consist of
costs of depreciation, utilities, maintenance supplies and repairs, indirect
labor, including wages and benefits, and warehouse and equipment rental
activities.
Product Warranty.
We warrant that our Trex Residential products will be free from material defects
in workmanship and materials for warranty periods ranging from 10 years to 25
years, depending on the product and its use. If there is a breach of such
warranties, we have an obligation either to replace the defective product or
refund the purchase price. Depending on the product and its use, we also warrant
that our Trex Commercial products will be free of manufacturing defects for 1 to
3 years.
We continue to receive and settle claims for decking products manufactured at
our Nevada facility prior to 2007 that exhibit surface flaking and maintain a
warranty reserve to provide for the settlement of these claims. We monitor
surface flaking claims activity each quarter for indications that our estimates
require revision. Typically, a majority of surface flaking claims received in a
fiscal year are received during the summer outdoor season, which spans the
second and third fiscal quarters. It has been our practice to utilize actuarial
techniques during the third quarter, after a significant portion of all claims
has been received for the fiscal year and variances to annual claims
expectations are more meaningful. Our actuarial analysis is based on currently
known facts and a number of assumptions. Projecting future events such as the
number of claims to be received, the number of claims that will require payment
and the average cost of claims could cause the actual warranty liabilities to be
higher or lower than those projected, which could materially affect our
financial condition, results of operations or cash flows. The number of incoming
claims received in the three months ended March 31, 2020 was consistent with our
expectations but higher than the number of claims received in the three months
ended March 31, 2019. Average settlement cost per claim experienced in the three
months ended March 31 2020 was slightly higher than our expectations,
considerably higher than that experienced in the three months ended March 31,
2019, due to an increase in larger claims settled and changes in the mix of
settlement methods, and slightly lower than that experienced in the year ended
December 31, 2019. We believe that our reserve at March 31, 2020 is sufficient
to cover future surface flaking obligations.
The following table details surface flaking claims activity related to our
warranty:

                                     Three Months Ended March 31,
                                       2020                2019
Claims open, beginning of period           1,724               2,021
Claims received (1)                          205                 176
Claims resolved (2)                         (195 )              (255 )

Claims open, end of period                 1,734               1,942

Average cost per claim (3)         $       3,331       $       2,407



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(1) Claims received include new claims received or identified during the period.

(2) Claims resolved include all claims settled with or without payment and closed


    during the period.



(3) Average cost per claim represents the average settlement cost of claims

closed with payment during the period.





Selling, General and Administrative Expenses.
The largest component of selling, general and administrative expenses is
personnel related costs, which includes salaries, commissions, incentive
compensation, and benefits of personnel engaged in sales and marketing,
accounting, information technology, corporate operations, research and
development, and other business functions. Another component of selling, general
and administrative expenses is branding and other sales and marketing costs,
which are used to build brand awareness. These costs consist primarily of
advertising, merchandising, and other promotional costs. Other general and
administrative expenses include professional fees, office occupancy costs
attributable to the business functions previously referenced, and consumer
relations expenses. As a percentage of net sales, selling, general and
administrative expenses may vary from quarter to quarter due, in part, to the
seasonality of our business.
RESULTS OF OPERATIONS
Below is our discussion and analysis of our operating results and material
changes in our operating results for the three months ended March 31, 2020 (2020
quarter) compared to the three months ended March 31, 2019 (2019 quarter).
Three Months Ended March 31, 2020 Compared To The Three Months Ended March 31,
2019
Net Sales

                               Three Months Ended March 31,
                                  2020                2019         $ Change       % Change
                                                 (dollars in thousands)
Total net sales              $       200,395       $   179,571     $  20,824           11.6 %
Trex Residential net sales   $       186,874       $   165,479     $  21,395           12.9 %
Trex Commercial net sales    $        13,521       $    14,092     $    (571 )         (4.1 )%



Total net sales increased by 11.6% in the 2020 quarter compared to the 2019
quarter reflecting an increase in Trex Residential net sales, offset by a small
decrease in Trex Commercial net sales. The increase of 12.9% in Trex Residential
net sales during the 2020 quarter was primarily driven by volume growth of our
residential decking and railing products, strong demand for our outdoor living
products, a strong residential repair and remodeling sector and our initiatives
to accelerate conversion from wood. The 4.1% decrease in Trex Commercial net
sales during the 2020 quarter was due primarily to fewer large projects compared
to the 2019 quarter.
Gross Profit

                          Three Months Ended March 31,
                            2020                 2019          $ Change       % Change
                                            (dollars in thousands)
Cost of sales          $      110,699       $      110,206     $     493            0.4 %
% of total net sales             55.2 %               61.4 %
Gross profit           $       89,696       $       69,365     $  20,331           29.3 %
Gross margin                     44.8 %               38.6 %



Gross profit as a percentage of net sales, gross margin, was 44.8% in the 2020
quarter compared to 38.6% in the 2019 quarter and reflects the increase in gross
margin for Trex Residential and Trex Commercial to 45.6% and 33.6%,
respectively, in the 2020 quarter compared to 40.2% and 20.5%, respectively, in
the 2019 quarter. The increase in Trex Residential gross margin in the 2020
quarter compared to the 2019 quarter was primarily due to
non-recurrence
of Enhance startup costs related to reduced throughput, equipment failures and
other inefficiencies at Trex Residential manufacturing facilities in 2019. Also,
a number of manufacturing lines were retrofitted during the quarter to allow
production of the reduced weight Enhance profile. We expect to be essentially at
the original design target for Enhance by the end of the third quarter of 2020.
The increase in gross margin at Trex Commercial was primarily due to
non-recurrence
of legacy low margin contracts coupled with a mix of higher margin contracts in
the 2020 quarter, and initiatives aimed at improving project estimating, project
management, and manufacturing cost savings initiatives.
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Selling, General and Administrative Expenses

                                         Three Months Ended March 31,
                                          2020                  2019             $ Change         % Change
                                                             (dollars in thousands)
Selling, general and
administrative expenses              $       34,561        $       30,166       $    4,395             14.6 %
% of total net sales                           17.3 %                16.8 %



The increase in selling, general and administrative expenses in the 2020 quarter
compared to the 2019 quarter primarily represented a $3.3 million increase in
personnel related expenses and a $1.1 million increase in branding and
advertising spend in support of our market growth programs.
Provision for Income Taxes

                                         Three Months Ended March 31,
                                          2020                  2019             $ Change         % Change
                                                             (dollars in thousands)
Provision for income taxes           $        13,255        $       7,700       $    5,555             72.1 %
Effective tax rate                              23.8 %               19.6 %



The effective tax rate for the 2020 quarter was 23.8% compared to the effective
tax rate for the 2019 quarter of 19.6%. The 4.2% increase was primarily due to a
current year decrease in excess tax benefits from the exercise of share-based
payments and an increase in
non-deductible
executive compensation.
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 March 31, 2020
                                    Trex               Trex
                                Residential         Commercial        Total
Net income                      $     41,020       $      1,382     $  42,402
Interest income, net                    (522 )               -           (522 )
Income tax expense                    12,788                467        13,255
Depreciation and amortization          3,664                187         3,851

EBITDA                          $     56,950       $      2,036     $  58,986





                                      Three Months Ended March 31, 2019
                                    Trex                Trex
                                 Residential         Commercial        Total
Net income                      $      31,255       $        300     $  31,555
Interest income, net                      (56 )               -            (56 )
Income tax expense                      7,600                100         7,700
Depreciation and amortization           3,268                126         3,394

EBITDA                          $      42,067       $        526     $  42,593

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.



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                             Three Months Ended March 31,
                               2020                 2019          $ Change       % Change
                                               (dollars in thousands)
Total EBITDA              $       58,986       $       42,593     $  16,393           38.5 %
Trex Residential EBITDA   $       56,950       $       42,067     $  14,883           35.4 %
Trex Commercial EBITDA    $        2,036       $          526     $   1,510          287.1 %






The Company uses EBITDA to assess performance as it believes EBITDA facilitates
performance comparison between the Company's and its competitors and between its
reportable segments by eliminating interest, income taxes, and depreciation and
amortization charges to income. Total EBITDA increased 38.5% to $59.0 million
for the 2020 quarter compared to $42.6 million for the 2019 quarter. The
increase was primarily driven by a 35.4% increase in Trex Residential EBITDA due
to net sales and gross margin and by an increase in Trex Commercial EBITDA
primarily related to an increase in gross margin.
LIQUIDITY AND CAPITAL RESOURCES
We finance operations and growth primarily with cash flows from operations,
borrowings under our revolving credit facility, operating leases and normal
trade credit terms from operating activities. At March 31, 2020 we had
$5.3 million of cash and cash equivalents.
S
ources and Uses of Cash.
The following table summarizes our cash flows from operating, investing and
financing activities (in thousands):

                                              Three Months Ended March 31,
                                                 2020                2019

Net cash used in operating activities $ (108,768 ) $ (109,990 ) Net cash used in investing activities

               (20,597 )          (8,647 )
Net cash used in financing activities               (14,129 )          

20,845

Net decrease in cash and cash equivalents $ (143,494 ) $ (97,792 )




Operating Activities
Cash used in operations was $108.8 million during the 2020 quarter compared to
cash used in operations of $110 million during the 2019 quarter. The slight
decrease in cash flows from operations was primarily due to higher working
capital investment in accounts receivable.
Investing Activities
Capital expenditures in the 2020 quarter were $22.7 million primarily for
capacity expansion at our Virginia and Nevada facilities and general plant cost
reduction initiatives and other production improvements.
Financing Activities
Net cash used in financing activities was $14.1 million in the 2020 quarter
primarily for repurchases of our common stock under our Stock Repurchase Program
of $39.1 million, offset by net borrowings under our revolving credit facility
of $28.5 million.
Amendment of Restated Certificate of Incorporation.
At the annual meeting of stockholders of the Company held on April 29, 2020, the
Company's stockholders approved an amendment of the Company's Restated
Certificate of Incorporation (Amendment), effective as of April 29, 2020. The
Company's Board of Directors unanimously approved the Amendment on February 19,
2020, subject to stockholder approval. The Amendment increases the number of
shares of common stock, par value $.01 per share, that the Company is authorized
to issue from 120 million shares to 180 million shares. The Amendment was filed
with the Delaware Secretary of State on April 29, 2020.
Stock Repurchase Program.
On February 16, 2018, the Board of Directors adopted a stock repurchase program
of up to 5.8 million shares of the Company's outstanding common stock (Stock
Repurchase Program). As of March 31, 2020, the Company had repurchased
1.4 million shares of the Company's outstanding common stock under the Stock
Repurchase Program.
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Due to the volatility and uncertainty in the stock market associated with the
COVID-19
pandemic, we suspended repurchases of our common stock under the Stock
Repurchase Program on March 12, 2020. As of the date of this report, the Stock
Repurchase Program remains in effect and we may determine to resume repurchases
at any time.
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 March 31,
2020, we had $28.5 million in outstanding indebtedness under the revolving
credit facility and borrowing capacity under the facility of $221.5 million.
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 March 31, 2020. 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.
Although the impact that the
COVID-19
pandemic will have on our liquidity for fiscal year 2020 is uncertain, we have
stress tested our financials and we believe that cash on hand, cash from
operations and borrowings expected to be available under our revolving credit
facility 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 new capital expenditure program to increase
production capacity at our Trex Residential facilities in Virginia and Nevada.
The new multi-year capital expenditure program is projected at approximately
$200 million between now and 2021, and involves the construction of a new
decking facility at the existing Virginia site and the installation of
additional production lines at the Nevada site. The Nevada capacity is projected
to come
on-line
by the end of the second quarter 2020, while the Virginia capacity will begin to
come online in the first quarter of 2021. The investment will allow us to
increase production output for future projected growth related to our strategy
of converting wood demand to Trex Residential wood-alternative composite
decking. When completed these investments will increase our capacity by
approximately 70 percent. In addition, our capital allocation priorities include
expenditures for internal growth opportunities, manufacturing cost reductions,
upgrading equipment, and acquisitions which fit our long-term growth strategy as
we continue to evaluate opportunities that would be a good strategic fit for
Trex, and return of capital to shareholders. Our capital expenditure guidance
for 2020 is $140 million to $160 million.
Inventory in Distribution Channels. We sell our Trex Residential decking and
railing products through a tiered distribution system. We have over 50
distributors worldwide and two national retail merchandisers to which we sell
our products. The distributors in turn sell the products to dealers and retail
locations who in turn sell the products to end users. Significant increases in
inventory levels in the distribution channel without a corresponding change in
end-use
demand could have an adverse effect on future sales. We cannot definitively
determine the level of inventory in the distribution channels at any time. We
are not aware of any significant increases in the levels of inventory in the
distribution channels at March 31, 2020 compared to inventory levels at
March 31, 2019 that would adversely impact net sales in future periods.
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 period.
Item 3.   Quantitative and Qualitative Disclosures About Market Risk






For information regarding our exposure to certain market risks, see
"Quantitative and Qualitative Disclosures about Market Risk," in Part II, Item
7A of the Company's Annual Report on Form
10-K
for the year ended December 31, 2019. There were no material changes to the
Company's market risk exposure during the three months ended March 31, 2020.
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