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." 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; and the impact of upcoming
data privacy laws and the EU General Data Protection Regulation and the related
actual or potential costs and consequences.
OVERVIEW
General.
Trex Company, Inc. currently operates in two reportable segments: Trex
Residential Products (Trex Residential) and Trex Commercial Products (Trex
Commercial). The Company is focused on using renewable resources within both our
Trex Residential and Trex Commercial segments.
Trex Residential
is the world's largest manufacturer of wood-alternative composite decking and
railing products marketed under the brand name Trex
®
and manufactured in the United States. We offer a comprehensive set of
aesthetically pleasing, high-performance, low maintenance,
eco-friendly
products in the decking, railing, fencing, steel deck framing and outdoor
lighting categories. We believe that the range and variety of our products allow
consumers to design much of their outdoor living space using Trex brand
products.
We offer the following composite decking and railing products through Trex
Residential:

 Decking and Accessories     Trex Transcend
                             ®
                              decking
                             Trex Enhance
                             ®
                              decking
                             Trex Select
                             ®
                              decking
                             Trex Hideaway
                             ®
                              hidden fastening system
                             Trex DeckLighting
                             ™
                              outdoor lighting system

 Railing                     Trex Transcend Railing
                             Trex Signature
                             ®
                             aluminum railing
                             Trex Select Railing
                             Trex Enhance Railing

 Fencing                     Trex Seclusions
                             ®

 Steel Deck Framing System   Trex Elevations
                             ®



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Trex Commercial
is a leading national provider of custom-engineered railing and staging systems.
We offer modular and architectural railing and staging systems and solutions for
the commercial and multifamily market, including sports stadiums and performing
arts venues through Trex Commercial.
Highlights related to the twelve months ended December 31, 2019 include:

• Increase in net sales of 9%, or $61.1 million, to $745.3 million in the

twelve months ended December 31, 2019 compared to $684.3 million in the

twelve months ended December 31, 2018. Net sales in 2019 were the highest

of any year in our history.

• Trex Residential net sales increased $81 million, or 13%, in 2019 compared

to 2018, and were the highest of any year in our history.

• Increase in gross profit of 4%, or $11.6 million, to $306.50 million for

the twelve months ended December 31, 2019 compared to $294.9 million for

the twelve months ended December 31, 2018.

• Increase in net income to $144.7 million, also reflecting the highest of

any year in our history.

• Cash flows from operating activities were $156.4 million in the twelve

months ended December 31, 2019 compared to $138.1 million in the twelve

months ended December 31, 2018.

• New capital expenditure program to increase production capacity at the


        Trex Residential facilities in Virginia and Nevada and projected at
        approximately $200 million in the aggregate by 2021.

• Repurchase of 500,059 shares of our outstanding common stock under our

Stock Repurchase Program in 2019, for a total of 959,380 shares

repurchased under the program to date.




Business Acquisition.
On July 31, 2017, through our wholly-owned subsidiary, Trex Commercial Products,
Inc., we entered into a definitive agreement with Staging Concepts Acquisition,
LLC (SC Company) and on that date acquired certain assets and liabilities of SC
Company for $71.8 million in cash. The acquisition provides us with the
opportunity to offer full service railing systems in the growing commercial and
multi-family markets, access to a complementary product category with a track
record of substantial revenue growth, the ability to achieve economies of scale
around raw material procurement, and an increase in the range of products the
Company may offer its core customers. The Consolidated Financial Statements
include the accounts of Trex Commercial Products, Inc. from the date of
acquisition.
Net Sales.
Net sales consist of sales and freight, net of returns and discounts. The level
of net sales is principally affected by sales volume and the prices paid for
Trex products. The operating results for Trex Residential have historically
varied from quarter to quarter, often due to seasonal trends in the demand for
outdoor living products. 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
practices, 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 to ensure adequate availability of its product to meet
anticipated seasonal consumer demand and to enable production planning. These
incentives include prompt 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 have not
historically varied from quarter to quarter as a result of seasonality, but 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 materials costs, direct labor costs, manufacturing
costs, warranty costs, and freight. Raw materials costs generally include the
costs to purchase and transport reclaimed wood fiber, scrap polyethylene and
pigmentation
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for coloring Trex products. 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 include 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 of Trex. 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 have varied from quarter to quarter due, in part, to the
seasonality of our business.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 2 to our Consolidated
Financial Statements appearing elsewhere in this report. Our critical accounting
estimates include the areas where we have made what we consider to be
particularly difficult, subjective or complex judgments in making estimates, and
where these estimates can significantly affect our financial results under
different assumptions and conditions. We prepare our financial statements in
conformity with accounting principles generally accepted in the United States.
As a result, we are required to make estimates, judgments and assumptions that
we believe are reasonable based upon the information available. These estimates,
judgments and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the periods presented. Actual results could be different from
these estimates.
Product Warranty.
We warrant that our Trex Residential products will be free from material defects
in workmanship and materials. Generally, this warranty period is 25 years for
residential use and 10 years for commercial use, excluding Trex Signature
®
Railing, which has a warranty period of 25 years for both residential and
commercial use. We further warrant that Trex Transcend, Trex Enhance, Trex
Select and Universal Fascia products will not fade in color more than a certain
amount and will be resistant to permanent staining from food substances or mold,
provided the stain is cleaned within seven days of appearance. This warranty
extends for a period of 25 years for residential use and 10 years for commercial
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, the Company also warrants its Trex Commercial products will
be free of manufacturing defects for one to three years.
We continue to receive and settle claims for Trex Residential 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.
Estimating the warranty reserve for surface flaking claims requires management
to estimate (1) the number of claims to be settled with payment and (2) the
average cost to settle each claim.
To estimate the number of claims to be settled with payment, we utilize
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 number of claims received has declined
each year since peaking in 2009. 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.
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 year are received during the summer outdoor season,
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which spans the second and third quarters. It has been our 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 year ended December 31, 2019, was slightly lower
than our expectations for 2019 and the number of claims received in the year
ended December 31, 2018, continuing the historical year-over-year decline in
incoming claims. Average settlement cost per claim experienced in 2019 was
considerably higher than our expectations for 2019 and the average settlement
cost per claim experienced in 2018 due to an increase in larger claims settled
and changes in the mix of settlement methods. We believe our reserve at
December 31, 2019 is sufficient to cover future surface flaking obligations and
no adjustments were required in the current year.
Our analysis is based on currently known facts and a number of assumptions, as
discussed above, and current expectations. Projecting future events such as the
number of claims to be received, the number of claims that will require payment
and the average cost of claims could cause the actual warranty liabilities to be
higher or lower than those projected, which could materially affect our
financial condition, results of operations or cash flows. We estimate that the
annual number of claims received will continue to decline over time and that the
average cost per claim will increase slightly, primarily due to inflation. If
the level of claims received or average cost per claim differs materially from
expectations, it could result in additional increases or decreases to the
warranty reserve and a decrease or increase in earnings and cash flows in future
periods. 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
residential product warranty:

                                             Year Ended December 31,
                                          2019         2018         2017

Claims unresolved beginning of period 2,021 2,306 2,755 Claims received (1)

                        1,394        1,481        2,250
Claims resolved (2)                       (1,691 )     (1,766 )     (2,699 )

Claims unresolved end of period            1,724        2,021        2,306

Average cost per claim (3)              $  3,447     $  2,631     $  2,546

(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.




For additional information about product warranties, see Notes 2 and 19 to the
Consolidated Financial Statements appearing elsewhere in this report.
Goodwill.
The Company evaluates the recoverability of goodwill in accordance with
Accounting Standard Codification Topic 350, "
Intangibles-Goodwill and Other
," annually or more frequently if an event occurs or circumstances change in the
interim that would more likely than not reduce the fair value of the asset below
its carrying amount. Goodwill is considered to be impaired when the net book
value of the reporting unit exceeds its estimated fair value. The Company first
assesses qualitative factors to determine if it is more likely than not that the
fair value of the reporting unit is less than its carrying amount to determine
if it should proceed with the evaluation of goodwill for impairment. If the
Company proceeds with the
two-step
impairment test, the Company first compares the fair value of the reporting unit
to its carrying value. If the carrying value of a reporting unit exceeds its
fair value, the goodwill of that reporting unit is potentially impaired and step
two of the impairment analysis is performed. In step two of the analysis, an
impairment loss is recorded equal to the excess of the carrying value of the
reporting unit's goodwill over its implied fair value should such a circumstance
arise. The Company measures fair value of the reporting unit based on a present
value of future discounted cash flows and a market valuation approach.
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Revenue Recognition
Effective January 1, 2018, we adopted the requirements of Financial Accounting
Standards Board Accounting Standards Update
2014-09,
"Revenue from Contracts with Customers" (Topic 606)
. We determined the appropriate revenue recognition for our contracts with
customers by analyzing the type, terms and conditions of our contracts with our
customers. Topic 606 provides a single, comprehensive model for revenue
recognition arising from contracts with customers. A performance obligation is a
promise in a contract to transfer a distinct good or service to the customer and
is the unit of account in Topic 606. A contract's transaction price is allocated
to each distinct performance obligation and revenue is recognized when or as the
Company satisfies the performance obligation. Revenue is recognized at an amount
that reflects the consideration to which the entity expects to be entitled in
exchange for transferring control of the goods or services to a customer.
Adoption of Topic 606 did not have an impact on the Company's financial
condition or results of operations. The following provides additional
information about our contracts with customers.
Trex Residential Products
Trex Residential principally generates revenue from the manufacture and sale of
its high-performance,
low-maintenance,
eco-friendly
composite decking and railing products and accessories. Substantially all of its
revenues are from contracts with customers, which are individual customer
purchase orders of short-term duration of less than one year. 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 and
recognized when the product ships and the performance obligation is satisfied.
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.
Trex Commercial satisfies its performance obligation over time as work
progresses because control is transferred continuously to its customers. Revenue
and estimated profit is recognized over time based on the proportion of actual
costs incurred to date relative to total estimated costs at completion to
measure progress toward satisfying the performance obligation. Incurred costs
represent work performed, which corresponds with, and thereby best depicts, the
transfer of control to the customer. Incurred costs include all direct material,
labor, subcontract and certain indirect costs. The Company reviews and updates
its estimates regularly and recognizes adjustments in estimated profit on
contracts under the cumulative
catch-up
method. Under this method, the impact of the adjustment on revenue and estimated
profit to date on a contract is recognized in the period the adjustment is
identified. Revenues and profits in future periods are recognized using the
adjusted estimate. If at any time the estimate of contract profitability
indicates an anticipated loss on the contract, the Company recognizes the total
loss in the period it is identified. During the year ended December 31, 2019, no
adjustment to any one contract was material to the Company's Consolidated
Financial Statements and no material impairment loss on any contract was
recorded.
RESULTS OF OPERATIONS
Below we have included a discussion of our operating results and material
changes in our operating results for the year ended December 31, 2019 compared
to the year ended December 31, 2018.
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Year Ended December 31, 2019 Compared To Year Ended December 31, 2018
Net Sales

                               Year Ended December 31,
                                 2019             2018        $ Change       % Change
                                              (dollars in thousands)
Total net sales              $    745,347       $ 684,250     $  61,097            8.9 %
Trex Residential net sales   $    694,267       $ 613,229     $  81,038           13.2 %
Trex Commercial net sales    $     51,080       $  71,021     $ (19,941 )        (28.1 )%


The 9% increase in total net sales in 2019 compared to 2018 was primarily due to
an increase in net sales of 13% at Trex Residential, offset by a 28% decrease in
Trex Commercial net sales. The primary driver of Trex Residential net sales was
increased volume growth. Through the first quarter of 2019, and to a much lesser
extent in the second and third quarters of 2019, Trex Residential net sales were
constrained due to supply issues primarily caused by new product startup
inefficiencies related to our new Enhance decking product. These inefficiencies
resulted in lower throughput than was needed to support market demand. Net sales
in 2018 were impacted by a $6 million unfavorable charge related to expanded
stocking positions in all residential sales channels. Excluding this impact,
Trex Residential net sales increased by 12%. Trex Commercial net sales decreased
mainly due to fewer large projects compared to the period of strong, large
project completions experienced in 2018.
Gross Profit

                         Year Ended December 31,
                           2019             2018        $ Change       % Change
                                        (dollars in thousands)
Cost of sales          $    438,844       $ 389,356     $  49,488           12.7 %
% of total net sales           58.9 %          56.9 %
Gross profit           $    306,503       $ 294,894     $  11,609            3.9 %
Gross margin                   41.1 %          43.1 %


Gross profit as a percentage of net sales, gross margin, was 41.1% in 2019
compared to 43.1% in 2018. Gross margin for Trex Residential and Trex Commercial
products in 2019 totaled 42.4% and 23.5%, respectively, compared to 45.6% and
21.8%, respectively, in 2018. The decrease in gross margin was primarily due to
a decrease in Trex Residential gross profit related to new product startup costs
and manufacturing inefficiencies associated with the slower than normal
production ramp up on those products, including reduced line rates, increased
material usage and lower manufacturing yields. During March and through the
third quarter, we made numerous changes to improve throughput. As a result, our
production rates largely returned to planned levels and associated operating
inefficiencies have been reduced. We believe these improvements will continue to
result in improved throughput and efficiency. The startup costs are largely
behind us and we expect continued improvement in throughput and efficiency in
future periods. We have begun to reduce material added to the Enhance product in
the first quarter of 2020 and expect to be essentially at the original design
target by the end of the third quarter in 2020. Trex Commercial gross margin
increased primarily due to initiatives aimed at improving project management,
estimating and manufacturing. However, the increase was hampered due to under
absorption of manufacturing overhead as a result of lower net sales.
Selling, General and Administrative Expenses

                                           Year Ended December 31,
                                            2019               2018            $ Change         % Change
                                                             (dollars in thousands)
Selling, general and
administrative expenses                 $    118,304         $ 118,225        $       79              0.1 %
% of total net sales                            15.9 %            17.3 %


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Selling, general and administrative expenses in 2019 were comparable to those in
2018. Incentive compensation decreased $4 million in 2019. In addition,
amortization expense decreased $2.7 million in 2019 due to the full amortization
of intangible assets acquired as part of the SC Company acquisition in July
2017. The decreases were offset primarily by increases in other personnel
expense of $3.6 million, $0.7 million in branding and advertising spend in
support of our market growth programs, $0.3 million in research and development
expenses and an increase in other miscellaneous expenses.
Provision for Income Taxes

                               Year Ended December 31,
                                 2019             2018         $ Change     

% Change


                                              (dollars in thousands)

Provision for income taxes $ 44,964 $ 42,289 $ 2,675

        6.3 %
Effective tax rate                   23.7 %          23.9 %


The effective tax rate for 2019 decreased by 0.2% compared to the effective tax
rate for 2018 primarily due to an increase in excess tax benefits from the
exercise of share-based payments.
Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA)
1
(in thousands)
Reconciliation of net income (GAAP) to EBITDA
(non-GAAP):

                                    2019              2019              2019
                                    Trex              Trex              Trex
Year Ended December 31           Residential       Commercial       Consolidated
Net income                      $     142,811     $      1,927     $      144,738
Interest income, net                   (1,496 )             (7 )           (1,503 )
Income tax expense                     44,292              672             44,964
Depreciation and amortization          13,413              618             14,031

EBITDA                          $     199,020     $      3,210     $      202,230




                                    2018              2018              2018
                                    Trex              Trex              Trex
Year Ended December 31           Residential       Commercial       Consolidated
Net income                      $     131,823     $      2,749     $      134,572
Interest income, net                     (192 )             -                (192 )
Income tax expense                     41,421              868             42,289
Depreciation and amortization          13,216            3,251             16,467

EBITDA                          $     186,268     $      6,868     $      193,136

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 evaluates the

performance of its reportable segments using 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 and, in relation to its competitors, it

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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                            Year Ended December 31,
                              2019             2018        $ Change       % Change
                                           (dollars in thousands)
Total EBITDA              $    202,230       $ 193,136     $   9,094            4.7 %
Trex Residential EBITDA   $    199,020       $ 186,268     $  12,752            6.9 %
Trex Commercial EBITDA    $      3,210       $   6,868     $  (3,658 )        (53.3 )%


The Company uses EBITDA to assess performance as it believes EBITDA facilitates
performance comparison between the Company and its competitors and between its
reportable segments by eliminating interest, income taxes, and depreciation and
amortization charges to income. Total EBITDA increased 4.7% to $202 million for
2019 compared to $193 million for 2018. The increase was primarily driven by a
$13 million increase in Trex Residential EBITDA driven by the increase in net
sales. The increase was offset by a decrease in EBITDA at Trex Commercial
primarily related to a decrease in net sales.
Year Ended December 31, 2018 Compared To Year Ended December 31, 2017
The Company hereby incorporates by reference the financial results from fiscal
year 2017 and the comparison of financial results from fiscal year 2018 to
fiscal year 2017 as set forth in the Company's Management's Discussion and
Analysis of Financial Condition and Results of Operation in the   Annual Report
on Form 10-K   for the year ended December 31, 2018 and filed with the U.S.
Securities and Exchange Commission on February 14, 2019.
LIQUIDITY AND CAPITAL RESOURCES
We finance operations and growth primarily with cash flow from operations,
borrowings, operating leases and normal trade credit terms from operating
activities.
S
ources and Uses of Cash.
The following table summarizes our cash flows from operating, investing and
financing activities for the years ended December 31, 2019, 2018, and 2017 (in
thousands):

                                                   Year Ended December 31,
                                              2019          2018          2017
Net cash provided by operating activities   $ 156,352     $ 138,121     $ 101,865
Net cash used in investing activities         (67,244 )     (33,733 )     (86,789 )
Net cash used in financing activities         (45,974 )     (29,203 )      (3,226 )

Net increase in cash and cash equivalents $ 43,134 $ 75,185 $ 11,850





Operating Activities
Cash provided by operating activities increased $18.2 million in 2019 compared
to 2018 primarily due to the increase in gross profit and related increase in
net income resulting from the increase in net sales volume growth, offset by a
decrease in working capital investment of $2.9 million.
Investing Activities
Investing activities in 2019 consisted of $67.3 million in capital expenditures,
including $59.8 million related to capacity expansion and general plant cost
reduction initiatives, $4.9 million for other production improvements and
$2.2 million for general support initiatives.
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Financing Activities
Net cash used in financing activities in 2019 increased $16.8 million compared
to 2018 primarily due to the increase in stock repurchase activity in 2019 of
$16.5 million.
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 the date of this report, the Company has repurchased
959,380 shares under the Stock Repurchase Program.
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 significant increases in the levels of inventory in the
distribution channels at December 31, 2019 compared to inventory levels at
December 31, 2018.
Business Acquisition.
On July 31, 2017, through our wholly-owned subsidiary, Trex Commercial Products,
Inc., we entered into a definitive agreement with SC Company and on that date
acquired certain assets and liabilities of SC Company for $71.8 million in cash.
We used cash on hand and $30.0 million from our existing revolving credit
facility to acquire the business.
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.
Indebtedness
.
Indebtedness after November 4, 2019
. On November 5, 2019, the Company 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; SunTrust
Bank (SunTrust); and Branch Banking and Trust Company (BB&T) (each, a Lender and
collectively, the Lenders), arranged by Bank of America Securities, Inc., as
Sole Lead Arranger and Sole Bookrunner, entered into a Fourth Amended and
Restated Credit Agreement (Fourth Amended Credit Agreement) to amend and restate
the Third Amended and Restated Credit Agreement dated as of January 12, 2016, as
amended (Third Amended Credit Agreement), by and among the Company, as borrower;
BOA, as a lender, Administrative Agent, Swing Line Lender and L/C Issuer;
CitiBank, N.A. (Citi); Capital One, N.A. (Capital One); and SunTrust, each as a
lender; and Bank of America Merrill Lynch, as Sole Lead Arranger and Sole
Bookrunner.
Under the Fourth Amended Credit Agreement, the Lenders agreed to provide 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
(Loan Limit) throughout the term, which ends November 5, 2024 (Term).
Previously, under the Third Amended Credit Agreement, BOA, Citi, Capital One and
SunTrust agreed to provide the Company with one or
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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 would have ended on January 12, 2021 if not replaced by the Fourth Amended
Credit Agreement.
Included within the Loan Limit are sublimits for a Letter of Credit facility in
an amount not to exceed $15 million and Swing Line Loans in an aggregate
principal amount at any time outstanding not to exceed $5 million. The Revolving
Loans, the Letter of Credit facility and the Swing Line Loans are for the
purpose of raising working capital and supporting general business operations.
The Notes provide the Company, in the aggregate, the ability to borrow an amount
up to the Loan Limit during the Term. The Company is not obligated to borrow any
amount under the Loan Limit. Within the Loan Limit, the Company may borrow,
repay and reborrow at any time or from time to time while the Notes are in
effect. Base Rate Loans (as defined in the Fourth Amended Credit Agreement)
under the Revolving Loans and the Swing Line Loans accrue interest at the Base
Rate plus the Applicable Rate (as defined in the Fourth Amended Credit
Agreement) and Eurodollar Rate Loans for the Revolving Loans and Swing Line
Loans accrue interest at the Adjusted London InterBank Offered Rate plus the
Applicable Rate (as defined in the Fourth Amended Credit Agreement). The Base
Rate for any day is a fluctuating rate per annum equal to the highest of (a) the
Federal Funds Rate plus 0.50%, (b) the rate of interest in effect for such day
as publicly announced from time to time by BOA as its prime rate, and (c) the
Eurodollar Rate plus 1.0%. Repayment of all then outstanding principal,
interest, fees and costs is due on November 5, 2024.
Under the terms of the Fourth Amended and Restated Security and Pledge
Agreement, the Company and TCP, subject to certain permitted encumbrances, as
collateral security for the above-stated loans and all other present and future
indebtedness of the Company owing to the Lenders grants to BOA, as
Administrative Agent for the Lenders, a continuing security interest in certain
collateral described and defined in the Fourth Amended and Restated Security and
Pledge Agreement.
Indebtedness through November 4, 2019
. On January 12, 2016, the Company entered into a Third Amended Credit Agreement
with BOA as Lender, Administrative Agent, Swing Line Lender and Letter of Credit
Issuer; and certain other lenders including Citi, Capital One, and SunTrust
(collectively, Lenders) arranged by Bank of America Merrill Lynch as Sole Lead
Arranger and Sole Bookrunner. The Third Amended Credit Agreement amended and
restated the Second Amended Credit Agreement.
Under the Third Amended Credit Agreement, the Lenders agreed to provide 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 would have ended on January 12, 2021. Included within
the revolving loan limit were sublimits for a letter of credit facility in an
amount not to exceed $15 million and swing line loans in an aggregate principal
amount at any time outstanding not to exceed $5 million. The revolving loans,
the letter of credit facility and the swing line loans were for the purpose of
funding working capital needs and supporting general business operations.
Additionally, within the Revolving Loan Limit, the Company could borrow, repay,
and reborrow, at any time or from time to time while the Third Amended Credit
Agreement was in effect.
The Company had the option to select interest rates for each loan request at the
Base Rate or Eurodollar Rate. Base rate loans under the revolving loans and the
swing line loans accrued interest at the Base Rate plus the Applicable Rate.
Eurodollar Rate Loans for the revolving loans and swing line loans accrued
interest at the Adjusted London InterBank Offered Rate plus the Applicable Rate.
The Base Rate for any day was a fluctuating rate per annum equal to the highest
of (a) the Federal Funds Rate plus 0.50%, (b) the rate of interest in effect for
such day as publicly announced from time to time by BOA as its prime rate, and
(c) the Eurodollar Rate plus 1.0%. Repayment of all then outstanding principal,
interest, fees and costs would have been due on January 12, 2021.
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The Third Amended Credit Agreement was secured by property with respect to which
liens in favor of the Administrative Agent, for the benefit of itself and the
other holders of the obligations, were purported to be granted pursuant to and
in accordance with the terms of the collateral documents as referenced in the
Third Amended 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 December 31, 2019. 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.
Contractual Obligations.
The following table summarizes our contractual obligations, which consist
primarily of purchase commitments and operating leases, as of December 31, 2019
(in thousands):
                            Contractual Obligations
                             Payments Due by Period

                                                                         2-3           4-5          After
                                            Total         1 year         years         years       5 years
Purchase obligations (1)                   $ 33,051      $ 26,763      $  6,274      $     14      $     -
Operating leases, including imputed
interest (2)                                 46,935         8,858        

14,743 12,255 11,079



Total contractual obligations              $ 79,986      $ 35,621      $ 21,017      $ 12,269      $ 11,079

(1) Purchase obligations represent supply contracts with raw material vendors and

service contracts for hauling raw materials. Open purchase orders written in

the normal course of business for goods or services that are provided on

demand have been excluded as the timing of which is not certain.

(2) Operating leases represent office space, storage warehouses, manufacturing

facilities and certain office and plant equipment under various operating

leases, and include operating leases accounted for under Financial Accounting

Standards Board Accounting Standards Codification Topic 842 and short-term

leases.




Off-Balance Sheet Arrangements.
We do not have
off-balance
sheet financing arrangements.
Capital and Other Cash Requirements.
In order to meet future demand, in June 2019 we announced a new multi-year
capital expenditure program projected at approximately $200 million between 2019
and 2021. The program will increase production capacity by at least 70% at our
Trex Residential facilities in Virginia and Nevada and will bring further
manufacturing efficiencies to our production operations. In the third quarter of
2019, we installed two additional lines in our Nevada facility and three new
lines will begin ramping up there in the second quarter of 2020. One new
production line was operational in Virginia in the fourth quarter of 2019, and a
new building being constructed in Virginia is scheduled to start ramping up
production by early 2021 at the latest. The investment will allow us to increase
production output for future projected growth related to our strategy of
converting wood demand to Trex Residential composite decking. We currently
estimate that capital expenditures in 2020 will be approximately $140 million to
$160 million.
We believe that cash on hand, cash flows from operations and borrowings expected
to be available under our revolving credit facility will provide sufficient
funds to enable us to fund planned capital expenditures, make scheduled
principal and interest payments, fund the warranty reserve, meet other cash
requirements and maintain compliance with terms of our debt agreements for at
least the next 12 months. We currently expect to fund future capital
expenditures from operations and borrowings under the revolving credit facility.
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. Our ability to meet our cash needs during
the next 12 months and thereafter could be adversely affected by various
circumstances, including increases in raw
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materials and product replacement costs, quality control problems, higher than
expected product warranty claims, service disruptions and lower than expected
collections of accounts receivable. In addition, any failure to negotiate
amendments to our existing debt agreements to resolve any future noncompliance
with financial covenants could adversely affect our liquidity by reducing access
to revolving credit borrowings needed primarily to fund seasonal borrowing
needs. We may determine that it is necessary or desirable to obtain financing
through bank borrowings or the issuance of debt or equity securities to address
such contingencies or changes to our business plan. Debt financing would
increase our level of indebtedness, while equity financing would dilute the
ownership of our stockholders. There can be no assurance as to whether, or as to
the terms on which, we would be able to obtain such financing, which would be
restricted by covenants contained in our existing debt agreements.
NEW ACCOUNTING STANDARDS
In August 2018, the FASB issued ASU No.
 2018-15,
"Intangibles-Goodwill and
Other-Internal-Use
Software (Subtopic
350-40):
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract (a consensus of FASB Emerging Issues Task
Force)". The new guidance aligns the requirements for capitalizing
implementation costs in a cloud computing arrangement service contract with the
requirements for capitalizing implementation costs incurred for an
internal-use
software license. Under that model, implementation costs are capitalized or
expensed depending on the nature of the costs and the project stage during which
they are incurred. Capitalized implementation costs are amortized over the term
of the associated hosted cloud computing arrangement service contract on a
straight-line basis, unless another systematic and rational basis is more
representative of the pattern in which the entity expects to benefit from its
right to access the hosted software. Capitalized implementation costs would then
be assessed for impairment in a manner similar to long-lived assets. The new
guidance is effective for fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. Early adoption is permitted. Entities
can choose to adopt the new guidance either prospectively to eligible costs
incurred on or after the date the guidance is first applied or retrospectively.
The Company will adopt the guidance on January 1, 2020, and has determined that
adoption will not have a material impact on its financial condition or results
of operations.
In January 2017, the FASB issued ASU No.

2017-04,


"Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill
Impairment". The guidance removes Step 2 of the goodwill impairment test and
eliminates the need to determine the fair value of individual assets and
liabilities to measure goodwill impairment. A goodwill impairment will now be
the amount by which a reporting unit's carrying value exceeds its fair value,
not to exceed the carrying amount of goodwill. Entities will continue to have
the option to perform a qualitative assessment to determine if a quantitative
impairment test is necessary. The guidance will be applied prospectively, and is
effective for annual and interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted for any
impairment tests performed on testing dates after January 1, 2017. The Company
will adopt the guidance on January 1, 2020. The Company does not believe
adoption will have a material impact on its financial condition or results of
operations.
In June 2016, the FASB issued ASU
2016-13,
"Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
in Financial Instruments," and issued subsequent amendments to the initial
guidance in November 2018 within ASU No.
 2018-09,
April 2019 within ASU No.
 2019-04,
and May 2019 within ASU No.
 2019-05.
The ASU amends the guidance on the impairment of financial instruments and adds
an impairment model, known as the current expected credit loss (CECL) model. The
CECL model requires an entity to recognize its current estimate of all expected
credit losses, rather than incurred losses, and applies to trade receivables and
other receivables. The CECL model is designed to capture expected credit losses
through the establishment of an allowance account, which will be presented as an
offset to the amortized cost basis of the related financial asset. The new
guidance is effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years, and is applied using the
modified-retrospective approach. The Company will adopt the guidance on
January 1, 2020. The Company has determined that adoption will not have a
material impact on its financial condition or results of operations.
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