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MarketScreener Homepage  >  Equities  >  Nyse  >  Trex Company, Inc.    TREX

TREX COMPANY, INC.

(TREX)
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TREX : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/03/2020 | 06:19pm EDT
The following management discussion should be read in conjunction with the Trex
Company, Inc. (Company, we or our) Annual Report on Form
10-K
for the year ended December 31, 2019 filed with the U.S. Securities and Exchange
Commission (SEC) and the condensed consolidated financial statements and notes
thereto included in Part I, Item 1. "Financial Statements" of this quarterly
report.
NOTE ON FORWARD-LOOKING STATEMENTS
This management's discussion and analysis contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements regarding our expected
financial position and operating results, our business strategy, our financing
plans, forecasted demographic and economic trends relating to our industry and
similar matters are forward-looking statements. These statements can sometimes
be identified by our use of forward-looking words such as "may," "will,"
"anticipate," "estimate," "expect," "intend" or similar expressions. We cannot
promise you that our expectations in such forward-looking statements will turn
out to be correct. Our actual results could be materially different from our
expectations because of various factors, including the factors discussed under
"Item 1A. Risk Factors" in our Annual Report on Form
10-K
for the year ended December 31, 2019 filed with the SEC, and the factor
discussed under "Item 1A. Risk Factors" in this quarterly report on form
10-Q.
These statements are also subject to risks and uncertainties that could cause
the Company's actual operating results to differ materially. Such risks and
uncertainties include, but are not limited to: the extent of market acceptance
of the Company's current and newly developed products; the costs associated with
the development and launch of new products and the market acceptance of such new
products; the sensitivity of the Company's business to general economic
conditions; the impact of seasonal and weather-related demand fluctuations on
inventory levels in the distribution channel and sales of the Company's
products; the availability and cost of third-party transportation services for
the Company's products and raw materials; the Company's ability to obtain raw
materials, including scrap polyethylene, wood fiber, and other materials used in
making our products, at acceptable prices; the Company's ability to maintain
product quality and product performance at an acceptable cost; the Company's
ability to increase throughput and capacity to adequately match supply with
demand; the level of expenses associated with product replacement and consumer
relations expenses related to product quality; the highly competitive markets in
which the Company operates; cyber-attacks, security breaches or other security
vulnerabilities; the impact of upcoming data privacy laws and the EU General
Data Protection Regulation and the related actual or potential costs and
consequences; and material adverse impacts from global public health pandemics,
including the strain of coronavirus known as
COVID-19.
OVERVIEW
COVID-19:
Our results of operations are affected by economic conditions, including
macroeconomic conditions and levels of business and consumer confidence. The
COVID-19
pandemic has increased the level of volatility and uncertainty globally and has
created economic disruption. We are actively managing our business to respond to
this health crisis and will continue to evaluate the nature and extent of its
impact. As of the date of this report, we have not experienced any material
disruptions to our operations due to the
COVID-19
pandemic. However, the pandemic remains an evolving situation due to the
continuation of the outbreak and any future measures that may be taken to
contain the spread of the virus. In addition, the extent and duration of the
economic fallout from
COVID-19
remains unclear. Our commitment to stakeholders is to take the appropriate
actions to ensure the safety and well-being of our employees and partners,
comply with any governmental orders relating to
COVID-19,
which may result in a period of disruption to our business, while at the same
time leveraging our strengths and ensuring financial flexibility.
As of June 30, 2020, our facilities continue to operate at output levels similar
to those prior to the
COVID-19
pandemic and we are following or exceeding all Centers for Disease Control and
Prevention (CDC) and public officials' guidelines. We have also adopted a
business continuity plan and local emergency response plans at each location. We
continue to take precautionary measures, make contingency plans and improve our
response to the developing situation. We have assembled a cross-functional team
whose chief charge is to oversee our efforts to ensure the health and safety of
all employees and supply product to our customers. That team constantly monitors
the latest CDC, Federal, state and other regulatory guidance, works to secure
personal protective equipment, finds new ways to help mitigate risk, and
identifies opportunities for us to exceed recommendations.

                                       18
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We have implemented preventative or protective actions at our facilities, our
corporate headquarters and with field sales personnel. In order to mitigate the
spread of the virus, we instructed our employees to practice social distancing.
Efforts for social distancing included employees working from home, where
possible, revising our production processes to allow for compliance with our
social distancing efforts, suspending air travel and enabling technologies to
allow employees to effectively perform their functions remotely. Our sales force
worked from home and conducted training sessions with our channel partners by
utilizing online audio and visual technologies. Late in the second quarter, our
employees began transitioning back to the workplace and conducting customer
visits on a voluntary basis. In addition, face masks and other protective
equipment have been distributed to employees across all of our facilities,
handwashing and hand sanitizing stations have been installed, and automated
temperature scanners have been provided at the entrances to our manufacturing
facilities and corporate office. We have installed air purifier systems for all
enclosed areas in every one of our buildings. Our internal cleaning crew
sanitizes an extensive checklist of high-touch items and areas across work
facilities, and our facilities are cleaned repeatedly throughout each shift with
CDC-recommended
chemicals and disinfectants by internal and external groups. In addition, we
fabricated face shields, donated the proceeds from decking sample sales to
Feeding America, and supported the
COVID-19
Relief Fund of our local United Way, supplementing our annual fund-raising
campaign.
Since we cannot predict the duration or scope of the pandemic, we cannot fully
anticipate or reasonably estimate all the ways in which the current global
health crisis and financial market conditions could adversely impact our
business in the future. During the latter part of the first quarter and
continuing into the first two months of the second quarter, some jurisdictions
into which we sell had deemed the construction industry as
non-essential
and ordered the closure of those businesses. In addition, we experienced areas
where the availability of our products was limited due to the closure of certain
of our channel partners. However, during the latter part of the second quarter,
jurisdictions began to lift their respective closure restrictions and certain of
our channel partners that were closed reopened. As a result, the slowdown in net
sales that we experienced early in the second quarter was offset by the pickup
of those sales in the latter part of the quarter when jurisdictions began to
lift their closure restrictions. As of June 30, 2020 we have no significant
supply issues and maintain inventories of materials sourced from diversified
geographies, allowing us to better tolerate short-term supply chain disruptions.
In May 2020, we amended and restated our revolving credit agreement to provide
us with an additional Revolving Line of Credit for Aggregate Revolving B
Commitments in the amount of $100 million. The purpose of the additional
$100 million is primarily to reduce risk, if necessary, associated with the
COVID-19
pandemic should the Company need to secure additional capital to continue its
strategy of accelerating the conversion of wood decking to Trex composite
decking and expanding its addressable market. As of June 30, 2020, we had no
outstanding indebtedness under our revolving credit facilities and $350 million
in available borrowing capacity. As the impact of
COVID-19
evolves, we will continue to evaluate our financial position and liquidity needs
in light of future developments.
Operations and Products:
Trex Company, Inc. currently operates in two reportable segments: Trex
Residential Products (Trex Residential) and Trex Commercial Products (Trex
Commercial). The Company is focused on using renewable resources within both our
Trex Residential and Trex Commercial segments.
Trex Residential
is the world's largest manufacturer of high-performance composite decking and
residential railing products, which are marketed under the brand name Trex
®
and manufactured in the United States. We offer a comprehensive set of
aesthetically appealing and durable,
low-maintenance
product offerings in the decking, residential railing, fencing, steel deck
framing, and outdoor lighting categories. A majority of the products are
eco-friendly
and leverage recycled materials to the extent possible. Trex Residential decking
is made in a proprietary process that combines reclaimed wood fibers and
recycled polyethylene film, making Trex one of the largest recyclers of plastic
film in North America. In addition to resisting fading and surface staining,
Trex Residential products require no sanding and sealing, resist moisture
damage, provide a splinter-free surface and do not require chemical treatment
against rot or insect infestation. Combined, these aspects yield significant
aesthetic advantages and lower maintenance than wood decking and railing and
ultimately render Trex products less costly than wood over the life of the deck.
Special characteristics (including resistance to splitting, the ability to bend,
and ease and consistency of machining and finishing) facilitate installation,
reduce contractor call-backs and afford consumers a wide range of design
options. Trex Residential products are sold to distributors and home centers for
final resale primarily to the residential market.
Trex offers the following products through Trex Residential:


Decking and   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 polyethylene film and feature a
              protective polymer shell for enhanced protection against fading,
              staining, mold and scratching.

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



                                       19
--------------------------------------------------------------------------------

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 Products designs and engineers custom solutions, which are
prevalent in professional and collegiate sports facilities, commercial and
high-rise applications, performing arts, sports, and event production and
rentals. With a team of devoted engineers, and industry-leading reputation for
quality and dedication to customer service, Trex Commercial markets to
architects, specifiers, contractors, and building owners.
Trex offers the following products through Trex Commercial:



Architectural     Our architectural railing systems are
Railing Systems   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          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.




                                       20

--------------------------------------------------------------------------------

Highlights for the three months ended June 30, 2020:

• Increase in net sales of 6.9%, or $14.2 million, to $220.6 million for

          the three months ended June 30, 2020 compared to $206.5 million for the
          three months ended June 30, 2019.


• Increase in gross profit of 10.7%, or $9.0 million, to $92.4 million for

          the three months ended June 30, 2020 compared to $83.4 million for the
          three months ended June 30, 2019.


• Increase in net income to $47.2 million, or $0.81 per diluted share, for

          the three months ended June 30, 2020 compared to $35.7 million, or $0.61
          per diluted share, for the three months ended June 30, 2019.


• Capital expenditures of $39.9 million primarily to increase production

capacity at the Trex Residential facilities in Virginia and Nevada and

for general plan cost reduction initiatives and other production

improvements.



Net Sales
. Net sales consist of sales and freight, net of discounts. The level of net
sales is principally affected by sales volume and the prices paid for Trex
products. Trex Residential operating results have historically varied from
quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in
certain geographic regions reduce the level of home and commercial improvement
and residential and commercial construction and can shift demand for our
products to a later period. As part of our normal business practice and
consistent with industry practice, we have historically provided our
distributors and dealers of our Trex Residential products incentives to build
inventory levels before the start of the prime deck-building season to ensure
adequate availability of our product to meet anticipated seasonal consumer
demand and to enable production planning. These incentives include payment
discounts, favorable payment terms, price discounts, or volume rebates on
specified products and other incentives based on increases in purchases as part
of specific promotional programs. The timing of our incentive programs can
significantly impact sales, receivables and inventory levels during the offering
period. However, the timing and terms of the majority of our programs are
generally consistent from year to year. In addition, the operating results for
Trex Commercial are driven by the timing of individual projects, which may vary
each quarterly period.
Gross Profit.
Gross profit represents the difference between net sales and cost of sales. Cost
of sales consists of raw material costs, direct labor costs, manufacturing
costs, subcontract costs and freight. Raw material costs generally include the
costs to purchase and transport reclaimed wood fiber, reclaimed polyethylene,
pigmentation for coloring our products, and commodities used in the production
of railing and staging. Direct labor costs include wages and benefits of
personnel engaged in the manufacturing process. Manufacturing costs consist of
costs of depreciation, utilities, maintenance supplies and repairs, indirect
labor, including wages and benefits, and warehouse and equipment rental
activities.
Product Warranty.
We warrant that our Trex Residential products will be free from material defects
in workmanship and materials for warranty periods ranging from 10 years to 25
years, depending on the product and its use. If there is a breach of such
warranties, we have an obligation either to replace the defective product or
refund the purchase price. We also warrant our Trex Commercial products for
periods ranging from 1 year to 3 years.
We continue to receive and settle claims for decking products manufactured at
our Nevada facility prior to 2007 that exhibit surface flaking and maintain a
warranty reserve to provide for the settlement of these claims. We monitor
surface flaking claims activity each quarter for indications that our estimates
require revision. Typically, a majority of surface flaking claims received in a
fiscal year are received during the summer outdoor season, which spans the
second and third fiscal quarters. It has been our practice to utilize actuarial
techniques during the third quarter, after a significant portion of all claims
has been received for the fiscal year and variances to annual claims
expectations are more meaningful. Our actuarial analysis is based on currently
known facts and a number of assumptions. Projecting future events such as the
number of claims to be received, the number of claims that will require payment
and the average cost of claims could cause the actual warranty liabilities to be
higher or lower than those projected, which could materially affect our
financial condition, results of operations or cash flows. The number of incoming
claims received in the six months ended June 30, 2020 was higher than the number
of claims received in the six months ended June 30, 2019 and exceeded our
expectations for the current year. Average settlement cost per claim experienced
in the six months ended June 30, 2020 was considerably higher than the average
settlement cost per claim experienced in the six months ended June 30, 2019, due
to an increase in larger claims settled and changes in the mix of settlement
methods that occurred in the second half of 2019, but was consistent with our
expectations for the current year, and lower than that experienced for the full
year ended December 31, 2019. We believe that our reserve at June 30, 2020 is
sufficient to cover future surface flaking obligations.
The following table details surface flaking claims activity related to our
warranty:

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

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

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



                                       21
--------------------------------------------------------------------------------

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

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

during the period.

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

closed with payment during the period.



Selling, General and Administrative Expenses.
The largest component of selling, general and administrative expenses is
personnel related costs, which includes salaries, commissions, incentive
compensation, and benefits of personnel engaged in sales and marketing,
accounting, information technology, corporate operations, research and
development, and other business functions. Another component of selling, general
and administrative expenses is branding and other sales and marketing costs,
which are used to build brand awareness. These costs consist primarily of
advertising, merchandising, and other promotional costs. Other general and
administrative expenses include professional fees, office occupancy costs
attributable to the business functions previously referenced, and consumer
relations expenses. As a percentage of net sales, selling, general and
administrative expenses may vary from quarter to quarter due, in part, to the
seasonality of our business.
RESULTS OF OPERATIONS
Below is our discussion and analysis of our operating results and material
changes in our operating results for the three months ended June 30, 2020 (2020
quarter) compared to the three months ended June 30, 2019 (2019 quarter), and
for the six months ended June 30, 2020 (2020
six-month
period) compared to the six months ended June 30, 2019 (2019
six-month
period).
Three Months Ended June 30, 2020 Compared To The Three Months Ended June 30,
2019Net Sales

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


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

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


Gross profit as a percentage of net sales, gross margin, was 41.9% in the 2020
quarter compared to 40.4% in the 2019 quarter and reflects the increase in gross
margin for Trex Residential and Trex Commercial to 42.5% and 30.7%,
respectively, in the 2020 quarter compared to 41.7% and 21.4%, respectively, in
the 2019 quarter. The increase in Trex Residential gross margin in the 2020
quarter compared to the 2019 quarter was primarily due to the
non-recurrence
of Enhance startup costs related to reduced throughput, equipment failures and
other inefficiencies at Trex Residential manufacturing facilities in 2019. Also,
a number of manufacturing lines were retrofitted to allow production of the
reduced weight Enhance profile. We expect to be essentially at the original
design target for Enhance by the end of the third quarter of 2020. The increase
in Trex Residential gross margin was offset by startup costs associated with the
expansion of capacity at our Nevada facility. The increase in gross margin at
Trex Commercial was primarily due to
non-recurrence
of legacy low margin contracts coupled with a mix of higher margin contracts in
the 2020 quarter, and initiatives aimed at improving project estimating, project
management, and manufacturing cost savings initiatives.

                                       22

--------------------------------------------------------------------------------

Selling, General and Administrative Expenses


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


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

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


The effective tax rate for the 2020 quarter of 25.6% was relatively unchanged
compared to the effective tax rate of 25.2% for the 2019 quarter.
Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA)
1
(in thousands)
Reconciliation of net income (GAAP) to EBITDA
(non-GAAP):

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

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

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.



                                       23
--------------------------------------------------------------------------------
                                       Three Months Ended June 30, 2019
                                     Trex
                                                        Trex
                                 Residential         Commercial        Total
Net income                       $     35,223$        487$ 35,710
Interest expense (income), net              6                 (7 )          (1 )
Income tax expense                     11,866                164        

12,030

Depreciation and amortization           3,258                141         3,399

EBITDA                           $     50,353$        785$ 51,138




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


Total EBITDA increased 31.9% to $67.5 million for the 2020 quarter compared to
$51.1 million for the 2019 quarter. The increase was primarily driven by a 30.1%
increase in Trex Residential EBITDA due to net sales and gross margin and by an
increase in Trex Commercial EBITDA primarily related to an increase in gross
margin.
Six Months Ended June 30, 2020 Compared To The Six Months Ended June 30, 2019Net Sales

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


The 9.1% increase in total net sales in the 2020
six-month
period compared to the 2019
six-month
period was due primarily to volume growth at Trex Residential for both our
legacy and new decking and residential railing products. The increase of 10.3%
in Trex Residential net sales during the 2020
six-month
period was primarily driven by volume growth, strong demand for our outdoor
living products, a strong residential repair and remodeling sector and our
initiatives to accelerate conversion from wood. The 6.6% decrease in Trex
Commercial net sales during the 2020
six-month
period was due primarily to fewer large projects compared to the 2019
six-month
period.
Gross Profit

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



                                       24
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Gross profit as a percentage of net sales, gross margin, was 43.3% in the 2020
six-month
period compared to 39.6% in the 2019
six-month
period. Gross margin for Trex Residential and Trex Commercial products in the
2020
six-month
period were 44.0% and 32.3%, respectively, compared to 41.0% and 21.0%,
respectively, in the 2019
six-month
period. The increase in Trex Residential gross margin in the 2020
six-month
period compared to the 2019
six-month
period was primarily due to
non-recurrence
of Enhance startup costs related to reduced throughput, equipment failures and
other inefficiencies at Trex Residential manufacturing facilities in 2019. Also,
a number of manufacturing lines were retrofitted to allow production of the
reduced weight Enhance profile. We expect to be essentially at the original
design target for Enhance by the end of the third quarter of 2020. The increase
in Trex Residential gross margin was offset by startup costs associated with the
expansion of capacity at our Nevada facility. The increase in gross margin at
Trex Commercial was primarily due to
non-recurrence
of legacy low margin contracts coupled with a mix of higher margin contracts in
the 2020 quarter, and initiatives aimed at improving project estimating, project
management, and manufacturing cost savings initiatives.
Selling, General and Administrative Expenses

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


The $2.3 million decrease in selling, general and administrative expenses in the
2020
six-month
period compared to the 2019
six-month
period resulted primarily from a decrease of $3.8 million in branding and
advertising spend and a $1.4 million decrease in research and development
expenses. The decreases were offset by a $1.3 million increase in personnel
related expenses and an increase of $1.6 million in other operating expenses.
Provision for Income Taxes

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


The effective tax rate for the 2020
six-month
period increased by 2.1% compared to the effective tax rate for the 2019
six-month
period primarily due to a current year decrease in excess tax benefits from the
exercise of share-based payments and an increase in
non-deductible
executive compensation.
Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA)
2
(in thousands)
Reconciliation of net income (GAAP) to EBITDA
(non-GAAP):

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

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

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.



                                       25
--------------------------------------------------------------------------------

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

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




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


Total EBITDA increased 34.9% to $126.4 million for the 2020
six-month
period compared to $93.7 million for the 2019
six-month
period. The increase was primarily driven by a 32.5% increase in Trex
Residential EBITDA due to net sales and gross margin and by an increase in Trex
Commercial EBITDA primarily related to an increase in gross margin.
LIQUIDITY AND CAPITAL RESOURCES
We finance operations and growth primarily with cash flows from operations,
borrowings under our revolving credit facilities, operating leases and normal
trade credit terms from operating activities. At June 30, 2020 we had
$12.2 million of cash and cash equivalents.
S
ources and Uses of Cash.
The following table summarizes our cash flows from operating, investing and
financing activities (in thousands):

                                                             Six Months 

Ended June 30,

                                                               2020         

2019

Net cash (used in) provided by operating activities $ (32,332 )

     $  43,058
Net cash used in investing activities                            (60,467 )        (19,061 )
Net cash used in financing activities                            (43,797 )  

(23,612 )

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

    $     385



Operating Activities
Cash used in operations was $32.3 million during the 2020
six-month
period compared to cash provided by operations of $43.1 million during the 2019
six-month
period. The use of cash flows in operations was primarily due to higher working
capital investment in accounts receivable as a result of the timing of sales
within the period and related payment discounts offered to our Trex Residential
decking and railing customers. The majority of the accounts receivable balance
at June 30, 2020, will be collected in the third quarter. The decrease was
primarily by offset increased net income, increase in accounts payable and the
timing of payment for Federal income taxes.
Investing Activities
Capital expenditures in the 2020
six-month
period were $62.6 million, consisting primarily of $52.6 million for capacity
expansion at our Virginia and Nevada facilities and $8.8 million for general
plant cost reduction initiatives and other production improvements.
Financing Activities
Net cash used in financing activities was $43.8 million in the 2020
six-month
period primarily for repurchases of our common stock of $44.1 million.

                                       26
--------------------------------------------------------------------------------
Amendment of Restated Certificate of Incorporation.
At the annual meeting of stockholders of the Company held on April 29, 2020, the
Company's stockholders approved an amendment of the Company's Restated
Certificate of Incorporation (Amendment), effective as of April 29, 2020. The
Company's Board of Directors unanimously approved the Amendment on February 19,
2020, subject to stockholder approval. The Amendment increases the number of
shares of common stock, par value $0.01 per share, that the Company is
authorized to issue from 120 million shares to 180 million shares. The Amendment
was filed with the Delaware Secretary of State on April 29, 2020.
Stock Repurchase Programs.
On February 16, 2018, the Board of Directors adopted a stock repurchase program
of up to 5.8 million shares of the Company's outstanding common stock (Stock
Repurchase Program). As of the June 30, 2020, the Company has repurchased
1.4 million shares of the Company's outstanding common stock under the Stock
Repurchase Program.
Due to the volatility and uncertainty in the stock market associated with the
COVID-19
pandemic, we suspended repurchases of our common stock under the Stock
Repurchase Program on March 12, 2020. As of the date of this report, the Stock
Repurchase Program remains in effect with repurchases suspended. However, we may
determine to resume repurchases at any time.
Stock Split.
On July 29, 2020, the Company's Board of Directors approved a
two-for-one
stock split of the Company's common stock, par value, $0.01. The stock split
will be in the form of a stock dividend to be distributed on September 14, 2020,
to stockholders of record at the close of business on August 19, 2020. The
condensed consolidated financial statements presented in this Form
10-Q
appropriately do not reflect the effects of the stock split.
Indebtedness.
Our Fourth Amended and Restated Credit Agreement (Fourth Amended Credit
Agreement) provides us with revolving loan capacity in a collective maximum
principal amount of $250 million from January 1 through June 30 of each year,
and a maximum principal amount of $200 million from July 1 through December 31
of each year throughout the term, which ends November 5, 2024. At June 30, 2020,
we had no outstanding indebtedness under the revolving credit facilities and
borrowing capacity under the facilities of $350 million, and $300 million from
July 1, 2020 through December 31, 2020.
On May 26, 2020, the Company entered into a First Amendment to the Original
Credit Agreement (the First Amendment) to provide for an additional $100 million
line of credit. The purpose of the additional $100 million line of credit is
primarily to reduce risk associated with the
COVID-19
pandemic should the Company need to secure additional capital to continue its
strategy of accelerating the conversion of wood decking to Trex composite
decking and expanding its addressable market. As a matter of convenience, the
parties incorporated the amendments to the Original Credit Agreement made by the
First Amendment into a new Fourth Amended and Restated Credit Agreement (New
Credit Agreement). In the New Credit Agreement, the revolving commitments under
the Original Credit Agreement are referred to as Revolving A Commitments and the
new $100 million line of credit is referred to as Revolving B Commitments. In
the New Credit Agreement, all of the material terms and conditions related to
the original line of credit (Revolving A Commitments) remain unchanged from the
Original Credit Agreement.
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%, Wells 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 June 30, 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.
We believe that cash on hand, cash from operations and borrowings expected to be
available under our revolving credit facilities, as amended, will provide
sufficient funds to fund planned capital expenditures, make scheduled principal
and interest payments, fund warranty payments, and meet other cash requirements.
We currently expect to fund future capital expenditures from operations and
financing activities. The actual amount and timing of future capital
requirements may differ materially from our estimate depending on the demand for
Trex products and new market developments and opportunities.
In addition, we believe our financial resources will allow us to manage the
impact of the
COVID-19
pandemic on the Company's business operations for the foreseeable
future. However, as the impact of
COVID-19
evolves, we will continue to evaluate our financial position and liquidity needs
in light of future developments.

                                       27

--------------------------------------------------------------------------------

Capital Requirements.
In June 2019, we announced a new capital expenditure program to increase
production capacity at our Trex Residential facilities in Virginia and Nevada.
The new multi-year capital expenditure program is projected at approximately
$200 million through 2021, and involves the construction of a new decking
facility at the existing Virginia site and the installation of additional
production lines at the Nevada site. The investment will allow us to increase
production output for future projected growth related to our strategy of
converting wood demand to Trex Residential wood-alternative composite decking.
When completed these investments will increase our Trex Residential production
capacity by approximately 70 percent. Our capital expenditure guidance for 2020
is $150 million to $170 million. In addition to the above, our capital
allocation priorities include expenditures for internal growth opportunities,
manufacturing cost reductions, upgrading equipment, and acquisitions which fit
our long-term growth strategy as we continue to evaluate opportunities that
would be a good strategic fit for Trex, and return of capital to shareholders.
Inventory in Distribution Channels. We sell our Trex Residential decking and
railing products through a tiered distribution system. We have over 50
distributors worldwide and two national retail merchandisers to which we sell
our products. The distributors in turn sell the products to dealers and retail
locations who in turn sell the products to end users. Significant increases in
inventory levels in the distribution channel without a corresponding change in
end-use
demand could have an adverse effect on future sales. We cannot definitively
determine the level of inventory in the distribution channels at any time. We
are not aware of any significant increases in the levels of inventory in the
distribution channels at June 30, 2020 compared to inventory levels at June 30,
2019.
Seasonality
. The operating results for Trex Residential have historically varied from
quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in
certain geographic regions reduce the level of home improvement and construction
activity and can shift demand for its products to a later period. As part of its
normal business practice and consistent with industry practice, Trex Residential
has historically offered incentive programs to its distributors and dealers to
build inventory levels before the start of the prime deck-building season in
order to ensure adequate availability of its product to meet anticipated
seasonal consumer demand. The seasonal effects are often offset by the positive
effect of the incentive programs. The operating results for Trex Commercial have
not historically varied from quarter to quarter as a result of seasonality.
However, they are driven by the timing of individual projects, which may vary
significantly each quarterly period.

© Edgar Online, source Glimpses


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