Trex Company, Inc.

TREX

US89531P1057

Construction Supplies & Fixtures

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

November 02, 2020 at 05:19 pm EST

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; material adverse impacts from global public health pandemics,
including the strain of coronavirus known as
COVID-19;
and material adverse impacts related to labor shortages or increases in labor
costs.
OVERVIEW
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 macroeconomic disruption. We are actively managing our business to
respond to this health crisis and we continue to evaluate the nature and extent
of its impact. As of the date of this report, we continue to operate at output
levels similar to those prior to the
COVID-19
pandemic, and the pandemic did not have a material adverse effect on our
business, results of operations, cash flows or financial condition. We have not
experienced any material disruptions to our operations, production or our supply
chain, and have not experienced any material reduction in demand for our
products 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. We are actively managing our business to respond to the impact,
such as engaging with our distributor network regarding market demand, ongoing
communications with our suppliers, and continuing to ensure the safety of our
employees. 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.
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.

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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.
Operations and Products:
Trex Company, Inc. currently operates in two reportable segments: Trex
Residential Products (Trex Residential) and Trex Commercial Products (Trex
Commercial). Refer to Note 16,
Segments
, in the Notes to the Condensed Consolidated Financial Statements in Part I.
Item 1.
Condensed Consolidated Financial Statements
of this Quarterly Report on Form
10-Q
for additional information. The Company is focused on using renewable resources
within both our Trex Residential and Trex Commercial segments.
Trex Residential
is the world's largest manufacturer of high-performance composite decking and
residential railing products, which are marketed under the brand name Trex
®
and manufactured in the United States. We offer a comprehensive set of
aesthetically appealing and durable,
low-maintenance
product offerings in the decking, residential railing, fencing, 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.



                                       20


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

approximately


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


Fencing       Our Trex Seclusions
              ®
              fencing product is offered through two specialty

distributors. This


              product consists of structural posts, bottom rail, pickets, top rail
              and decorative post caps.


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



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


Aluminum        Trex Signature
Railing         ®
Systems         aluminum railing collection, made from a minimum of 50 percent
                recycled content, combines superior styling with the

unparalleled


                strength of aluminum - making it an ideal railing choice

for a


                variety of commercial settings. Its straightforward,

unobtrusive


                design features traditional balusters and contemporary vertical
                rods, and can be installed with continuously graspable rail options
                for added safety, comfort and functionality. Trex Signature is
                available in three colors - charcoal black, bronze and

classic white


                - and is available in a variety of stock lengths.


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

Highlights for the three months ended September 30, 2020:

• Increase in net sales of 19%, or $37.0 million, to $231.5 million for the


          three months ended September 30, 2020 compared to $194.6 million for the
          three months ended September 30, 2019.



                                       21

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• Increase in gross profit of 3.1%, or $2.5 million, to $85.0 million for

the three months ended September 30, 2020 compared to $82.4 million for


          the three months ended September 30, 2019.

• Increase in net income to $42.7 million, or $0.37 per diluted share, for

the three months ended September 30, 2020 compared to $42.0 million, or

$0.36 per diluted share, for the three months ended September 30, 2019.



     •    Capital expenditures of $37.1 million, primarily to increase production

capacity at the Trex Residential facilities in Virginia and Nevada and

for cost reduction initiatives and other production improvements.

Net Sales
. Net sales consist of sales and freight, net of discounts. The level of net
sales is principally affected by sales volume and the prices paid for Trex
products. Trex Residential operating results have historically varied from
quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in
certain geographic regions reduce the level of home and commercial improvement
and residential and commercial construction and can shift demand for our
products to a later period. As part of our normal business practice and
consistent with industry practice, we have historically provided our
distributors and dealers of our Trex Residential products incentives to build
inventory levels before the start of the prime deck-building season to ensure
adequate availability of our product to meet anticipated seasonal consumer
demand and to enable production planning. These incentives include payment
discounts, favorable payment terms, price discounts, or volume rebates on
specified products and other incentives based on increases in purchases as part
of specific promotional programs. The timing of our incentive programs can
significantly impact sales, receivables and inventory levels during the offering
period. 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 nine months ended September 30,
2020 was higher than the number of claims received in the nine months ended
September 30, 2019 and exceeded our expectations for the current year. Prior to
2020, the number of incoming claims received declined each year since 2009.
After evaluating the rise in incoming claims in our actuarial analysis, we
increased our estimate of the number of future claims to be settled with
payment. Average cost per claim experienced in the nine months ended
September 30, 2020 was lower than that experienced in the nine months ended
September 30, 2019 but higher than expectations for the current year. We
estimate that average cost per claim will increase in future years, primarily
due to inflation.
As a result of the increase in estimated future claims and expected rise in
future average cost per claim, in the three-month period ended September 30,
2020, we recorded a provision of $6.5 million to the warranty reserve for the
future settlement of surface flaking claims. We believe the reserve at
September 30, 2020 is sufficient to cover future surface flaking obligations.
Refer to Note 18,
Commitments and Contingencies, Product Warranty
, in the Notes to the Condensed Consolidated Financial Statements in Part I.
Item 1.
Condensed Consolidated Financial Statements
of this Quarterly Report on Form
10-Q
for additional information.

                                       22

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

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



                                      Nine Months Ended September 30,
                                        2020                   2019
Claims open, beginning of period            1,724                  2,021
Claims received (1)                         1,263                  1,184
Claims resolved (2)                        (1,042 )               (1,239 )

Claims open, end of period                  1,945                  1,966

Average cost per claim (3)         $        3,396         $        3,475

(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 September 30, 2020
(2020 quarter) compared to the three months ended September 30, 2019 (2019
quarter), and for the nine months ended September 30, 2020 (2020 nine-month
period) compared to the nine months ended September 30, 2019 (2019 nine-month
period).
Three Months Ended September 30, 2020 Compared To The Three Months Ended
September 30, 2019
Net Sales

                                          Three Months Ended September 30,
                                            2020                    2019             $ Change         % Change
                                                               (dollars in thousands)
Total net sales                       $        231,502        $        194,551       $  36,951             19.0 %
Trex Residential net sales            $        218,435        $        182,775       $  35,660             19.5 %
Trex Commercial net sales             $         13,067        $         11,776       $   1,291             11.0 %


Total net sales increased by 19% in the 2020 quarter compared to the 2019
quarter reflecting a 19.5% increase in Trex Residential net sales and an 11%
increase in Trex Commercial net sales. The increase in Trex Residential net
sales was substantially all due to volume growth of our residential decking and
railing products, resulting from strong demand for our outdoor living products,
a strong residential repair and remodeling sector and our initiatives to
accelerate conversion from wood. The increase in Trex Commercial net sales
during the 2020 quarter was primarily due to underlying growth in the commercial
segment.
Gross Profit

                          Three Months Ended September 30,
                           2020                     2019            $ Change       % Change
                                              (dollars in thousands)
Cost of sales          $       146,538         $       112,120      $  34,418           30.7 %
% of total net sales              63.3 %                  57.6 %
Gross profit           $        84,964         $        82,431      $   2,533            3.1 %
Gross margin                      36.7 %                  42.4 %


Gross profit as a percentage of net sales, gross margin, was 36.7% in the 2020
quarter compared to 42.4% in the 2019 quarter. Gross margin for Trex Residential
and Trex Commercial was 37.4% and 24.4%, respectively, in the 2020 quarter
compared to 43.4% and 26.5%, respectively, in the 2019 quarter. Excluding a
$6.5 million provision to the Trex Residential

                                       23
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legacy warranty reserve, gross margin was 39.5% for the 2020 quarter period
compared to 42.4% in the 2019 quarter. This charge related to the surface
flaking issue that affected a portion of products produced at our Nevada plant
before 2007. In addition to the warranty reserve provision, gross margin was
unfavorably impacted by increased labor costs related to our announced capacity
expansion program,
COVID-19
management and depreciation due to capital expansion expenditures, partially
offset by favorable material costs due to managing our Enhance profile to the
lower weight target.
Selling, General and Administrative Expenses

                                         Three Months Ended September 30,
                                          2020                     2019              $ Change        % Change
                                                              (dollars in thousands)
Selling, general and
administrative expenses              $        28,027          $        27,409        $     618             2.3 %
% of total net sales                            12.1 %                   14.1 %


Selling, general and administrative expenses in the 2020 quarter were comparable
to those in the 2019 quarter. The increase in selling, general and
administrative expenses was primarily the result of higher operating expenses
offset by lower branding.
Provision for Income Taxes

                                         Three Months Ended September 30,
                                          2020                     2019              $ Change        % Change
                                                              (dollars in thousands)
Provision for income taxes           $        14,435          $        13,790        $     645             4.7 %
Effective tax rate                              25.3 %                   24.7 %


The effective tax rate for the 2020 quarter of 25.3% was relatively unchanged
with an increase of 0.6% compared to the effective tax rate of 24.7% 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 September 30, 2020
                                    Trex
                                                          Trex
                                 Residential           Commercial          Total
Net income                      $      42,225         $        485       $  42,710
Interest income, net                     (208 )                 -             (208 )
Income tax expense                     14,276                  159          14,435
Depreciation and amortization           4,326                  209           4,535

EBITDA                          $      60,619         $        853       $  61,472

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.



                                       24


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                                      Three Months Ended September 30, 2019
                                    Trex
                                                          Trex
                                 Residential           Commercial          Total
Net income                      $      41,381         $        595       $  41,976
Interest income, net                     (744 )                 -             (744 )
Income tax expense                     13,580                  210          13,790
Depreciation and amortization           3,422                  165           3,587

EBITDA                          $      57,639         $        970       $  58,609




                                        Three Months Ended September 30,
                                          2020                   2019              $ Change          % Change
                                                              (dollars in thousands)
Total EBITDA                         $        61,472        $        58,609       $    2,863               4.9 %
Trex Residential EBITDA              $        60,619        $        57,639       $    2,980               5.2 %
Trex Commercial EBITDA               $           853        $           970       $     (117 )           (12.1 )%


Total EBITDA increased 4.9% to $61.5 million for the 2020 quarter compared to
$58.6 million for the 2019 quarter. The increase was driven by a 5.2% increase
in Trex Residential EBITDA, primarily due to the volume growth in net sales. The
increase was offset by the decrease in Trex Commercial EBITDA related to a
decrease in gross margin. Excluding the impact of the $6.5 million surface
flaking reserve, the growth in EBITDA was 15.9%.
Nine Months Ended September 30, 2020 Compared To The Nine Months Ended
September 30, 2019
Net Sales

                                        Nine Months Ended September 30,
                                          2020                    2019             $ Change          % Change
                                                              (dollars in thousands)
Total net sales                     $        652,545        $        580,575       $  71,970              12.4 %
Trex Residential net sales          $        614,187        $        541,722       $  72,465              13.4 %
Trex Commercial net sales           $         38,358        $         38,853       $    (495 )            (1.3 )%


The 12.4% increase in total net sales in the 2020 nine-month period compared to
the 2019 nine-month period was primarily due to increased net sales at Trex
Residential. The increase of 13.4% in Trex Residential net sales during the 2020
nine-month period was substantially all due to volume growth, resulting from the
strong broad-based demand for our outdoor living products, positive momentum in
the residential repair and remodeling sector and our initiatives to expand our
addressable market and accelerate conversion from wood.
Gross Profit

                           Nine Months Ended September 30,
                            2020                    2019            $ Change       % Change
                                              (dollars in thousands)
Cost of sales          $       385,479         $       345,334      $  40,145           11.6 %
% of total net sales              59.1 %                  59.5 %
Gross profit           $       267,066         $       235,241      $  31,825           13.5 %
Gross margin                      40.9 %                  40.5 %


Gross profit as a percentage of net sales, gross margin, was 40.9% in the 2020
nine-month period, comparable to 40.5% in the 2019 nine-month period. Gross
margin for Trex Residential and Trex Commercial in the 2020 nine-month period
were 41.6% and 29.6%, respectively, compared to 41.8% and 22.6%, respectively,
in the 2019 nine-month period. Excluding a $6.5 million provision to the Trex
Residential legacy warranty reserve, gross margin was 41.9% for the 2020
nine-month period compared to 40.5% in the 2019 nine-month period. This charge
related to the surface flaking issue that affected a portion of products
produced at our Nevada plant before 2007. Gross margin was favorably impacted by
the
non-recurrence
of Enhance

                                       25


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startup costs in 2019 experienced at Trex Residential in the 2019 nine-month
period. Also, an increase in gross
margin at Trex Commercial, primarily due to
non-recurrence
of legacy low margin contracts coupled with a mix of higher margin contracts in
the 2020 nine-month period, and initiatives aimed at improving project
estimating, project management, and manufacturing cost savings, contributed to
the increase in gross margin.
Selling, General and Administrative Expenses

                                       Nine Months Ended September 30,
                                         2020                   2019              $ Change          % Change
                                                             (dollars in thousands)
Selling, general and
administrative expenses             $       91,598          $       93,281        $  (1,683 )            (1.8 )%
% of total net sales                          14.0 %                  16.1 %


The $1.7 million decrease in selling, general and administrative expenses in the
2020 nine-month period compared to the 2019 nine-month period was primarily
driven by disciplined branding and advertising spending, which decreased by
$4.4 million during the 2020 nine-month period, as the effects of
COVID-19
played out during the second and third quarters. The decreases were offset by
increases in personnel related expenses of $1.2 million and a net increase in
information technology and other operating expenses of $2.3 million.
Provision for Income Taxes

                                         Nine Months Ended September 30,
                                           2020                    2019             $ Change         % Change
                                                               (dollars in thousands)
Provision for income taxes            $       43,938          $       33,520        $  10,418             31.1 %
Effective tax rate                              24.9 %                  23.5 %


The effective tax rate for the 2020 nine-month period increased by 1.4% compared
to the effective tax rate for the 2019 nine-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):

                                     Nine Months Ended September 30, 2020
                                    Trex
                                                        Trex
                                 Residential         Commercial        Total
Net income                      $     129,157        $     3,174     $ 132,331
Interest income, net                     (801 )               -           (801 )
Income tax expense                     42,853              1,085        43,938
Depreciation and amortization          11,855                595        12,450

EBITDA                          $     183,064        $     4,854     $ 187,918

2 EBITDA represents net income before interest, income taxes, depreciation and