TREX COMPANY, INC. The following management discussion should be read in conjunction with theTrex Company, Inc. (Company, we or our) Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theU.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. EXPLANATORY NOTE: OnJuly 29, 2020 , the Board of Directors of the Company approved a two-for-one stock split of the Company's common stock, par value$0.01 . The stock split was in the form of a stock dividend distributed onSeptember 14, 2020 , to stockholders of record at the close of business onAugust 19, 2020 . The stock split entitled each stockholder to receive one additional share of common stock, par value$0.01 , for each share they held as of the record date. All common stock share and per share data for all periods presented have been retroactively adjusted to reflect the stock split. 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 endedDecember 31, 2019 filed with theSEC , and the factor discussed under "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q. These statements are also subject to risks and uncertainties that could cause the Company's actual operating results to differ materially. Such risks and uncertainties include, but are not limited to: the extent of market acceptance of the Company's current and newly developed products; the costs associated with the development and launch of new products and the market acceptance of such new products; the sensitivity of the Company's business to general economic conditions; the impact of seasonal and weather-related demand fluctuations on inventory levels in the distribution channel and sales of the Company's products; the availability and cost of third-party transportation services for the Company's products and raw materials; the Company's ability to obtain raw materials, including scrap polyethylene, wood fiber, and other materials used in making our products, at acceptable prices; the Company's ability to maintain product quality and product performance at an acceptable cost; the Company's ability to increase throughput and capacity to adequately match supply with demand; the level of expenses associated with product replacement and consumer relations expenses related to product quality; the highly competitive markets in which the Company operates; cyber-attacks, security breaches or other security vulnerabilities; the impact of upcoming data privacy laws and the EU General Data Protection Regulation and the related actual or potential costs and consequences; material adverse impacts from global public health pandemics, including the strain of coronavirus known as COVID-19; and material adverse impacts related to labor shortages or increases in labor costs. OVERVIEW Operations and Products:Trex Company, Inc. currently operates in two reportable segments: Trex Residential Products (Trex Residential) andTrex 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 inthe United States . We offer a comprehensive set of aesthetically appealing and durable, low-maintenance product offerings in the decking, residential railing, fencing and outdoor lighting categories. A majority of the products are eco-friendly and leverage recycled 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 inNorth 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. 16 -------------------------------------------------------------------------------- Table of Contents Trex offers the following products through Trex Residential:
Decking and Our principal decking products are Trex Transcend Accessories ®
, Trex Select
®
and Trex Enhance
®
. In addition, our Trex Transcend decking product can also be used
as cladding. Our high-performance,
low-maintenance,
eco-friendly
composite decking products are comprised of a blend of 95 percent
reclaimed wood fibers and recycled polyethylene film and feature a
protective polymer shell for enhanced protection against fading,
staining, mold and scratching.
We also offer accessories to our decking products, including Trex
Hideaway
®
and Trex DeckLighting
™
, an outdoor lighting system. Trex DeckLighting is a line of
energy-efficient LED dimmable deck lighting, which isdesigned for
use on posts, floors and steps. The line includes a post cap light,
deck rail light, riser light and a recessed deck light.
Railing Our residential railing products are Trex Transcend
®
Railing, Trex Select
®
Railing, Trex Enhance
®
Railing and Trex Signature
®
aluminum railing. Trex Transcend Railing, made fromapproximately
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 specialtydistributors. This
product consists of structural posts, bottom rail, pickets, top rail
and decorative post caps.
Trex Commercial
is a leading national provider of custom-engineered railing and staging systems.
Trex Commercial designs and engineers custom solutions, which are prevalent in
professional and collegiate sports facilities, commercial and high-rise
applications, performing arts, sports, and event production and rentals. With a
team of devoted engineers, and industry-leading reputation for quality and
dedication to customer service, Trex Commercial markets to architects,
specifiers, contractors, and building owners.
Trex offers the following products through Trex Commercial:
Architectural
Railing Systems Our architectural railing systems are
pre-engineered
guardrails with options to accommodate styles ranging from classic
and elegant wood top rail combined with sleek stainless components
and glass infill, to modern and minimalist stainless cable and rod
infill choices. Trex Commercial can also design, engineer and
manufacture custom railing systems tailored to the customer's
specific material, style and finish. Many railing styles are
achievable, including glass, mesh, perforated railing and cable
railing.
Aluminum 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 a variety of colors and stock lengths to accommodate
project needs.
17
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Staging
Equipment and Our advanced modular, lightweight custom staging systems include
Accessories portable platforms, orchestra shells, guardrails, stair units,
barricades, camera platforms, VIP viewing decks, ADA infills, DJ
booths, pool covers, and other custom applications. Our systems
provide superior staging product solutions for facilities and venues
with custom needs. Our modular stage equipment is designed to appear
seamless, feel permanent, and maximize the functionality of the
space.
Highlights for the three months ended
• Increase in net sales of 22.5%, or
the three months ended March 31, 2021 compared to $200.4 million for the
three months ended March 31, 2020 .
• Increase in net income to
the three months ended March 31, 2021 compared to $42.4 million , or $0.36
per diluted share, for the three months ended March 31, 2020 .
• Increase in EBITDA (earnings before interest, income tax and depreciation
and amortization) of 20.2%, or
three months ended
months ended March 31, 2020 .
• Capital expenditures of
capacity at the Trex Residential facilities and for cost reduction
initiatives and other production improvements.
• Repurchase of 504,275 shares of our outstanding common stock during the
three months ended
a total 3.3 million shares repurchased under the program to date.
Net Sales . Net sales consist of sales and freight, net of discounts. The level of net sales is principally affected by sales volume and the prices paid for Trex products. Trex Residential operating results have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home and commercial improvement and residential and commercial construction and can shift demand for our products to a later period. As part of our normal business practice and consistent with industry practice, we have historically provided our distributors and dealers of our Trex Residential products incentives to build inventory levels before the start of the prime deck-building season to ensure adequate availability of our product to meet anticipated seasonal consumer demand and to enable production planning. These incentives include payment discounts, favorable payment terms, price discounts, or volume rebates on specified products and other incentives based on increases in purchases as part of specific promotional programs. The timing of our incentive programs can significantly impact sales, receivables and inventory levels during the offering period. In addition, the operating results for Trex Commercial are driven by the timing of individual projects, which may vary each quarterly period. Gross Profit. Gross profit represents the difference between net sales and cost of sales. Cost of sales consists of raw material costs, direct labor costs, manufacturing costs, subcontract costs and freight. Raw material costs generally include the costs to purchase and transport reclaimed wood fiber, reclaimed polyethylene, pigmentation for coloring our products, and commodities used in the production of railing and staging. Direct labor costs include wages and benefits of personnel engaged in the manufacturing process. Manufacturing costs consist of costs of depreciation, utilities, maintenance supplies and repairs, indirect labor, including wages and benefits, and warehouse and equipment rental activities. Selling, General and Administrative Expenses. The largest component of selling, general and administrative expenses is personnel related costs, which includes salaries, commissions, incentive compensation, and benefits of personnel engaged in sales and marketing, accounting, information technology, corporate operations, research and development, and other business functions. Another component of selling, general and administrative expenses is branding and other sales and marketing costs, which are used to build brand awareness. These costs consist primarily of advertising, merchandising, and other promotional costs. Other general and administrative expenses include professional fees, office occupancy costs attributable to the business functions previously referenced, and consumer relations expenses. As a percentage of net sales, selling, general and administrative expenses may vary from quarter to quarter due, in part, to the seasonality of our business. Product Warranty. We warrant that our Trex Residential products will be free from material defects in workmanship and materials for warranty periods ranging from 10 years to 25 years, depending on the product and its use. If there is a breach of such warranties, we have an obligation either to replace the defective product or refund the purchase price. Depending on the product and its use, we also warrant our Trex Commercial products will be free of manufacturing defects for periods ranging from 1 year to 3 years. 18 -------------------------------------------------------------------------------- Table of Contents We continue to receive and settle claims for decking products manufactured at our Trex Residential Nevada facility prior to 2007 that exhibit surface flaking and maintain a warranty reserve to provide for the settlement of these claims. We monitor surface flaking claims activity each quarter for indications that our estimates require revision. Typically, a majority of surface flaking claims received in a fiscal year are received during the summer outdoor season, which spans the second and third fiscal quarters. It has been our practice to utilize actuarial techniques during the third quarter, after a significant portion of all claims has been received for the fiscal year and variances to annual claims expectations are more meaningful. Our actuarial analysis is based on currently known facts and a number of assumptions. Projecting future events such as the number of claims to be received, the number of claims that will require payment and the average cost of claims could cause the actual warranty liabilities to be higher or lower than those projected, which could materially affect our financial condition, results of operations or cash flows. The number of incoming claims received in the three months endedMarch 31, 2021 was higher than the number of claims received in the three months endedMarch 31, 2020 and exceeded our expectations for the first quarter of 2021. Average cost per claim experienced in the three months endedMarch 31, 2021 was higher than that experienced in the three months endedMarch 31, 2020 but was consistent with expectations for the current year. We estimate that average cost per claim will increase in future years, primarily due to inflation. We believe the reserve atMarch 31, 2021 is sufficient to cover future surface flaking obligations. Refer to Note 18, Commitments and Contingencies, Product Warranty , in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1. Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional information. We estimate that the annual number of claims received will decline over time and that the average cost per claim will increase, primarily due to inflation. If the level of claims received or average cost per claim differs materially from expectations, it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flows in future periods. We estimate that a 10% change in the expected number of remaining claims to be settled with payment or the expected cost to settle claims may result in approximately a$2.1 million change in the surface flaking warranty reserve. The following table details surface flaking claims activity related to our warranty: Three Months Ended March 31, 2021 2020 Claims open, beginning of period 1,799 1,724 Claims received (1) 214 205 Claims resolved (2) (215 ) (195 ) Claims open, end of period 1,798 1,734 Average cost per claim (3)$ 3,620 $ 3,331
(1) Claims received include new claims received or identified during the period.
(2) Claims resolved include all claims settled with or without payment and closed
during the period.
(3) Average cost per claim represents the average settlement cost of claims
closed with payment during the period.
COVID-19.
Our results of operations are affected by economic conditions, including
macroeconomic conditions and levels of business and consumer confidence. The
COVID-19
pandemic increased the level of volatility and uncertainty globally and created
macroeconomic disruption. We are actively managing our business to respond to
this health crisis, and we continue to evaluate the nature and extent of its
impact. We have not experienced any material disruptions to our operations,
production, supply chain, or any material reduction in demand for our products
due to the
COVID-19
pandemic. Even though vaccines have been approved and are being distributed, the
pandemic remains an evolving situation. 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.
19
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Table of Contents
We are following or exceeding all Centers for Disease Control and Prevention
(CDC ) and public officials' guidelines. We adopted a business continuity plan
and local emergency response plans at each location. We continue to take
precautionary measures, make contingency plans and improve our response to the
developing situation. We have assembled a cross-functional team whose chief
charge is to oversee our efforts to ensure the health and safety of all
employees and supply product to our customers. That team constantly monitors the
latest CDC , Federal, state and other regulatory guidance, works to secure
personal protective equipment, finds new ways to help mitigate risk, and
identifies opportunities for us to exceed recommendations.
We have implemented preventative or protective actions at our facilities, our
corporate headquarters and with field sales personnel. In order to mitigate the
spread of the virus, we instructed our employees to practice social distancing.
In addition, face masks and other protective equipment have been distributed to
employees across all of our facilities, and handwashing and hand sanitizing
stations have been installed. 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.
Fire at Virginia Facility
On March 13, 2021 , an electrical fire occurred at one of the Company's
manufacturing buildings in its Virginia complex. No injuries occurred from the
event. The building was
off-line
while damage to the building's electrical systems was addressed. Repairs were
substantially completed at the end of March 2021 . The Company has insurance
coverage for repairs, incremental direct costs to serve its customers, and
losses in operating income from the loss in net sales. No proceeds from the
insurance recovery were received during the three months ended March 31, 2021 .
RESULTS OF OPERATIONS
Below is the discussion and analysis of our operating results and material
changes in our operating results for the three months ended March 31, 2021 (2021
quarter) compared to the three months ended March 31, 2020 (2020 quarter).
Three Months Ended March 31, 2021 Compared To The Three Months Ended March 31,
2020
Net Sales
Three Months Ended
March 31,
2021 2020 $ Change % Change
(dollars in thousands)
Total net sales $ 245,524 $ 200,395 $ 45,129 22.5 %
Trex Residential net sales $ 233,070 $ 186,874 $ 46,196 24.7 %
Trex Commercial net sales $ 12,454 $ 13,521 $ (1,067) (7.9) %
Total net sales increased by 22.5% in the 2021 quarter compared to the 2020
quarter reflecting a 24.7% increase in Trex Residential net sales and a 7.9%
decrease in Trex Commercial net sales. The increase in Trex Residential net
sales was substantially all due to volume growth across all residential product
lines. The sustained broad-based demand continued to reflect strong secular
trends, including growth in the outdoor living category, renewed focus on the
home, the shift in population from urban to suburban and smaller metropolitan
areas and consumers' increasing preference for environmentally sustainable
products. In addition, we continue to benefit from our long-term growth strategy
to convert consumers from wood decking to our
eco-friendly
Trex decking, a benefit that we believe is not only continuing but accelerating
as we are still in the early stages of executing our strategy, providing us with
a significant runway. As a result of our capacity expansion program at Trex
Residential announced in 2019, the production lines at our new Virginia facility
started coming online in the first quarter of 2021 and will continue to ramp up
through the end of May giving us more available capacity to capture additional
growth. Also, due to inflationary pressures, effective with January orders we
took a mid single-digit price increase on certain product lines. The decrease in
Trex Commercial net sales reflects the impact of the
COVID-19
pandemic on the commercial construction business due to the delay in and
deferral of the startup of new projects.
20
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Gross Profit
Three Months Ended March 31,
2021 2020 $ Change % Change
(dollars in thousands)
Cost of sales $ 149,723 $ 110,699 $ 39,024 35.3 %
% of total net sales 61.0 % 55.2 %
Gross profit $ 95,801 $ 89,696 $ 6,105 6.8 %
Gross margin 39.0 % 44.8 %
Gross profit as a percentage of net sales, gross margin, was 39.0% in the 2021
quarter compared to 44.8% in the 2020 quarter. Gross margin for Trex Residential
and Trex Commercial was 40.2% and 17.2%, respectively, in the 2021 quarter
compared to 45.6% and 33.6%, respectively, in the 2020 quarter. Gross margin was
unfavorably impacted by inflationary pressures on raw materials,
start-up
costs and increased depreciation related to our capacity expansion program at
Trex Residential, and reduced overhead absorption due to the fire at the
Virginia facility. The decrease in gross margin was partially offset by the
price increase on certain product lines at Trex Residential. The decrease in
Trex Commercial gross margin was due to product mix of lower margin projects and
additional project costs.
Selling, General and Administrative Expenses
Three Months Ended March 31,
2021 2020 $ Change % Change
(dollars in thousands)
Selling, general and
administrative expenses $ 31,312 $ 34,561 $ (3,249 ) (9.4 )%
% of total net sales 12.8 % 17.3 %
Selling, general and administrative expenses in the 2021 quarter were slightly
lower than those in the 2020 quarter. The decrease in selling, general and
administrative expenses was primarily the result lower branding spend and travel
and entertainment expenses.
Provision for Income Taxes
Three Months Ended March 31,
2021 2020 $ Change % Change
(dollars in thousands)
Provision for income taxes $ 15,947 $ 13,255 $ 2,692 20.3 %
Effective tax rate 24.7 % 23.8 %
The effective tax rate for the 2021 quarter of 24.7% was relatively unchanged
with an increase of 0.9% compared to the effective tax rate of 23.8% for the
2020 quarter.
Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA)
1
(in thousands)
Reconciliation of net income (GAAP) to EBITDA
(non-GAAP):
Three Months Ended March 31, 2021
Trex
Trex
Residential Commercial Total
Net income (loss) $ 48,745 $ (200 ) $ 48,545
Interest income, net (3 ) - (3 )
Income tax expense (benefit) 16,012 (65 ) 15,947
Depreciation and amortization 6,210 213 6,423
EBITDA $ 70,964 $ (52 ) $ 70,912 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
included data with respect to EBITDA because management believes it
facilitates performance comparison between the Company and its competitors,
and management evaluates the performance of its reportable segments using
several measures, including EBITDA. Management considers EBITDA to be an
important supplemental indicator of our core operating performance because it
eliminates interest, income taxes, and depreciation and amortization charges
to net income or loss. In relation to competitors, EBITDA eliminates
differences among companies in capitalization and tax structures, capital
investment cycles and ages of related assets. For these reasons, management
believes that EBITDA provides important information regarding the operating
performance of the Company and its reportable segments.
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Table of Contents
Three Months Ended March 31, 2020
Trex
Trex
Residential Commercial Total
Net income $ 41,020 $ 1,382 $ 42,402
Interest income, net (522 ) - (522 )
Income tax expense 12,788 467 13,255
Depreciation and amortization 3,664 187 3,851
EBITDA $ 56,950 $ 2,036 $ 58,986
Three Months Ended March 31,
2021 2020 $ Change % Change
(dollars in thousands)
Total EBITDA $ 70,912 $ 58,986 $ 11,926 20.2 %
Trex Residential EBITDA $ 70,964 $ 56,950 $ 14,014 24.6 %
Trex Commercial EBITDA $ (52 ) $ 2,036 $ (2,088 ) (102.6 )%
Total EBITDA increased 20.2% to $70.9 million for the 2021 quarter compared to
$59 million for the 2020 quarter. The increase was driven by a 24.6% increase in
Trex Residential EBITDA, primarily due to the volume growth in net sales. The
increase was partially offset by a decrease in Trex Commercial EBITDA related to
a decrease 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 March 31, 2021 we had
$8.2 million of cash and cash equivalents.
S
ources and Uses of Cash.
The following table summarizes our cash flows from operating, investing and
financing activities (in thousands):
Three Months
Ended
2021 2020
Net cash used in operating activities$ (142,574 ) $ (108,768 ) Net cash used in investing activities (57,800 ) (20,597 ) Net cash provided by (used in) financing activities 86,894
(14,129 )
Net decrease in cash and cash equivalents$ (113,480 ) $ (143,494 ) Operating Activities Cash used in operations was$142.6 million during the 2021 three-month period compared to cash used in operations of$108.8 million during the 2020 three-month period. The increase in the use of cash flows in operations was primarily due to higher working capital investment in accounts receivable as a result of the increase in Trex Residential net sales. Investing Activities Capital expenditures in the 2021 three-month period were$58.1 million , primarily for capacity expansion at our Trex Residential facilities, general plant cost reduction initiatives and other production improvements. Financing Activities Net cash provided by financing activities of$86.9 million in the 2021 quarter consisted of net borrowings on our line of credit of$136 million offset by repurchases of our common stock of$49.6 million . 22 -------------------------------------------------------------------------------- Table of Contents Stock Repurchase Program. OnFebruary 16, 2018 , the Board of Directors adopted a stock repurchase program of up to 11.6 million shares of the Company's outstanding common stock (Stock Repurchase Program). OnMarch 12, 2020 , the Company suspended repurchases of its common stock under the Stock Repurchase Program due to the volatility and uncertainty in the stock market associated with the COVID-19 pandemic. As ofMarch 31, 2021 , the Company has repurchased 3.3 million shares of the Company's outstanding common stock under the Stock Repurchase Program. OnOctober 30, 2020 , the Company lifted the suspension of repurchases of its common stock under the Stock Repurchase Program. Stock Split. OnJuly 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 was in the form of a stock dividend distributed onSeptember 14, 2020 , to stockholders of record at the close of business onAugust 19, 2020 . The stock split entitled each stockholder to receive one additional share of common stock for each share they held as of the record date. All common stock share and per share data for all periods presented in the accompanying unaudited condensed consolidated financial statements and notes thereto have been retroactively adjusted to reflect 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 fromJanuary 1 through June 30 of each year, and a maximum principal amount of$200 million fromJuly 1 through December 31 of each year throughout the term, which endsNovember 5, 2024 . AtMarch 31, 2021 , we had$136 million in outstanding borrowings under the revolving credit facilities and borrowing capacity under the facilities of$214 million . OnMay 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, SwingLine Lender and L/C Issuer; and certain other lenders includingWells Fargo Bank, N.A. (Wells Fargo), who is also Syndication Agent;Truist Bank (Truist); andRegions Bank (Regions) (each, a Lender and collectively, the Lenders), arranged byBofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner. The First Amendment further provides that the New Credit Agreement is amended and restated by changing Schedule 2.01 to add applicable Lender percentages related to the Revolving B Commitment for BOA of 47.5%, Well Fargo of 28.0% and Regions of 24.5%. Compliance with Debt Covenants. Pursuant to the terms of the Fourth Amended Credit Agreement, the Company is subject to certain loan compliance covenants. The Company was in compliance with all covenants as ofMarch 31, 2021 . Failure to comply with the financial covenants could be considered a default of repayment obligations and, among other remedies, could accelerate payment of any amounts outstanding. 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 continues to evolve, we will continue to evaluate our financial position and liquidity needs in light of future developments. Capital Requirements. InJune 2019 , we announced a new capital expenditure program to increase production capacity at our Trex Residential facilities inVirginia andNevada . The new multi-year capital expenditure program is projected at approximately$200 million through the second quarter of 2021, and involves the construction of a new decking facility at the existingVirginia site and the installation of additional production lines at theNevada 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. The production lines at our newVirginia facility started coming online in the first quarter of 2021 and will continue to ramp up through the end of May, one month ahead of schedule. When completed, our capacity expansion program will increase our Trex Residential production capacity by approximately 70 percent when compared to 2019 volume levels. Our capital expenditure guidance for 2021 is$130 million to$150 million . In addition to the above, our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, upgrading equipment and support systems, and acquisitions which fit our long-term growth strategy as we continue to evaluate opportunities that would be a good strategic fit for Trex, and return of capital to shareholders. 23
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Table of Contents 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 atMarch 31, 2021 compared to inventory levels atMarch 31, 2020 . 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.
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