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, 2020 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. 17 -------------------------------------------------------------------------------- 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.
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 isdesigned to appear
seamless, feel permanent, and maximize the functionality of the
space.
18-------------------------------------------------------------------------------- Table of Contents Highlights for the three months endedJune 30, 2021 :
• Increase in net sales of 41.2%, or
the three months ended June 30, 2021 compared to $220.6 million for the
three months ended June 30, 2020 .
• Increase in net income to
the three months ended June 30, 2021 compared to $47.2 million , or $0.41
per diluted share, for the three months ended June 30, 2020 .
• Increase in EBITDA (earnings before interest, income tax and depreciation
and amortization) of 35.8%, or
three months ended
months ended June 30, 2020 .
• Capital expenditures of
capacity at the Trex Residential facilities 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. 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. 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. 19 -------------------------------------------------------------------------------- Table of Contents 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 endedJune 30, 2021 was lower than the number of claims received in the six months endedJune 30, 2020 and consistent with our expectations for 2021. Average cost per claim experienced in the six months endedJune 30, 2021 was higher than that experienced in the six months endedJune 30, 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 atJune 30, 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$2.0 million change in the surface flaking warranty reserve. The following table details surface flaking claims activity related to our warranty: Six Months Ended June 30, 2021 2020 Claims open, beginning of period 1,799 1,724 Claims received (1) 523 782 Claims resolved (2) (515 ) (572 ) Claims open, end of period 1,807 1,934 Average cost per claim (3)$ 3,610 $ 3,263
(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 have not experienced any material disruptions to our operations, production, supply chain, or any material reduction in demand for our Trex Residential outdoor living products due to the COVID-19 pandemic. However, the pandemic remains an evolving situation and while macro-economic recovery seems likely, the duration of the macro-economic recovery remains uncertain. We are managing our business to ensure the continuity of our operations and the safety of our employees. Fire at Virginia Facility OnMarch 13, 2021 , an electrical fire occurred at one of the Company's manufacturing buildings in itsVirginia complex. No injuries occurred from the event. The building was temporarily off-line while damage to the building's electrical systems was addressed. 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 and will file respective claims with its insurance company. 20 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Below is our discussion and analysis of our operating results and material changes in our operating results for the three months endedJune 30, 2021 (2021 quarter) compared to the three months endedJune 30, 2020 (2020 quarter), and for the six months endedJune 30, 2021 (2021 six-month period) compared to the six months endedJune 30, 2020 (2020 six-month period). Three Months EndedJune 30, 2021 Compared To The Three Months EndedJune 30, 2020 Net Sales Three Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Total net sales$ 311,596 $ 220,648 $ 90,948 41.2 % Trex Residential net sales$ 298,632 $ 208,877 $ 89,755 43.0 % Trex Commercial net sales$ 12,964 $ 11,771 $ 1,193
10.1 %
Total net sales increased by 41.2% in the 2021 quarter compared to the 2020 quarter reflecting a 43.0% increase in Trex Residential net sales and a 10.1% increase in Trex Commercial net sales. The increase in net sales was substantially all due to volume growth across all Trex Residential product lines. Our capacity expansion program that delivered a 70% improvement over 2019 levels was fully operational as of the end ofMay 2021 enabling our ability to capture additional growth. However, labor shortages impacted the extent of that growth. Sustained broad-based demand for Trex Residential products and market share gains from wood drove volume growth in the 2021 quarter. Demand was driven by continued strong, secular trends across Trex Residential's outdoor living products. The increase also reflects a price increase that was effective onJanuary 1, 2021 to address inflationary pressures in key raw materials and transportation. Gross Profit Three Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Cost of sales$ 193,323 $ 128,243 $ 65,080 50.7 % % of total net sales 62.0 % 58.1 % Gross profit$ 118,273 $ 92,405 $ 25,868 28.0 % Gross margin 38.0 % 41.9 % Gross profit as a percentage of net sales, gross margin, was 38.0% in the 2021 quarter compared to 41.9% in the 2020 quarter. Gross margin for Trex Residential and Trex Commercial was 38.7% and 21.6%, respectively, in the 2021 quarter compared to 42.5% and 30.7%, respectively, in the 2020 quarter. Gross margin was unfavorably impacted primarily by inflationary pressures on key raw materials and transportation, and by start-up costs and increased depreciation related to the capacity expansion program at Trex Residential. The decrease in gross margin was partially offset by the price increase that was effectiveJanuary 1, 2021 on certain product lines at Trex Residential. Selling, General and Administrative Expenses Three Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Selling, general and administrative expenses$ 35,916 $ 29,009 $ 6,907 23.8 % % of total net sales 11.5 % 13.2 % Selling, general and administrative expenses in the 2021 quarter increased compared to the 2020 quarter primarily due to a$4.6 million increase in personnel related expenses and a$1.5 million increase in branding and advertising spend and travel and entertainment expenses, as the impacts from COVID-19 lessened. 21
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Table of Contents
Provision for Income Taxes
Three Months Ended June 30,
2021 2020 $ Change % Change
(dollars in thousands)
Provision for income taxes $ 20,978 $ 16,249 $ 4,729 29.1 %
Effective tax rate 25.5 % 25.6 %
The effective tax rate for the 2021 quarter of 25.5% was relatively unchanged
compared to the effective tax rate of 25.6% 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 June 30, 2021
Trex
Trex
Residential Commercial Total
Net income $ 61,089 $ 277 $ 61,366
Interest expense, net 13 - 13
Income tax expense 20,886 92 20,978
Depreciation and amortization 9,020 258 9,278
EBITDA $ 91,008 $ 627 $ 91,635
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
Three Months Ended
June 30,
2021 2020 $ Change % Change
(dollars in thousands)
Total EBITDA $ 91,635 $ 67,459 $ 24,176 35.8 %
Trex Residential EBITDA $ 91,008 $ 65,495 $ 25,513 39.0 %
Trex Commercial EBITDA $ 627 $ 1,964 $ (1,337 ) (68.1 )%
Total EBITDA increased 35.8% to $91.6 million for the 2021 quarter compared to
$67.5 million for the 2020 quarter. The increase was driven by a 39.0% increase
in Trex Residential EBITDA, primarily due to the volume growth in net sales.
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.
22-------------------------------------------------------------------------------- Table of Contents Six Months EndedJune 30, 2021 Compared To The Six Months EndedJune 30, 2020 Net Sales Six Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Total net sales$ 557,120 $ 421,043 $ 136,077 32.3 % Trex Residential net sales$ 531,702 $ 395,751 $ 135,951 34.4 % Trex Commercial net sales$ 25,418 $ 25,292 $ 126
0.5 %
The 32.3% increase in total net sales in the 2021 six-month period compared to the 2020 six-month period was substantially all due to volume growth at Trex Residential across all product lines. The increase of 34.4% in Trex Residential net sales during the 2021 six-month period was primarily driven by sustained broad-based demand and market share gains from wood. Our capacity expansion program that delivered a 70% improvement over 2019 levels was fully operational as of the end ofMay 2021 enabling our ability to capture additional growth. The increase in net sales at Trex Residential was also impacted by our price increase that was effectiveJanuary 1, 2021 to address inflationary pressures across many key raw materials and transportation. Gross Profit Six Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Cost of sales$ 343,046 $ 238,941 $ 104,105 43.6 % % of total net sales 61.6 % 56.8 % Gross profit$ 214,074 $ 182,102 $ 31,972 17.6 % Gross margin 38.4 % 43.3 % Gross profit as a percentage of net sales, gross margin, was 38.4% in the 2021 six-month period compared to 43.3% in the 2020 six-month period. Gross margin for Trex Residential and Trex Commercial products in the 2021 six-month period were 39.3% and 19.4%, respectively, compared to 44.0% and 32.3%, respectively, in the 2020 six-month period. Gross margin at Trex Residential in the 2021 six-month period was unfavorably impacted by inflationary pressures on key raw materials and transportation, by start-up costs and increased depreciation related to the capacity expansion program at Trex Residential, and by reduced overhead absorption due to the fire at theVirginia facility. The decrease in gross margin was partially offset by the price increase that was effectiveJanuary 1, 2021 on certain product lines at Trex Residential. Selling, General and Administrative Expenses Six Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Selling, general and administrative expenses$ 67,229 $ 63,571 $ 3,658 5.8 % % of total net sales 12.1 % 15.1 % The$3.7 million increase in selling, general and administrative expenses in the 2021 six-month period compared to the 2020 six-month period resulted primarily from a$4.2 million increase in personnel related expenses and a$1.4 million increase in other selling, general and administrative expenses, offset by a$2.1 million decrease in branding expenses driven by disciplined spending as the impacts of COVID-19 played out during the first quarter. Provision for Income Taxes Six Months Ended June 30, 2021 2020 $
Change % Change
(dollars in thousands)
Provision for income taxes $ 36,925 $ 29,504 $ 7,421 25.2 %
Effective tax rate 25.1 % 24.8 %
23
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The effective tax rate for the 2021
six-month
period was comparable to the effective tax rate for the 2020
six-month
period.
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, 2021
Trex
Trex
Residential Commercial Total
Net income $ 109,833 $ 77 $ 109,910
Interest expense, net 10 - 10
Income tax expense 36,899 26 36,925
Depreciation and amortization 15,231 472 15,703
EBITDA $ 161,973 $ 575 $ 162,548
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
Six Months Ended June 30,
2021 2020 $ Change % Change
(dollars in thousands)
Total EBITDA $ 162,548 $ 126,446 $ 36,102 28.6 %
Trex Residential EBITDA $ 161,973 $ 122,445 $ 39,528 32.3 %
Trex Commercial EBITDA $ 575 $ 4,001 $ (3,426 ) (85.6 )%
Total EBITDA increased 28.6% to $162.5 million for the 2021
six-month
period compared to $126.4 million for the 2020
six-month
period. The increase was driven by a 32.3% increase in Trex Residential EBITDA,
primarily due to the volume growth in net sales.
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, 2021 we had
$5.5 million of cash and cash equivalents.
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
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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Table of Contents
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,
2021 2020
Net cash used in operating activities
(93,517 ) (60,467 )
Net cash used in financing activities (4,472 ) (43,797 )
Net decrease in cash and cash equivalents
Operating Activities Cash used in operating activities was$18.2 million during the 2021 six-month. 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. The majority of the accounts receivable balance atJune 30, 2021 , will be collected in the third quarter. Cash used in operating activities was offset by the increase in net income primarily from the increase in net sales at Trex Residential. Investing Activities Capital expenditures in the 2021 six-month period consisted primarily of$44.8 million in capacity expansion at our Trex Residential facilities,$28.6 million in general plant cost reduction initiatives and other production improvements and$4.9 million in other non-production expenditures. Financing Activities Net cash used in financing activities of$4.5 million in the 2021 six-month period consisted of repurchases of our common stock of$54.8 million , offset by net borrowings on our line of credit of$49.5 million . 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). As ofJune 30, 2021 , the Company has repurchased 3.3 million shares of the Company's outstanding 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 . AtJune 30, 2021 , we had$49.5 million in outstanding borrowings under the revolving credit facilities and borrowing capacity under the facilities of$300.5 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. 25
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Table of Contents 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 ofJune 30, 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. Capital Requirements. InJune 2019 , we announced a$200 million capital expenditure program to increase production capacity at our Trex Residential facilities inVirginia andNevada . The program involved the construction of a new decking facility at the existingVirginia site and the installation of additional production lines at theNevada site. The investment allows 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 were fully operational at the end of May. Our capacity expansion program increased 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 our capital expenditure program, 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. 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 atJune 30, 2021 compared to inventory levels atJune 30, 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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