UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2017~~

March 31, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number:

001-14649

Trex Company, Inc.

(Exact name of registrant as specified in its charter)


~~Delaware~~		~~54-1910453~~
Delaware		54-1910453
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

160 Exeter Drive Winchester, Virginia		22603-8605
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:(540)

542-6300

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation

S-T

during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.:


Large accelerated filer	☒	Accelerated filer	☐

~~Non-accelerated filer~~	☐
Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ~~Act.~~ Act

☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule

12b-2

of the Exchange Act): Yes

☐

☒

The number of shares of the registrant’s common stock, par value $.01 per share, outstanding at ~~October 17, 2017~~April 13, 2020 was ~~29,424,889~~57,853,215 shares.

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	TREX	New York Stock Exchange LLC

Table of Contents

TREX COMPANY, INC.

INDEX


			Page
PART I FINANCIAL INFORMATION				2
			~~Page~~
Item 1.	Condensed Consolidated Financial Statements			2


~~PART I FINANCIAL INFORMATION~~				2

~~Item 1. Financial Statements~~				2

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and ~~Nine Months~~ ~~Ended September 30, 2017 and 2016~~March 31, 2019 (unaudited)				2

	Condensed Consolidated Balance Sheets as of ~~September 30, 2017 (unaudited)~~March 31, 2020 and December 31, ~~2016~~2019 (unaudited)			3

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2020 and March 31, 2019 (unaudited)			4

	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~ March 31, 2019 (unaudited)			4 5

	Notes to Condensed Consolidated Financial Statements (unaudited)			5 6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			17 16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			26 23

~~Item 4. Controls and Procedures~~				26
Item 4.	Controls and Procedures			24

PART II OTHER INFORMATION				25
		27

~~Item 1. Legal Proceedings~~				27
Item 1.	Legal Proceedings			25

Item 1A.	Risk Factors			25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			27 25

~~Item 5. Other Information~~				27

~~Item 6. Exhibits~~				28
Item 5.	Other Information			26

Item 6.	Exhibits			27

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

TREX COMPANY, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands, except share and per share data)

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Net sales
   $ 140,194    $ 106,168    $ 442,941    $ 384,294
Cost of sales
   84,910    76,223    250,473    235,312








Gross profit
   55,284    29,945    192,468    148,982
Selling, general and administrative expenses
   24,919    19,379    75,409    64,786








Income from operations
   30,365    10,566    117,059    84,196
Interest expense, net
   59    77    515    1,108








Income before income taxes
   30,306    10,489    116,544    83,088
Provision for income taxes
   10,208    2,702    39,715    27,871








Net income
   $ 20,098    $ 7,787    $ 76,829    $ 55,217








Basic earnings per common share
   $ 0.68    $ 0.27    $ 2.61    $ 1.88








Basic weighted average common shares outstanding
   29,404,049    29,295,284    29,385,722    29,419,958








Diluted earnings per common share
   $ 0.68    $ 0.26    $ 2.60    $ 1.86








Diluted weighted average common shares outstanding
   29,578,216    29,516,718    29,563,497    29,635,796








Comprehensive income
   $ 20,098    $ 7,787    $ 76,829    $ 55,217


	Three Months Ended March 31,
	2020			2019
Net sales	$	200,395		$	179,571
Cost of sales		110,699			110,206

Gross profit		89,696			69,365
Selling, general and administrative expenses		34,561			30,166

Income from operations		55,135			39,199
Interest income, net		(522	)		(56	)

Income before income taxes		55,657			39,255
Provision for income taxes		13,255			7,700

Net income	$	42,402		$	31,555

Basic earnings per common share	$	0.73		$	0.54

Basic weighted average common shares outstanding		58,129,529			58,543,478

Diluted earnings per common share	$	0.73		$	0.54

Diluted weighted average common shares outstanding		58,323,721			58,829,177

Comprehensive income	$	42,402		$	31,555

See Notes to Condensed Consolidated Financial Statements (Unaudited).

Table of Contents

TREX COMPANY, INC.

Condensed Consolidated Balance Sheets

(In thousands)

   September 30,
2017 December 31,
2016
   (Unaudited)
Assets

Current assets:

Cash and cash equivalents
   $ 25,541 $ 18,664
Accounts receivable, net
   70,802 48,039
Contract retainage
   1,893 —
Inventories
   26,029 28,546
Prepaid expenses and other assets
   3,912 10,400
Revenues in excess of billings
   4,706 —


Total current assets
   132,883 105,649
Property, plant and equipment, net
   102,788 103,286
Goodwill and other intangibles
   72,544 10,523
Other assets
   2,981 1,972


Total assets
   $ 311,196 $ 221,430


Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable
   $ 15,960 $ 10,767
Accrued expenses and other liabilities
   41,327 34,693
Accrued warranty
   6,725 5,925
Billings in excess of revenues
   1,353 —
Customer deposits
   953 —


Total current liabilities
   66,318 51,385
Deferred income taxes
   894 894
Non-current accrued warranty
   29,733 31,767
Other long-term liabilities
   2,676 3,223


Total liabilities
   99,621 87,269


Commitments and contingencies
   — —
Stockholders’ equity:

Preferred stock, $0.01 par value, 3,000,000 shares authorized; none issued and outstanding
   — —
Common stock, $0.01 par value, 80,000,000 shares authorized; 34,918,427 and 34,894,233 shares issued and 29,424,746 and 29,400,552 shares outstanding at September 30, 2017 and December 31, 2016, respectively
   349 349
Additionalpaid-in capital
   120,667 120,082
Retained earnings
   264,071 187,242
Treasury stock, at cost, 5,493,681 shares at September 30, 2017 and December 31, 2016
   (173,512 ) (173,512 )


Total stockholders’ equity
   211,575 134,161


Total liabilities and stockholders’ equity
   $ 311,196 $ 221,430


	March 31, 2020			December 31, 2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	5,339		$	148,833
Accounts receivable, net		241,242			78,462
Inventories		58,716			56,106
Prepaid expenses and other assets		16,582			19,803

Total current assets		321,879			303,204
Property, plant and equipment, net		193,099			171,300
Goodwill and other intangible assets, net		73,980			74,084
Operating lease assets		38,329			40,049
Other assets		3,569			3,602

Total assets	$	630,856		$	592,239

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	28,917		$	15,227
Accrued expenses and other liabilities		54,355			58,265
Accrued warranty		5,178			5,178
Line of credit		28,500			—

Total current liabilities		116,950			78,670
Operating lease liabilities		32,440			34,242
Deferred income taxes		9,831			9,831
Non-current accrued warranty		19,912			20,317
Other long-term liabilities		—			4

Total liabilities		179,133			143,064

Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, $0.01 par value, 3,000,000 shares authorized; NaN issued and outstanding		—			—
Common stock, $0.01 par value, 120,000,000 shares authorized; 70,241,911 and 70,187,463 shares issued and 57,853,160 and 58,240,721 shares outstanding at March 31, 2020 and December 31, 2019, respectively		702			702
Additional paid-in capital		123,214			123,996
Retained earnings		604,082			561,680
Treasury stock, at cost, 12,388,751 and 11,946,742 shares at March 31, 2020 and December 31, 2019, respectively		(276,275	)		(237,203	)

Total stockholders’ equity		451,723			449,175

Total liabilities and stockholders’ equity	$	630,856		$	592,239

See Notes to Condensed Consolidated Financial Statements (Unaudited).

Table of Contents

TREX COMPANY, INC.

Condensed Consolidated Statements of ~~Cash Flows~~

Changes in Stockholders’ Equity

(Unaudited)

(In ~~thousands)~~

   Nine Months Ended
September 30,
   2017 2016
Operating Activities

Net income
   $ 76,829 $ 55,217
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
   12,065 10,893
Stock-based compensation
   3,913 3,806
Loss (gain) on disposal of property, plant and equipment
   1,720 (189 )
Othernon-cash adjustments
   (405 ) (285 )
Changes in operating assets and liabilities:

Accounts receivable
   (14,407 ) 1,580
Contract retainage
   55 —
Inventories
   4,860 6,597
Prepaid expenses and other assets
   2,987 (771 )
Revenues in excess of billings
   (1,243 ) —
Accounts payable
   1,203 (6,761 )
Accrued expenses and other liabilities
   (1,430 ) 5,005
Billings in excess of revenues
   (399 ) —
Customer deposits
   (609 ) —
Income taxes receivable/payable
   7,698 8,487


Net cash provided by operating activities
   92,837 83,579


Investing Activities

Expenditures for property, plant and equipment
   (11,108 ) (8,534 )
Proceeds from sales of property, plant and equipment
   — 4,349
Acquisition of business
   (71,523 ) —


Net cash used in investing activities
   (82,631 ) (4,185 )


Financing Activities

Borrowings under line of credit
   201,000 242,700
Principal payments under line of credit
   (201,000 ) (249,700 )
Repurchases of common stock
   (3,617 ) (55,185 )
Financing costs
   — (485 )
Proceeds from employee stock purchase and option plans
   288 218


Net cash used in financing activities
   (3,329 ) (62,452 )


Net increase in cash and cash equivalents
   6,877 16,942
Cash and cash equivalents, beginning of period
   18,664 5,995


Cash and cash equivalents, end of period
   $ 25,541 $ 22,937


Supplemental Disclosure:

Cash paid for interest
   $ 416 $ 849
Cash paid for income taxes, net
   $ 32,016 $ 19,435

thousands, except share data)


	Common Stock					Additional Paid-In Capital			Retained Earnings		Treasury Stock					Total
	Shares			Amount		Additional Paid-In Capital			Retained Earnings		Shares		Amount			Total
Balance, December 31, 2019		58,240,721		$	702	$	123,996		$	561,680		11,946,742	$	(237,203	)	$	449,175
Net income		—			—		—			42,402		—		—			42,402
Employee stock plans		16,386			—		299			—		—		—			299
Shares withheld for taxes on awards		(38,142	)		—		(3,856	)		—		—		—			(3,856	)
Stock-based compensation		76,204			—		2,775			—		—		—			2,775
Repurchases of common stock		(442,009	)		—		—			—		442,009		(39,072	)		(39,072	)

Balance, March 31, 2020		57,853,160		$	702	$	123,214		$	604,082		12,388,751	$	(276,275	)	$	451,723


	Common Stock					Additional Paid-In Capital			Retained Earnings		Treasury Stock					Total
	Shares			Amount		Additional Paid-In Capital			Retained Earnings		Shares		Amount			Total
Balance, December 31, 2018		58,551,653		$	700	$	124,224		$	416,942		11,446,683	$	(198,903	)	$	342,963
Net income		—			—		—			31,555		—		—			31,555
Employee stock plans		24,472			—		302			—		—		—			302
Shares withheld for taxes on awards		(74,010	)		—		(5,727	)		—		—		—			(5,727	)
Stock-based compensation		160,359			1		2,793			—		—		—			2,794
Repurchases of common stock		(124,989	)		—		—			—		124,989		(8,730	)		(8,730	)

Balance, March 31, 2019		58,537,485		$	701	$	121,592		$	448,497		11,571,672	$	(207,633	)	$	363,157

See Notes to Condensed Consolidated Financial Statements (Unaudited).

Table of Contents

TREX COMPANY, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Three Months Ended
March 31,

2020

2019

Operating Activities

Net income
$
42,402
$
31,555

Adjustments to reconcile net income to net cash used in operating activities:

Depreciation and amortization

3,851

3,394

Stock-based compensation

2,775

2,793

(Gain) loss on disposal of property, plant and equipment

(123
)
10

Other
non-cash
adjustments

32

31

Changes in operating assets and liabilities:

Accounts receivable

(162,780
)
(128,182
)
Inventories

(2,610
)
7,645

Prepaid expenses and other assets

1,059

1,214

Accounts payable

8,865

(7,556
)
Accrued expenses and other liabilities

(14,089
)
(27,332
)
Income taxes receivable/payable

11,850

6,438

Net cash used in operating activities

(108,768
)
(109,990
)

Investing Activities

Expenditures for property, plant and equipment

(22,733
)
(8,647
)
Proceeds from sales of property, plant and equipment

2,136

—

Net cash used in investing activities

(20,597
)
(8,647
)

Financing Activities

Borrowings under line of credit

36,500

35,000

Principal payments under line of credit

(8,000
)
—

Repurchases of common stock

(42,929
)
(14,457
)
Proceeds from employee stock purchase and option plans

300

302

Net cash (used in) provided by financing activities

(14,129
)
20,845

Net decrease in cash and cash equivalents

(143,494
)
(97,792
)
Cash and cash equivalents, beginning of period

148,833

105,699

Cash and cash equivalents, end of period
$
5,339
$
7,907

Supplemental Disclosure:

Cash paid for interest
$
1
$
11

Cash paid for income taxes, net
$
1,405
$
1,262

See Notes to Condensed Consolidated Financial Statements

(Unaudited).

Table of Contents

TREX COMPANY, INC.

Notes to Condensed Consolidated Financial Statements

For the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~

2019

(Unaudited)

1.	BUSINESS AND ORGANIZATION

Trex Company, Inc. (Company) is the world’s largest manufacturer of wood-alternative decking and railing products, with more than 25 years of product experience, which are marketed under the brand name Trex^{®
. The Company manufactures and distributes high-performance,low-maintenance, wood/
eco-friendly
wood and plastic composite outdoor living products and related accessories. A majority of its products are manufactured in a proprietary process that combines reclaimed wood fibers and scrap polyethylene. On July 31, 2017, through its newly-formed, wholly-owned subsidiary, Trex Commercial Products, Inc.,Also, the Company acquired certain assetsis a leading national provider of custom-engineered railing and assumed certain liabilities of Staging Concepts Acquisition, LLC (SC Company) and thus expanded its markets to also become a market leader for the design, engineering and marketing of modular and architectural railingstaging systems and solutions for the commercial and multifamily markets, and a leading provider of staging, acoustical and seating systems for commercial markets,multi-family market, including sports stadiums and performing arts venues. Additional information on the acquisition of SCThe Company is presentedoperates in Note 6.2 reportable segments, Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). The Company is incorporated in Delaware. The principal executive offices are located at 160 Exeter Drive, Winchester, Virginia 22603, and the telephone number at that address is(540) 542-6300. Subsequent to the acquisition, the Company operates in two reportable segments, Trex Residential Products and Trex Commercial Products.}

2.	BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and the instructions to Form

10-Q

and Article 10 of Regulation

S-X

and, accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and ~~footnotes~~notes required by ~~accounting principles generally accepted in the United States~~GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments, except as otherwise described herein) considered necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Trex ~~Wood-Polymer Espana, S.L,~~Commercial Products, Inc., for all periods presented. ~~The Condensed Consolidated Statements of Comprehensive Income~~Intercompany accounts and the Condensed Consolidated Statements of Cash Flows of the Company include the operations and cash flows of Trex Commercial Products, Inc., its newly-formed, wholly-owned subsidiary, from July 31, 2017 through September 30, 2017. The Company’s Condensed Consolidated Balance Sheet includes the assets and liabilities of Trex Commercial Products, Inc. at September 30, 2017. Trex Commercial Products, Inc. was formed to acquire certain assets and assume certain liabilities of SC Company on July 31, 2017. Additional information on the acquisition of SC Company is presentedtransactions have been eliminated in ~~Note 6.~~

consolidation.

The consolidated results of operations for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2017.~~ 2020. The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence. The impact that the recent

COVID-19

pandemic will have on the Company’s consolidated results of operations and financial condition is uncertain. The Company is actively managing its business to respond to this health crisis and will continue to evaluate the nature and extent of the impact.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, ~~2016~~2019 and ~~2015~~2018 and for each of the three years in the period ended December 31, ~~2016~~2019 included in the Annual Report of Trex Company, Inc. on Form

10-K,

as filed with the U.S. Securities and Exchange Commission.

3.	~~SIGNIFICANT ACCOUNTING POLICIES~~

~~In addition to the critical accounting policies included in the Company’s Annual Report on Form10-K~~ for the year ended December 31, 2016, the Company’s critical accounting policies also currently include the following policies implemented subsequent to and in connection with the SC Company acquisition:

~~Revenue Recognition~~

For Trex Commercial Products, the Company recognizes revenue using the percentage of completion method measured by the ratio of direct costs incurred to date to estimated total costs for each contract. Contract costs include all direct material, labor, subcontract and certain indirect costs. Administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are recognized when such losses are determined. Changes in job performance, conditions and estimated profitability may result in revisions to costs and income and are recognized in the period they are determined. Revenues recognized in excess of amounts billed are classified under current assets. Billings in excess of revenues are classified under current liabilities.

~~Concentrations and Credit Risk~~

In addition to its trade receivables, the Company assesses the credit risk exposure of its customers’ contracts receivable by considering the length of time receivables may be past due, the customer’s financial condition and ability to repay the obligation, historical and expected credit loss experience, and other factors. Contracts receivable are carried at the original invoice amount in accounts receivable in the Company’s Condensed Consolidated Balance Sheet and are generally due when billed, and contract retainage is generally due at the completion of the construction contract.

4.	RECENTLY ADOPTED ACCOUNTING ~~STANDARD~~STANDARDS

In ~~March 2016,~~August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)No. ~~2016-09,~~

2018-15,

“~~Compensation~~

Intangibles – ~~Stock Compensation (Topic 718)~~Goodwill and Other – Internal-Use Software (Subtopic 350-40):~~Improvements~~ Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of FASB Emerging Issues Task Force)

”. The new guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an
internal-use
software license. Under that model, implementation costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred. Capitalized implementation costs are amortized over the term of the associated hosted cloud computing arrangement service contract on a straight-line basis, unless another systematic and rational basis is more representative of the pattern in which the entity expects to ~~Employee Share-Based Payment Accounting~~.”benefit from its right to access the hosted software. Capitalized implementation costs would then be assessed for impairment in a manner similar to long-lived assets. The standard amends certain aspects of accounting for employee share-based payment transactions, including the accounting for income taxes related to those transactions and forfeitures. The standard requires recognizing excess tax benefits and deficiencies on share-based awards in the tax provision instead of in equity. Also, the standard requires these amounts to be classified as an operating activity, and shares withheld to satisfy employee taxes to be classified as a financing activity in the statement of cash flows, rather than as currently classified as financing and operating activities, respectively. The standardnew guidance was effective for ~~annual reporting periods~~fiscal years beginning after December 15, ~~2016~~2019, and interim periods within ~~that reporting period, with early adoption permitted. The Company elected to early~~those fiscal years. Entities could adopt ~~the standard in fiscal year 2016. The impact of the early adoption resulted in the following:~~

The standard requires that excess tax benefits of the settlement or vesting of time-based restricted stock or time-based restricted stock units and performance-based restricted stock or performance-based restricted stock units be recorded within income tax expense. Prior to adoption this amount would have been recorded as an increase in additional~~paid-in~~ capital. Additionally, the standard requires that excess tax benefits are now reported as an operating activity in the Company’s Consolidated Statements of Cash Flows, rather than as a financing activity as was previously reported. The Company applied this guidance prospectively as of January 1, 2016 during the quarterly period ended December 31, 2016, and, accordingly, data previously reported for the three and nine months ended September 30, 2016 have been adjusted, as follows:

   Three Months Ended September 30, 2016
         As Reported               Adjusted

(in thousands, except share
and per share data)

Provision for income taxes
   $ 3,591    $ 2,702
Net Income
   $ 6,898    $ 7,787
Basic net income per share
   $ 0.24    $ 0.27
Diluted net income per share
   $ 0.23    $ 0.26
Diluted weighted average common shares outstanding
   29,457,653    29,516,718

   Nine Months Ended September 30, 2016
         As Reported                Adjusted

(in thousands, except share
and per share data)

Provision for income taxes
   $ 29,510    $ 27,871
Net Income
   $ 53,578    $ 55,217
Basic net income per share
   $ 1.82    $ 1.88
Diluted net income per share
   $ 1.81    $ 1.86
Diluted weighted average common shares outstanding
   29,581,578    29,635,796
Cash flows provided by operating activities
   $ 81,880    $ 83,579
Cash flows used in financing activities
   $ (60,573 )    $ (62,452 )

The Company elected to change its policy on accounting for forfeitures and recognize forfeitures as they occur. The Company applied this guidance on a modified retrospective transition method. The Company determined that the cumulative effect of applying the guidance under the modified retrospective transition method was not material to its Consolidated Financial Statements.

The standard requires the presentation of employee taxes as a financing activity in the Consolidated Statements of Cash Flows. This provision did not impact the Company’s Consolidated Financial Statements as the Company previously presented employee taxes as a financing activity in its Consolidated Statements of Cash Flows.

The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share for 2016, which did not materially increase the diluted weighted average common shares outstanding.

5.	~~NEW ACCOUNTING STANDARDS NOT YET ADOPTED~~

~~In May 2017, the FASB issued ASUNo. 2017-09,~~ “~~Compensation—Stock Compensation (Topic 718), Scope Modification Accounting~~~~.” The guidance clarified when to account for a change to the terms or conditions of a share-based payment award as a modification. Under~~ the new guidance ~~modification accounting is required only if the fair value (or calculated intrinsic value, if those amounts are being used~~either prospectively to measure the award under ASC 718), the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for annual periods beginningeligible costs incurred on or after ~~December 15, 2017. Early adoption~~the date the guidance is ~~permitted.~~first applied or retrospectively. The Company ~~intends to adopt~~adopted the guidance prospectively on ~~the effective date and does~~January 1, 2020. Adoption did not ~~believe adoption will~~ have a material impact on its consolidated financial condition or results of operations.

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In January 2017, the FASB issued ASUNo.

2017-04,

“

Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment

”.” The guidance removes Step 2 of the goodwill impairment test and eliminates the need to determine the fair value of individual assets and liabilities to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The guidance ~~is to be~~was applied prospectively, and iswas effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. ~~Early adoption is permitted for any impairment tests performed~~The Company adopted the guidance on ~~testing dates after~~ January 1, ~~2017.~~2020. Adoption did not have a material impact on its consolidated financial condition or results of operations.

In June 2016, the FASB issued ASU No.

2016-13,

“

Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses in Financial Instruments

,” as amended. The ~~Company intends to adopt~~ASU amends the guidance on the impairment of financial instruments and adds an impairment model, known as the current expected credit loss (CECL) model. The CECL model applies to trade receivables and other receivables and requires an entity to recognize its current estimate of all expected credit losses, rather than incurred losses. The CECL model is designed to capture expected credit losses through the establishment of an allowance account, which will be presented as an offset to the amortized cost basis of the related financial asset. The new guidance was effective ~~date~~for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and ~~does~~was applied using the modified-retrospective approach. The Company adopted the guidance on January 1, 2020. Adoption did not ~~believe adoption will~~ have a material impact on its financial condition or results of operations.

4.	NEW ACCOUNTING STANDARDS NOT YET ADOPTED

In ~~August 2016,~~March 2020, the FASB issued ASUNo. ~~2016-15,~~

2020-04,

“~~Statement~~

Reference Rate Reform (Topic 848): Facilitation of ~~Cash flows (Topic 230): Classification~~the Effects of ~~Certain Cash Receipts and Cash Payments~~Reference Rate Reform on Financial Reporting

”.” The guidance provides temporary optional expedients and exceptions related to contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. The new guidance allows entities to elect not to apply certain modification accounting requirements, if certain criteria are met, to contracts affected by what the guidance calls reference rate reform. An entity that makes this election would consider changes in reference rates and other contract modifications related to reference rate reform to be events that do not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The ASU notes that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is ~~intended~~separate from or in addition to ~~reduce diversity in practice across all industries in how certain transactions are classified in~~changes to the ~~statement~~terms of ~~cash flows.~~a contract to effect that transition. The guidance is effective ~~for financial statements issued for fiscal years beginning after~~upon issuance and generally can be applied as of March 12, 2020 through December ~~15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The guidance requires application using a retrospective transition method.~~31, 2022. The Company ~~intends to adopt~~is currently evaluating the ~~guidance on~~impact of the ~~effective date and does not believe adoption will have a material impact~~standard on its ~~consolidated financial statements.~~

credit agreement accounted for under Codification topic ASC 470, “

Debt

”.

In ~~February 2016,~~December 2019, the FASB issued ASUNo. ~~2016-02,~~

2019-12,

“~~Leases~~

Income Taxes (Topic ~~842)~~740), Simplifying the Accounting for Income Taxes

”.” The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a

step-up

in the tax basis of goodwill. The standard ~~requires lessees to recognize leases on the balance sheet as aright-of-use~~ ~~asset and a lease liability, other than leases that meet the definition of a short-term lease. The liability~~ will be equal to the present value of the lease payments. The asset will be based on the liability, subject to adjustment. Currently, under existing U.S. generally accepted accounting standards, the Company does not recognize on the balance sheet a~~right-of-use~~ asset or lease liability related to its operating leases. For income statement purposes, the leases will continue to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) and finance leases will result in a front-loaded expense pattern (similar to current capital leases). The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2018. Early~~2020, with early adoption is permitted. The ~~standard must be adopted using the modified retrospective transition method and provides for the option~~Company does not intend to ~~elect a package of practical expedients upon adoption. The Company intends to~~early adopt the standard inand does not expect the ~~first quarter of fiscal 2019 and is assessing the impact of adoption of the~~ standard to have a material effect on its consolidated financial ~~statements~~condition and ~~related note disclosures. The Company has not made any decision on the option to elect adoption of the practical expedients.~~

~~In May 2014, the FASB issued ASUNo. 2014-09,~~ ~~“Revenue from Contracts with Customers (Topic 606),~~~~” and issued subsequent amendments to the initial guidance in August 2015 within ASUNo. 2015-14,~~ ~~in March 2016 within ASUNo. 2016-08,~~ ~~in April 2016 within ASUNo. 2016-10,~~ ~~in May 2016 within ASUNo. 2016-12,~~ ~~and in December 2016 within ASUNo. 2016-20~~ (collectively, the new standard). The new standard provides a single, comprehensive model for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new standard requires an entity to recognize revenue when it satisfies a performance obligation at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring control of goods or services to a customer. The Company intends to adopt the new standard in the first quarter of fiscal 2018. Currently, the Company intends to use the retrospective application to each reporting period presented, with the option to elect certain practical expedients as defined in the new standard. The Company has substantially completed evaluation of its Trex Residential Products segment and believes that

adoption of the new standard will not have a significant impact on that segment. The Company continues to evaluate the impact of the new standard on its recently acquired Trex Commercial Products segment and expects to complete the evaluation during the fourth quarter of 2017. The Company expects expanded financial statement note disclosure. The Company continues to evaluate the impacts of the pending adoption. As such, the Company’s preliminary assessments are subject to change.

6.	~~ACQUISITION~~

On July 31, 2017, through its newly-formed, wholly-owned subsidiary, Trex Commercial Products, the Company acquired certain assets and assumed certain liabilities of SC Company for $71.8 million in cash, subject to adjustment pending final determination of working capital at closing. The Company used cash on hand and $30.0 million of funding from its existing revolving credit facility, which was fully paid on August 17, 2017, to acquire the assets. The acquired business designs, engineers and markets modular architectural railing systems and solutions for the commercial and multifamily markets, and provides staging, acoustical and seating systems for commercial markets, including sports stadiums and performing arts venues. As a result of the purchase, the Company gained access to growing commercial markets, expanded its custom design and engineering capabilities, and added the contract architect and specifier communities as new channels for its products.

The acquisition was accounted for using the acquisition method of accounting under U.S. Generally Accepted Accounting Principles, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values of consideration transferred and net assets acquired were determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, “~~Fair Value Measurements and Disclosures~~~~.” The Company believes that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. The Company’s consolidated~~ results of operations for the quarterly and nine-month period ended September 30, 2017 include the operating results of the acquired business from the date of acquisition through quarter end. The Company’s consolidated balance sheet at September 30, 2017 includes the acquired assets and any liabilities assumed.

Based on the Company’s preliminary valuation, a total estimated consideration of $71.8 million has been allocated on a preliminary basis to the assets acquired and liabilities assumed, as follows (in thousands). A final determination of the purchase price and adjustment to the fair values of assets acquired and liabilities assumed and finalization of the valuation report will be completed upon the final determination of working capital at closing:

Accounts receivable, net
   $ 8,357
Contract retainage
   1,948
Inventories, net
   2,344
Prepaid expenses and other assets
   1,223
Revenues in excess of billings
   3,463
Fixed assets, net
   1,264
Intangible assets
   4,900
Goodwill
   57,938
Accounts payable
   (3,990 )
Accrued liabilities and other expenses
   (2,329 )
Billings in excess of revenues
   (1,752 )
Customer Deposits
   (1,562 )


Total estimated consideration
   $ 71,804

The preliminary goodwill of $57.9 million is primarily attributable to the potential opportunity for the Company to offer full service railing systems in the growing commercial and multi-family markets, access to a complementary product category with a track record of substantial revenue growth, the ability to achieve economies of scale around raw material procurement, an increase in the range of products the Company may offer its core customers, and intangible assets that do not qualify for separable or legal criterion, such as an assembled workforce. The amount of goodwill that is expected to be amortized and deductible for tax purposes in 2017 is $1.1 million. All of the goodwill was recorded to the Trex Commercial Products reportable segment. The fair value attributed to intangible assets, which consists of production backlog and trade names and trademarks, is being amortized straight line over 12 months and is based on the estimated economics of the assets. The fair value attributed to the intangible assets acquired and goodwill was based on assumptions and other information compiled by management, including independent valuations that utilized established valuation techniques.

From July 31, 2017, through September 31, 2017, Trex Commercial Products generated $9.2 million of revenue and incurred a net loss of $75 thousand. The Company incurred $0.5 million of acquisition-related expenses during the nine months ended September 30, 2017, which are included in selling, general and administrative expense.

The following pro forma results are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the years presented or the results which may occur in the future. The following unaudited pro forma results of operations assume the acquisition occurred on January 1, 2016 (in thousands, except per share amounts):

   Nine Months Ended September 30
   2017    2016    2017    2016
   Actual    Pro Forma
Net sales
   $ 442,941    $ 384,294    $ 475,076    $ 427,043
Net income
   $ 76,829    $ 55,217    $ 77,570    $ 54,978
Basic earnings per common share
   $ 2.61    $ 1.88    $ 2.64    $ 1.87
Diluted earnings per common share
   $ 2.60    $ 1.86    $ 2.62    $ 1.86

Significant pro forma adjustments included in the above pro forma information include an adjustment to amortization expense for the intangible assets acquired (see Note 9), elimination of transaction costs related to the acquisition as such costs are considered to be~~non-recurring~~ in nature, an adjustment to compensation expense related to restricted stock units granted in connection with the acquisition, the income tax effects of the adjustments based on a blended statutory rate of 38.0%, and an adjustment to SC Company’s income taxes to the blended statutory rate, as SC Company was treated as a limited liability company for Federal and state income tax purposes.

operations.

7.5.	INVENTORIES

Inventories valued at LIFO~~(last-in,~~

(last-in,

first-out),

consist of the following (in thousands):

   September 30,
2017    December 31,
2016
Finished goods
   $ 23,486    $ 29,686
Raw materials
   21,344    20,231




Total FIFO(first-in,first-out) inventories
   44,830    49,917
Reserve to adjust inventories to LIFO value
   (21,371 )    (21,371 )




Total LIFO inventories
   $ 23,459    $ 28,546


	March 31, 2020			December 31, 2019
Finished goods	$	43,458		$	42,281
Raw materials		33,050			31,686

Total FIFO (first-in, first-out) inventories		76,508			73,967
Reserve to adjust inventories to LIFO value		(19,062	)		(19,062	)

Total LIFO inventories	$	57,446		$	54,905

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The Company utilizes the LIFO method of accounting related to its ~~wood-alternative decking and residential railing~~Trex Residential products, which generally provides for the matching of current costs with current revenues. However, under the LIFO method, reductions in annual inventory balances cause a portion of the Company’s cost of sales to be based on historical costs rather than current year costs (LIFO liquidation). Reductions in interim inventory balances expected to be replenished by

year-end

do not result in a LIFO liquidation. Accordingly, interim LIFO calculations are based, in part, on management’s estimates of expected

year-end

inventory levels and costs which may differ from actual results. Since inventory levels and costs are subject to factors beyond management’s control, interim results are subject to the final

year-end

LIFO inventory valuation. ~~There~~As of March 31, 2020, there were no0 LIFO inventory liquidations or related impact on cost of sales in the ~~nine~~three months ended ~~September 30, 2017 or 2016.~~

March 31, 2020.

Inventories valued at lower of cost (FIFO method) and net realizable value ~~consist~~were $1.3 million at March 31, 2020 and $1.2 million at December 31, 2019, consisting primarily of ~~the following (in thousands):~~

   September 30,
2017    December 31,
2016
Work-in-process
   $ 580    $ —
Raw materials
   1,990    —




Total FIFO inventories
   $ 2,570    $ —

raw materials. The

Company

utilizes the FIFO method of accounting related to its ~~commercial railing and staging~~ Trex

Commercial

products.~~Work-in-process~~ ~~includes estimated production costs.~~

8.6.	PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consist of the following (in thousands):

   September 30,
2017    December 31,
2016
Prepaid expenses
   $ 3,190    $ 6,209
Income tax receivable
   —    4,024
Other
   722    167




Total prepaid expenses and other assets
   $ 3,912    $ 10,400


	March 31, 2020		December 31, 2019
Prepaid expenses	$	6,901	$	8,282
Revenues in excess of billings		6,247		6,664
Contract retainage		2,273		1,832
Income tax receivable		513		2,675
Other		648		350

Total prepaid expenses and other assets	$	16,582	$	19,803

9.7.	GOODWILL AND OTHER INTANGIBLE ASSETS

The ~~following table summarizes the activity related to the~~ carrying amount of goodwill ~~during the nine months ended September 30, 2017 (in thousands):~~

   2017
Beginning balance, January 1
   $ 10,523
Goodwill recognized from acquisition of SC Company
   57,938


Ending balance, September 30
   $ 68,461

~~Intangible~~by reportable segment at March 31, 2020 and December 31, 2019 was $14.2 million for Trex Residential and $54.3 million for Trex Commercial.

The Company’s intangible assets ~~acquired from SC Company on July 31, 2017~~ consist of ~~the following at September 30, 2017:~~

Net Carrying
Amount
(in thousands)    Amortization
Period
      (in months)
Intangible assets:

Customer backlog
   $ 4,000    12
Trade names and trademarks
   900    12



Total intangible assets
   4,900



Accumulated amortization:

Customer backlog
   (683 )
Trade name
   (134 )



Total accumulated amortization
   (817 )



Intantible assets, net
   $ 4,083

domain names. At March 31, 2020 and December 31, 2019, intangible assets were $6.3 million and accumulated amortization

was

$0.8 million and $0.7 million, respectively.

Intangible asset amounts were determined based on the estimated economics of the asset and are amortized over the estimated useful lives on a straight-line ~~bases,~~basis over 15 years, which approximates the pattern in which the economic benefits are expected to be received. ~~Amortization~~The Company evaluates the recoverability of intangible assets periodically and considers events or circumstances that may warrant revised estimates of useful lives or that may indicate an impairment. Intangible asset amortization expense for the ~~quarterly period~~three months ended ~~September~~

March

31 ~~2017~~

2020

and March

2019

, was ~~$0.8~~$

0.1

million.

~~10.~~8.

ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following (in thousands):

   September 30,
2017    December 31,
2016
Sales and marketing
   $ 21,013    $ 16,707
Compensation and benefits
   10,727    13,298
Income taxes
   3,674    —
Manufacturing costs
   1,215    1,799
Rent obligations
   739    632
Other
   3,959    2,257




Total accrued expenses and other liabilities
   $ 41,327    $ 34,693


	March 31, 2020		December 31, 2019
Sales and marketing	$	18,392	$	28,402
Income taxes		9,688		—
Compensation and benefits		7,721		13,475
Operating lease liabilities		7,111		7,079
Customer deposits		3,232		2,905
Manufacturing costs		2,504		2,564
Billings in excess of revenues		2,125		816
Other		3,582		3,024

Total accrued expenses and other liabilities	$	54,355	$	58,265

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~~11.~~9.

DEBT

The Company’s outstanding debt consists of a revolving credit facility.

The Company had $28.5 million in outstanding borrowings under its revolving credit facility and remaining available borrowing capacity of $221.5 million at March 31, 2020.

Revolving Credit Facility

On ~~January 12, 2016,~~November 5, 2019, the Company entered into a ~~Third~~Fourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) as ~~amended, with~~borrower, Trex Commercial Products, Inc., as guarantor; Bank of America, N.A. as a Lender, Administrative Agent, Swing Line Lender and ~~Letter of Credit Issuer,~~L/C Issuer; and certain other lenders including ~~Citibank,~~Wells Fargo Bank, N.A., ~~Capital One, N.A.~~who is also Syndication Agent; SunTrust Bank; and Branch Banking and Trust Company, arranged by BOA Securities, Inc., as Sole Lead Arranger and ~~SunTrust.~~Sole Bookrunner, to amend and restate the Third Amended and Restated Credit Agreement (Third Amended Credit Agreement), dated as of January 12, 2016, as amended. The ~~Third~~Fourth Amended Credit Agreement ~~as amended,~~ provides the Company with one or more ~~revolving loans~~Revolving Loans in a collective maximum principal amount of $250 million from January 1 through June 30 of each year and a maximum principal amount of $200 million from July 1 through December 31 of each year throughout the term, which ends ~~January 12, 2021.~~

~~The Company had no outstanding borrowings under its revolving credit facility and remaining available borrowing capacity of $200 million at September 30, 2017.~~

November 5, 2024.

Compliance with Debt Covenants and Restrictions

~~The Company’s ability~~

Pursuant to ~~make scheduled principal and interest payments, borrow and repay amounts under any outstanding revolving credit facility and continue~~the terms of the Fourth Amended Credit Agreement, the Company is subject to ~~comply with any~~certain loan ~~covenants depends primarily on the Company’s ability to generate sufficient cash flow from operations.~~

~~As of September 30, 2017, the~~compliance covenants. The Company was in compliance with all covenants as of ~~the covenants contained in its debt agreements.~~March 31, 2020. Failure to comply with the ~~loan~~financial covenants ~~might cause lenders to accelerate the~~could be considered a default of repayment obligations ~~under the credit facility, which may be declared payable immediately based on a default.~~

and, among other remedies, could accelerate payment of any amounts outstanding.

~~12.~~10.

LEASES

The Company leases office space, storage warehouses and certain plant equipment under various operating leases. The Company’s operating leases have remaining lease terms of 1 year to 9 years. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

For the three months ended March 31, 2020 and March 31, 2019, total operating lease cost was $2.1 million. The weighted average remaining lease term at March 31, 2020 and December 31, 2019 was 6.2 years and 6.5 years, respectively. The weighted average discount rate at March 31, 2020 and December 31, 2019 was 3.66%.

The following table includes supplemental cash flow information for the three months ended March 31, 2020 and March 31, 2019 and supplemental balance sheet information at March 31, 2020 and December 31, 2019 related to operating leases (in thousands):


	Three Months Ended
Supplemental cash flow information	March 31, 2020		March 31, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	2,143	$	2,118
Operating ROU assets obtained in exchange for lease liabilities	$	—	$	388


Supplemental balance sheet information	March 31, 2020		December 31, 2019
Operating lease ROU assets	$	38,329	$	40,049

Operating lease liabilities:
Accrued expenses and other current liabilities	$	7,111	$	7,079
Operating lease liabilities		32,440		34,242

Total operating lease liabilities	$	39,551	$	41,321

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The following table summarizes maturities of operating lease liabilities at March 31, 2020 (in thousands):


Maturities of operating lease liabilities
2020	$	6,329
2021		8,279
2022		6,464
2023		6,109
2024		6,146
Thereafter		11,079

Total lease payments		44,406
Less imputed interest		(4,855	)

Total operating liabilities	$	39,551

11.	FINANCIAL INSTRUMENTS

The Company considers the recorded value of its financial assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, ~~and~~ other current liabilities, and debt to approximate the fair value of the respective assets and liabilities on the Condensed Consolidated Balance Sheets at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~

2019.

~~13.~~

12.

STOCKHOLDERS’ EQUITY

Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Numerator:

Net income available to common shareholders
   $ 20,098    $ 7,787    $ 76,829    $ 55,217








Denominator:

Basic weighted average shares outstanding
   29,404,049    29,295,284    29,385,722    29,419,958
Effect of dilutive securities:

Stock appreciation rights and options
   97,315    116,803    98,905    133,907
Restricted stock
   76,852    104,631    78,870    81,931








Diluted weighted average shares outstanding
   29,578,216    29,516,718    29,563,497    29,635,796








Basic earnings per share
   $ 0.68    $ 0.27    $ 2.61    $ 1.88








Diluted earnings per share
   $ 0.68    $ 0.26    $ 2.60    $ 1.86


	Three Months Ended March 31,
	2020		2019
Numerator:
Net income available to common shareholders	$	42,402	$	31,555

Denominator:
Basic weighted average shares outstanding		58,129,529		58,543,478
Effect of dilutive securities:
Stock appreciation rights and options		90,723		154,076
Restricted stock		103,469		131,623

Diluted weighted average shares outstanding		58,323,721		58,829,177

Basic earnings per share	$	0.73	$	0.54

Diluted earnings per share	$	0.73	$	0.54

Diluted earnings per share is computed using the weighted average number of shares determined for the basic earnings per share computation plus the dilutive effect of common stock equivalents using the treasury stock method. The computation of diluted earnings per share excludes the following potentially dilutive securities because the effect would be anti-dilutive:

   Three Months Ended
September 30,    Nine Months Ended
September 30,
       2017            2016            2017            2016
Stock appreciation rights
   17,957    —    14,156    6,174
Restricted stock
   330    46    110    15

Three Months Ended
March 31,

2020

2019

Stock appreciation rights

9,135

12,813

10

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Stock Repurchase ~~Programs~~

Program

On ~~October 22, 2015,~~February 16, 2018, the Board of Directors adopted a stock repurchase program of up to ~~3,150,000~~5.8 million shares of the Company’s outstanding common stock ~~(October 2015 Stock~~(Stock Repurchase Program). ~~This authorization terminated on December~~As of March 31, ~~2016. The~~2020, the Company has repurchased ~~1,578,952 shares for $53.3~~1.4 million ~~under the October 2015 Stock Repurchase Program.~~

~~On February 16, 2017, the Board of Directors authorized a common stock repurchase program of up to 2,960,000~~ shares of ~~the Company’s~~its outstanding common stock ~~(February 2017~~under the Stock Repurchase ~~Program).~~Program.

Due to the volatility and uncertainty in the stock market associated with the

COVID-19

pandemic, the Company suspended repurchases of its common stock under the Stock Repurchase Program on March 12, 2020. As of the date of this report, the ~~Company has made no repurchases under the February 2017~~ Stock Repurchase ~~Program.~~

Program remains in effect and the Company may determine to resume repurchases at any time.

Amendment of Restated Certificate of Incorporation

At the annual meeting of stockholders of the Company held on April 29, 2020, the Company’s stockholders approved an amendment of the Company’s Restated Certificate of Incorporation (Amendment), effective as of April 29, 2020. The Company’s Board of Directors unanimously approved the Amendment on February 19, 2020, subject to stockholder approval. The Amendment increases the number of shares of common stock, par value $.01 per share, that the Company is authorized to issue from 120 million shares to 180 million shares.

13.	REVENUE FROM CONTRACTS WITH CUSTOMERS

Trex Residential Products

Trex Residential principally generates revenue from the manufacture and sale of its high-performance,

low-maintenance,

eco-friendly

wood-alternative decking and residential railing products and accessories. Substantially all of its revenues are from contracts with customers, which are purchase orders of short-term duration of less than one year. Its customers, in turn, sell primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products. Trex Residential satisfies its performance obligations at a point in time. The shipment of each product is a separate performance obligation as the customer is able to derive benefit from each product shipped and no performance obligation remains after shipment. Upon shipment of the product, the customer obtains control over the distinct product and Trex Residential satisfies its performance obligation. Any performance obligation that remains unsatisfied at the end of a reporting period is part of a contract that has an original expected duration of one year or less. Any variable consideration related to the unsatisfied performance obligation is allocated wholly to the unsatisfied performance obligation, is recognized when the product ships and the performance obligation is satisfied and is included in “Accrued expenses and other liabilities, Sales and marketing” in Note 8 to the Condensed Consolidated Financial Statements.

Trex Commercial Products

Trex Commercial generates revenue from the manufacture and sale of its modular and architectural railing and staging systems. All of its revenues are from fixed-price contracts with customers. Trex Commercial contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and is, therefore, not distinct. The transaction price allocated to remaining performance obligations on contracts with an original duration greater than one year was $60.1 million as of March 31, 2020. The Company will recognize this revenue as contracts are completed, which is expected to occur within the next 24 months.

For the three months ended March 31, 2020 and 2019, net sales were disaggregated in the following tables by (1) market, (2) timing of revenue recognition, and (3) type of contract. The tables also include a reconciliation of the respective disaggregated net sales with the Company’s reportable segments (in thousands):


Three Months Ended March 31, 2020	Reportable Segment
	Trex Residential		Trex Commercial		Total
Timing of Revenue Recognition and Type of Contract
Products transferred at a point in time and variable consideration contracts	$	186,874	$	—	$	186,874
Products transferred over time and fixed price contracts		—		13,521		13,521

	$	186,874	$	13,521	$	200,395

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Three Months Ended March 31, 2019	Reportable Segment
	Trex Residential		Trex Commercial		Total
Timing of Revenue Recognition and Type of Contract
Products transferred at a point in time and variable consideration contracts	$	165,479	$	—	$	165,479
Products transferred over time and fixed price contracts		—		14,092		14,092

	$	165,479	$	14,092	$	179,571

14.	STOCK-BASED COMPENSATION

The Company has one stock-based compensation plan, the 2014 Stock Incentive Plan (Plan),

approved

by the Company’s stockholders in April 2014. The Plan amended and restated in its entirety the Trex Company, Inc. 2005 Stock Incentive Plan. The Plan was subsequently amended and restated by the Company’s Board of Directors in May 2014 and May 2018. The Plan is administered by the Compensation Committee of the Company’s Board of Directors. Stock-based compensation is granted to officers, directors and certain key employees in accordance with the provisions of the Plan. The Plan provides for grants of stock options, restricted stock, restricted stock units, stock appreciation rights (SARs), and unrestricted stock. ~~As of September 30, 2017, the~~The total aggregate number of shares of the Company’s common stock that may be issued under the Plan is ~~6,420,000.~~

12,840,000 and as of March 31, 2020, the total number of shares available for future issuance are 5,335,353.

The following table summarizes the Company’s stock-based compensation grants for the ~~nine~~three months ended ~~September 30, 2017:~~

   Stock Awards Granted    Weighted-Average
Grant Price
Per Share
Time-based restricted stock units
   36,105    $ 72.50
Performance-based restricted stock units (a)
   43,307    $ 57.54
Stock appreciation rights
   18,739    $ 70.75

March 31, 2020:


	Stock Awards Granted		Weighted-Average Grant Price Per Share
Time-based restricted stock units		19,769	$	101.53
Performance-based restricted stock units (a)		36,510	$	78.18
Stock appreciation rights		19,792	$	101.66

(a)

Includes ~~25,986~~24,320 of target performance-based restricted stock unit awards granted during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, and adjustments of ~~1,071, 5,396~~(2,562), 3,029 and ~~10,854~~11,723 to grants due to the actual performance level achieved for restricted stock and restricted stock units awarded in ~~2014, 2015,~~2019, 2018 and ~~2016,~~2017, respectively.

The fair value of each SAR is estimated on the date of grant using a Black-Scholes option-pricing formula. ~~There were no SARs issued during the nine months ended September 30, 2016.~~ For SARs issued in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and 2019 the data and assumptions shown in the following table were used:

   Nine Months Ended
September 30, 2017
Weighted-average fair value of grants
   $ 27.97
Dividend yield
   0 %
Average risk-free interest rate
   2.0 %
Expected term (years)
   5
Expected volatility
   42.2 %


	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Weighted-average fair value of grants	$	35.65		$	29.56
Dividend yield		0	%		0	%
Average risk-free interest rate		1.4	%		2.5	%
Expected term (years)		5			5
Expected volatility		37.8	%		39.1	%

The Company recognizes stock-based compensation expense ratably over the period from the grant date to the earlier of: (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For performance-based restricted stock and performance-based restricted stock units, expense is recognized ratably over the performance and vesting period of each tranche based on management’s judgment of the ultimate award that is likely to be paid out based on the achievement of the predetermined performance measures. For the employee stock purchase plan, compensation expense is recognized related to the discount on purchases. Stock-based compensation expense is included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Comprehensive Income. The following table summarizes the Company’s stock-based compensation expense (in thousands):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Stock appreciation rights
   $ 28    $ —    $ 220    $ 184
Time-based restricted stock
   417    368    1,557    1,847
Performance-based restricted stock
   538    450    2,044    1,680
Employee stock purchase plan
   54    43    92    95








Total stock-based compensation
   $ 1,037    $ 861    $ 3,913    $ 3,806

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	Three Months Ended March 31
	2020		2019
Stock appreciation rights	$	354	$	295
Time-based restricted stock and restricted stock units		1,256		1,149
Performance-based restricted stock and restricted stock units		1,135		1,314
Employee stock purchase plan		30		35

Total stock-based compensation	$	2,775	$	2,793

Total unrecognized compensation cost related to unvested awards as of ~~September 30, 2017~~March 31, 2020 was ~~$4.8~~$7.4 million. The cost of these unvested awards is being recognized over the requisite vesting period of each award.

15.	INCOME TAXES

The Company’s effective tax rate for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 was ~~34.1%~~23.8% and ~~33.5%~~19.6%, respectively, which resulted in expense of ~~$39.7~~$13.3 million and ~~$27.9~~$7.7 million, respectively. The increase of ~~0.6%~~4.2% in the effective tax rate was primarily due to ~~lower~~a current year decrease in excess tax benefits ~~in 2017 compared to 2016. In fiscal year 2016,~~from the ~~Company adopted FASB ASUNo. 2016-09,~~ “~~Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.~~~~” The new standard requires excess tax benefits on~~exercise of share-based ~~awards be recognized~~payments and an increase in ~~the tax provision instead of in equity.~~

non-

deductible

executive compensation.

During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~September 30, 2016,~~2019, the Company realized ~~$1.4~~$1.0 million and ~~$1.7~~$2.3 million, respectively, of excess tax benefits from stock-based awards and recorded a corresponding benefit to income tax expense.

The Company analyzes its deferred tax assets each reporting period, considering all available positive and negative evidence in determining the expected realization of those deferred tax assets. As of ~~September 30, 2017,~~March 31, 2020, the Company maintains a valuation allowance of ~~$4.1~~$3.0 million against deferred tax assets primarily related to state tax credits it estimates will expire before they are realized.

In response to

COVID-19,

Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary suspension of certain payment requirements for the employer portion of Social Security taxes and the creation of certain refundable employee retention credits. The Company evaluated the impact on its consolidated financial statements and determined that as of March 31, 2020, the CARES Act did not have a material impact on its consolidated financial condition or results of operations.

The Company operates in multiple tax jurisdictions and, in the normal course of business, its tax returns are subject to examination by various taxing authorities. Such examinations may result in future assessments by these taxing authorities, and the Company accrues a liability when it believes that it is more likely than not that benefits of tax positions will not be realized. The Company believes that adequate provisions have been made for all tax returns subject to examination. As of ~~September 30, 2017,~~March 31, 2020, for certain tax jurisdictions tax years ~~2013~~2016 through ~~2016~~2019 remain subject to examination. The Company’s returns filed with the state of New Jersey for the tax years 2015 through 2018 are currently under examination. No material adjustments are expected as a result of the audit. Sales made to foreign distributors are not taxable in any foreign ~~jurisdictions~~jurisdiction as the Company does not have a taxable presence in any foreign jurisdiction.

16.	SEGMENT INFORMATION

~~Prior to July 31, 2017, the Company operated in one reportable segment. Subsequent to the acquisition of certain assets and assumption of certain liabilities of SC Company on July 31, 2017, the~~

The Company operates in ~~two~~2 reportable segments:

•

~~Trex Residential Products manufactures wood-alternative decking and railing and related products marketed under the brand name Trex~~^®. The products are sold to its distributors and two national retailers who, in turn, sell primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products.

Trex Residential manufactures wood-alternative decking and residential railing and related products marketed under the brand name Trex

. Trex Residential products are sold to distributors and home centers for final resale primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products.

Trex Commercial ~~Products~~ designs, engineers, and markets modular and architectural railing ~~systems~~ and ~~solutions~~staging systems for the commercial and ~~multifamily markets, and staging, acoustical and seating systems for commercial markets,~~multi-family market, including sports stadiums and performing arts venues. ~~The segment’s~~Trex Commercial products are ~~sold through~~marketed to architects, specifiers, contractors, and others doing business within the ~~segment’s~~ commercial and multi-family market.

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The Company’s ~~operating~~reportable segments have been determined in accordance with its internal management structure, which is organized based on residential and commercial sales activities. The Company evaluates performance of each segment primarily based on net sales and earnings before interest, taxes, depreciation and amortization (EBITDA). The Company uses net sales to assess performance and allocate resources as this measure represents the amount of business the segment engaged in during a given period of time, is an indicator of market growth and acceptance of segment products, and represents the segment’s customers’ spending habits along with the amount of product the segment sells relative to its competitors. The Company uses EBITDA to assess performance and allocate resources because it believes that EBITDA facilitates performance comparison between the segments by eliminating interest, taxes, and depreciation and amortization charges to income. The below segment data for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020 and 2019 includes data for Trex Residential ~~Products for the nine-month period~~ and ~~data for~~ Trex Commercial ~~Products from the date of the acquisition of SC Company through September 30, 2017~~ (in thousands):

   Nine Months Ended September 30, 2017
   Residential    Commercial    Total
Net sales
   $ 433,790    $ 9,151    $ 442,941
Net income (loss)
   $ 76,904    $ (75 )    $ 76,829
EBITDA
   $ 128,221    $ 806    $ 129,027
Depreciation and amortization
   $ 11,087    $ 881    $ 11,968
Income tax expense
   $ 39,715    $ —    $ 39,715
Capital expenditures
   $ 11,068    $ 40    $ 11,108
Total assets
   $ 232,663    $ 78,533 �� $ 311,196

Segment Data:


	Three Months Ended March 31, 2020						Three Months Ended March 31, 2019
	Trex Residential		Trex Commercial		Total		Trex Residential		Trex Commercial		Total
Net sales	$	186,874	$	13,521	$	200,395	$	165,479	$	14,092	$	179,571
Net income	$	41,020	$	1,382	$	42,402	$	31,255	$	300	$	31,555
EBITDA	$	56,950	$	2,036	$	58,986	$	42,067	$	526	$	42,593
Depreciation and amortization	$	3,664	$	187	$	3,851	$	3,268	$	126	$	3,394
Income tax expense	$	12,788	$	467	$	13,255	$	7,600	$	100	$	7,700
Capital expenditures	$	22,416	$	317	$	22,733	$	7,694	$	953	$	8,647
Total assets	$	539,352	$	91,504	$	630,856	$	448,303	$	87,342	$	535,645

Reconciliation of ~~net income~~Net Income to EBITDA:

   Nine Months Ended September 30, 2017
   Residential    Commercial    Total
Net income (loss)
   $ 76,904    $ (75 )    $ 76,829
Interest
   515    —    515
Taxes
   39,715    —    39,715
Depreciation and amortization
   11,087    881    11,968






EBITDA
   $ 128,221    $ 806    $ 129,027






   Three Months Ended September 30, 2017
   Residential    Commercial    Total
Net sales
   $ 131,043    $ 9,151    $ 140,194
Net income (loss)
   $ 20,173    $ (75 )    $ 20,098
EBITDA
   $ 34,079    $ 806    $ 34,885
Depreciation and amortization
   $ 3,639    $ 881    $ 4,520
Income tax expense
   $ 10,208    $ —    $ 10,208
Capital expenditures
   $ 3,943    $ 40    $ 3,983
Total assets
   $ 232,663    $ 78,533    $ 311,196

~~Reconciliation of net income to EBITDA:~~

   Three Months Ended September 30, 2017
   Residential    Commercial    Total
Net income (loss)
   $ 20,173    $ (75 )    $ 20,098
Interest
   59    —    59
Taxes
   10,208    —    10,208
Depreciation and amortization
   3,639    881    4,520






EBITDA
   $ 34,079    $ 806    $ 34,885


	Three Months Ended March 31, 2020								Three Months Ended March 31, 2019
	Trex Residential			Trex Commercial		Total			Trex Residential			Trex Commercial		Total
Net income	$	41,020		$	1,382	$	42,402		$	31,255		$	300	$	31,555
Interest income, net		(522	)		—		(522	)		(56	)		—		(56	)
Income tax expense		12,788			467		13,255			7,600			100		7,700
Depreciation and amortization		3,664			187		3,851			3,268			126		3,394

EBITDA	$	56,950		$	2,036	$	58,986		$	42,067		$	526	$	42,593

17.	SEASONALITY

The ~~Company’s~~ 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 ~~Trex~~its products to a later period. As part of its normal business practice and consistent with industry practice, ~~the Company~~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 ~~the Company’s~~its product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs.

The operating results for Trex Commercial have not historically varied from quarter to quarter as a result of seasonality. However, they are driven by the timing of individual projects, which may vary significantly each period.

18.	COMMITMENTS AND CONTINGENCIES

~~Contract Termination Costs~~

The Company leases 55,047 square feet of office and storage space that it does not occupy, but has sublet all of the office space for the remainder of the term of its lease obligation, which ends June 30, 2019. The Company estimates that the future sublease receipts will be less than the remaining minimum lease payment obligations under its lease and has recorded a liability for the present value of the expected shortfall.

As of September 30, 2017, minimum payments remaining under the Company’s lease relating to its reconsidered corporate relocation over the years ending December 31, 2017, 2018, and 2019 are $0.5 million, $2.0 million and $1.0 million, respectively. Net minimum receipts remaining under the Company’s existing subleases over the years ending December 31, 2017, 2018 and 2019 are $0.3 million, $1.3 million and $0.7 million, respectively.

~~The following table provides information about the Company’s liability related to the lease (in thousands):~~

   2017    2016
Beginning balance, January 1
   $ 1,475    $ 2,106
Net rental payments
   (430 )    (536 )
Accretion of discount
   78    113
Decrease in net estimated contract termination costs
   (23 )    (85 )




Ending balance, September 30
   $ 1,100    $ 1,598

Product Warranty

The Company warrants that its decking and residential railing 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, the Company has an obligation either to replace the defective product or refund the purchase price. The Company continues to receive and settle claims for products manufactured at its Nevada facility prior to 2007 that exhibit surface flaking and maintains a warranty reserve to provide for the settlement of these claims. Estimating the warranty reserve for surface flaking claims requires management to estimate (1) the number of claims to be settled with payment and (2) the average cost to settle each claim.

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To estimate the number of claims to be settled with payment, the Company utilizes actuarial techniques to quantify both the expected number of claims to be received and the percentage of those claims that will ultimately require payment (collectively, elements). Estimates for these elements are quantified using a range of assumptions derived from claim count history and the identification of factors influencing the claim counts. The number of claims received has declined each year since peaking in 2009, although the rate of decline has decelerated in recent years. Additionally, events, such as the 2009 settlement of a class action lawsuit covering the surface

defect and communications by the Company in 2013 informing homeowners of potential hazards associated with products exhibiting surface flaking that are not timely replaced, have obscured observable trends in historical claims activity. The cost per claim varies due to a number of factors, including the size of affected decks, the availability and type of replacement material used, the cost of production of replacement material and the method of claim settlement.

The Company monitors surface flaking claims activity each quarter for indications that its estimates require revision. Typically, a majority of surface flaking claims received in a year are received during the summer outdoor season, which spans the second and third quarters. It has been the Company’s practice to utilize the actuarial techniques discussed above during the third quarter, after a significant portion of all claims has been received for the fiscal year and variances to annual claims expectations are more meaningful. The number of incoming claims received in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020, was ~~lower~~consistent with the Company’s expectations but higher than the number of claims received in the ~~nine~~three months ended ~~September 30, 2016, continuing the historical year-over-year decline in incoming claims, and consistent with the Company’s expectations. The average~~March 31, 2019. Average settlement cost per claim experienced in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 was ~~lower~~slightly higher than ~~the average settlement cost per claim experienced during the nine months ended September 30, 2016 and consistent with~~ the Company’s expectations, considerably higher than that experienced in the three months ended March 31, 2019, due to an increase in larger claims settled and changes in the mix of settlement methods, and slightly lower than that experienced for ~~2017.~~the year ended December 31, 2019. The Company believes its reserve at ~~September 30, 2017~~March 31, 2020 is sufficient to cover future surface flaking ~~obligations.~~

obligations and no adjustments were required in the current period.

The Company’s analysis is based on currently known facts and a number of assumptions, as discussed above, and current expectations. Projecting future events such as the number of claims to be received, the number of claims that will require payment and the average cost of claims could cause ~~the~~ actual warranty liabilities to be higher or lower than those projected, which could materially affect the Company’s financial condition, results of operations or cash flows. The Company estimates that the annual number of claims received will continue to decline over time and that the average cost per claim will increase slightly, primarily due to inflation. If the level of claims received or average cost per claim differs materially from expectations, it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flows in future periods. The Company estimates 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 ~~$2.9~~$1.8 million change in the surface flaking warranty reserve.

The following is a reconciliation of the Company’s residential product warranty reserve ~~that represents amounts accrued for surface flaking claims~~ (in thousands):

   2017    2016
Beginning balance, January 1
   $ 33,847    $ 29,673
Changes in estimates related topre-existing warranties
   —    9,835
Settlements made during the period
   (4,425 )    (4,188 )




Ending balance, September 30
   $ 29,422    $ 35,320

~~The remainder of the Company’s warranty reserve represents amounts accrued fornon-surface~~ ~~flaking claims.~~

Three Months Ended March 31, 2020

Surface
Flaking

Other
Residential

Total

Beginning balance, January 1
$
19,024
$
  6,470
$
25,494

Provisions and changes in estimates

—

321

321

Settlements made during the period

(557
)
(168
)
(725
)

Ending balance, March 31
$
18,467
$
6,623
$
25,090

Three Months Ended March 31, 2019

Surface
Flaking

Other
Residential

Total

Beginning balance, January 1
$
23,951
$
  6,803
$
30,754

Provisions and changes in estimates

—

505

505

Settlements made during the period

(633
)
(292
)
(925
)

Ending balance, March 31
$
23,318
$
7,016
$
30,334

Legal Matters

The Company has lawsuits, as well as other claims, pending against it which are ordinary routine litigation and claims incidental to the business. Management has evaluated the merits of these lawsuits and claims, and believes that their ultimate resolution will not have a material effect on the Company’s consolidated financial condition, results of operations, liquidity or competitive position.

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~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management discussion and analysis 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, ~~2016~~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, ~~2016~~2019 filed with the ~~SEC.~~ 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;~~our products and raw materials; the Company’s ability to obtain raw materials at acceptable prices; the Company’s ability to maintain product quality and product performance at an acceptable cost; the Company’s ability to increase throughput and capacity to adequately match supply with demand; the level of expenses associated with product replacement and consumer relations expenses related to product quality; ~~and~~ the highly competitive markets in which the Company ~~operates.~~

operates; cyber-attacks, security breaches or other security vulnerabilities; the impact of upcoming data privacy laws and the EU General Data Protection Regulation and the related actual or potential costs and consequences; and material adverse impacts from global public health pandemics, including the strain of coronavirus known as

COVID-19.

OVERVIEW

COVID-19:

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence. The
COVID-19
pandemic has increased the level of volatility and uncertainty globally and has created economic disruption. We are actively managing our business to respond to this health crisis and will continue to evaluate the nature and extent of its impact. Our commitment to stakeholders is to take the appropriate actions to ensure the safety and well-being of our employees and partners, comply with any governmental orders relating to
COVID-19,
which may result in a period of disruption to our business, while at the same time leveraging our strengths and ensuring financial flexibility.

As of March 31, 2020, our facilities continue to operate at output levels similar to those prior to the
COVID-19
pandemic and we are following or exceeding all 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.

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 have instructed our employees to practice social distancing. Efforts for social distancing include 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 is working from home and conducting training sessions with our channel partners by utilizing online audio and visual technologies. 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. In addition, we have made a donation of face masks to the local healthcare community. We have installed air purifier systems for all enclosed areas in every one of our buildings. In addition, 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.

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Since we cannot predict the duration or scope of the pandemic, we cannot fully anticipate or reasonably estimate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future. Some jurisdictions into which we sell have now deemed the construction industry as
non-essential
and ordered the closure of those businesses. In addition, we have experienced areas where the availability of our products is limited due to the closure of certain of our channel partners. As of March 31, 2020 we have no significant supply issues and maintain inventories of materials sourced from diversified geographies, allowing us to better tolerate short-term supply chain disruptions.
The impact that the
COVID-19
pandemic will have on our consolidated results of operations for fiscal year 2020 is uncertain. Although net sales increased considerably during the three months ended March 31, 2020, due to a number of our channel partners on both the distribution and consumer side closing or significantly curtailing operations in their respective localities because of
COVID-19
restrictions, net sales for our second quarter may be impacted and this trend could continue until the pandemic subsides and macro-economics, particularly in the United States, return to normal. Also, we have stress tested our financials and believe our available financial resources will allow us to manage the impact of the
COVID-19
pandemic on the Company’s business operations for the foreseeable future. As of March 31, 2020, our revolving credit facility provides us with $221.5 million in liquidity and we see no need to modify our current capital expansion program, which can be adjusted if necessary. As the impact of
COVID-19
evolves, we will continue to evaluate our financial position and liquidity needs in light of future developments.

Operations and Products:

Trex Company, Inc. currently operates in two ~~business~~reportable segments: Trex Residential Products (Trex Residential) and Trex Commercial ~~Products.~~

Products (Trex Commercial). The Company is focused on using renewable resources within both our Residential and Commercial segments.

Trex Residential ~~Products~~ is the world’s largest manufacturer of high-performance,

low-maintenance,

eco-friendly

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, porch, fencing, trim, steel deck framing, and outdoor lighting categories. A majority of the products areeco-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.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 two national retailers who, in turn, sellhome centers for final resale primarily to the residential market.}

Trex Commercial Products is a leading national provider of custom-engineered railing systems and one of the leading suppliers of staging equipment. Trex Commercial Products designs and engineers custom railing solutions, which are prevalent in professional and collegiate sports facilities, standardized architectural and aluminum railing systems, which target commercial and high-rise applications, and portable staging equipment for the performing arts, sports, and event production and rental markets. With a team of devoted engineers, and industry-leading reputation for quality and dedication to customer service, Trex Commercial Products are sold through architects, specifiers, and contractors.

~~Trex Residential Products~~ offers the following ~~products:~~

products through Trex Residential:



*Decking* and Accessories		Our principal decking products are Trex Transcend^{® , Trex Enhance^{Select® and Trex Select^{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 recycledreclaimed wood fibers and recycled plastic 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. 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.}

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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.}

*~~Porch~~*		~~Our Trex Transcend Porch Flooring and Railing System is an integrated system of porch components and accessories.~~

*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* *Framing*		Our triple-coated steel deck framing system called Trex Elevations^{® 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 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 rental markets. With a team of devoted engineers, and an 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:

~~Outdoor Lighting~~

Our outdoor lighting systems are Trex DeckLighting™ and Trex LandscapeLighting™. 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. The Trex LandscapeLighting line includes an energy-efficient well light, path light, multifunction light and spotlight.

~~Trex Commercial Products offers the following products:~~



*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.

*~~Aluminum Railing Systems~~*		~~Our aluminum railings are a versatile, cost-effective andlow-maintenance~~ choice for a variety of interior and exterior applications that we believe blend form, function and style. They are often used in high-rise condominium and resort projects and offer safety and durability to stairs, public walkways and balconies. They are available in picket or glass infills with a selection of top cap styles, color finishes and mounting capabilities.

*~~Custom Railing Options~~*		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.

*~~Portable Stage Platforms~~* Aluminum Railing Systems		Trex Signature ® 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 Equipment and Accessories		Our advanced modular, lightweight custom staging systems include 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 ~~requires no tools, making it easy and efficient forset-up~~ ~~and take-down, and our staging products are designed to withstand the harshest of weather conditions. Our modular stages are~~is designed to appear seamless, feel permanent, and maximize the functionality of the space.

Highlights for the three months ended ~~September 30, 2017:~~

◾

The acquisition of certain assets and the assumption of certain liabilities of Stadium Concepts Acquisition, LLC (SC Company) on July 31, 2017, by the Company’s newly-formed, wholly-owned subsidiary, Trex Commercial Products, Inc.

◾

~~Net sales of $140.2 million for the three months ended September 30, 2017, an increase of 32.0% over net sales of $106.2 million for the three months ended September 30, 2016.~~

◾

Gross profit as a percentage of net sales, gross margin, of 39.4% for the three months ended September 30, 2017, an increase of 11.2% over the gross margin of 28.2% for the three months ended September 30, 2016.

◾

~~Net income of $20.1 million for the three months ended September 30, 2017, or $0.68 per diluted share, compared to $7.8 million, or $0.26 per diluted share, for the same period in 2016.~~

~~Business Acquisition.~~~~On July~~March 31, ~~2017, through~~2020:

Increase in net sales of 11.6%, or $20.8 million, to $200.4 million for the three months ended March 31, 2020 compared to $179.6 million for the three months ended March 31, 2019.

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Increase in gross profit of 29.3%, or $20.3 million, to $89.7 million for the three months ended March 31, 2020 compared to $69.4 million for the three months ended March 31, 2019.

Increase in net income to $42.4 million, or $0.73 per diluted share, for the three months ended March 31, 2020 compared to $31.6 million, or $0.54 per diluted share, for the three months ended March 31, 2019.

Capital expenditures of $22.7 million to increase production capacity at the Trex Residential facilities in Virginia and Nevada and general plant cost reduction initiatives and other production improvements.

Repurchase of 442,009 shares of our ~~wholly-owned subsidiary, Trex Commercial Products, Inc., we entered into~~outstanding common stock during the three months ended March 31, 2020 under our Stock Repurchase Program, for a ~~definitive agreement with SC Company and on that date acquired certain assets and liabilities~~total of ~~SC Company for $71.8~~1.4 million ~~in cash. The purchase price is subject to adjustment pending final determination of working capital. We used cash on hand and $30.0 million from our existing revolving credit facility to acquire~~shares repurchased under the business. The acquisition provides us with the opportunity to offer full service railing systems in the growing commercial and multi-family markets, access to a complementary product category with a track record of substantial revenue growth, the ability to achieve economies of scale around raw material procurement, and an increase in the range of products the Company may offer its core customers. The unaudited condensed consolidated financial statements include the accounts Trex Commercial Products from the date of acquisition through September 30, 2017.

program as March 31, 2020.

Net Sales

. Net sales consist of sales and freight, net of ~~returns and~~ discounts. The level of net sales is principally affected by sales volume and the prices paid for Trex products. ~~Our branding and product differentiation strategy enables us to command premium prices. Our~~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 ~~practices,~~practice, we have historically provided our distributors and dealers of our Trex Residential ~~Products~~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 and favorable payment terms. In addition, we offer price discounts or volume rebates on specified products and other incentives based on increases in purchases as part of specific promotional programs. The timing of sales incentive programs can significantly impact sales, receivables and inventory levels during the offering period. However, the timing and terms of the majority of our programs are generally consistent from year to year.

In addition, the operating results for Trex Commercial are driven by the timing of individual projects, which may vary significantly each period.

Gross Profit.

Gross profit represents the difference between net sales and cost of sales. Cost of sales consists of raw ~~materials~~material costs, direct labor costs, manufacturing costs, subcontract costs and freight. Raw ~~materials~~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. Depending on the product and its use, we also warrant that our Trex Commercial products will be free of manufacturing defects for 1 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. The number of claims received has declined each year since peaking in 2009, although the rate of decline has decelerated in recent years. Additionally, events, such as the 2009 settlement of a class action lawsuit covering the surface defect and 2013 communications made by the Company informing homeowners of potential hazards associated with products exhibiting surface flaking that are not timely replaced, have obscured any observable trends in historical claims activity.

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~~three months ended ~~September 30, 2017~~March 31, 2020 was ~~lower~~consistent with our expectations but higher than the number of claims received in the ~~nine~~three months ended ~~September 30, 2016, continuing the historical year-over-year decline in incoming claims, and consistent with our expectations. The average~~March 31, 2019. Average settlement cost per claim experienced in the ~~nine~~three months ended ~~June 30, 2017 decreased compared to~~March 31 2020 was slightly higher than our expectations, considerably higher than that experienced in the ~~average settlement cost per claim experienced during the nine~~three months ended ~~June 30, 2016,~~March 31, 2019, due to an increase in larger claims settled and ~~was consistent with expectations for 2017.~~changes in the mix of settlement methods, and slightly lower than that experienced in the year ended December 31, 2019. We believe that our reserve at ~~September 30, 2017~~March 31, 2020 is sufficient to cover future surface flaking obligations.

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

   Nine Months Ended
September 30,
   2017    2016
Claims open, beginning of period
   2,755    2,500
Claims received (1)
   1,931    2,257
Claims resolved (2)
   (2,003 )    (1,774 )




Claims open, end of period
   2,683    2,983




Average cost per claim (3)
   $ 2,553    $ 2,670


	Three Months Ended March 31,
	2020			2019
Claims open, beginning of period		1,724			2,021
Claims received (1)		205			176
Claims resolved (2)		(195	)		(255	)

Claims open, end of period		1,734			1,942

Average cost per claim (3)	$	3,331		$	2,407

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(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 ~~include~~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

On July 31, 2017, Trex Commercial Products, our newly-formed, wholly-owned subsidiary, acquired certain assets and assumed certain liabilities of SC Company for $71.8 million in cash, subject to adjustment pending final determination of working capital at closing. The Company used cash on hand and $30.0 million of funding from its existing revolving credit facility to acquire the assets. The acquired business designs, engineers and markets modular architectural railing systems and solutions for the commercial and multifamily markets, and provides staging, acoustical and seating systems for commercial markets, including sports stadiums and performing arts venues. As a result of the purchase, we will gain access to growing commercial markets, expand our custom design and engineering capabilities, and add the contract architect and specifier communities as new channels for its products. Our consolidated results of operations include the operating results of the acquired business following the date of acquisition. Our consolidated balance sheet at September 30, 2017 includes the acquired assets and any liabilities assumed.

Below is our discussion and analysis of our operating results and material changes in our operating results for the three months ended ~~September 30, 2017 (2017~~March 31, 2020 (2020 quarter) compared to the three months ended ~~September 30, 2016 (2016~~March 31, 2019 (2019 quarter)~~, and for the nine months ended September 30, 2017 (2017 nine-month period) compared to the nine months ended September 30, 2016 (2016 nine-month period)~~.

Three Months Ended ~~September 30, 2017~~March 31, 2020 Compared To The Three Months ~~September 30, 2016~~

Ended March 31, 2019

Net Sales

   Three Months Ended September 30,    $ Change    % Change
         2017                2016
   (dollars in thousands)
Total net sales
   $ 140,194    $ 106,168    $ 34,026    32.0 %
Residential net sales
   $ 131,043    $ 106,168    $ 24,875    23.4 %
Commercial net sales
   $ 9,151    —    $ 9,151    N/A

~~The 32.0% increase in~~


	Three Months Ended March 31,				$ Change			% Change
	2020		2019		$ Change			% Change
	(dollars in thousands)
Total net sales	$	200,395	$	179,571	$	20,824			11.6	%
Trex Residential net sales	$	186,874	$	165,479	$	21,395			12.9	%
Trex Commercial net sales	$	13,521	$	14,092	$	(571	)		(4.1	)%

Total net sales increased by 11.6% in the ~~2017~~2020 quarter compared to the ~~2016~~2019 quarter reflecting an increase in Trex Residential net sales, offset by a small decrease in Trex Commercial net sales. The increase of 12.9% in Trex Residential net sales during the 2020 quarter was primarily driven by volume growth of our residential decking and railing products, strong demand for our outdoor living products, a strong residential repair and remodeling sector and our initiatives to accelerate conversion from wood. The 4.1% decrease in Trex Commercial net sales during the 2020 quarter was due primarily to ~~volume growth in our Trex branded decking and railing products. The volume growth was positively impacted by continued strength in~~fewer large projects compared to the remodeling sector, our marketing programs aimed at taking market share from wood, and the healthy demand across our full suite of outdoor living products with decking and railing products as the major growth contributors. The remaining increase resulted from net sales of our recently acquired commercial products segment for the period from the date of acquisition of July 31, 2017 through quarter end.

2019 quarter.

Gross Profit

   Three Months Ended September 30, $ Change    % Change
         2017             2016
   (dollars in thousands)
Cost of sales
   $ 84,910 $ 76,223 $ 8,687    11.4 %
% of total net sales
   60.6 % 71.8 %
Gross profit
   $ 55,284 $ 29,945 $ 25,339    84.6 %
Gross margin
   39.4 % 28.2 %


	Three Months Ended March 31,						$ Change		% Change
	2020			2019			$ Change		% Change
	(dollars in thousands)
Cost of sales	$	110,699		$	110,206		$	493		0.4	%
% of total net sales		55.2	%		61.4	%
Gross profit	$	89,696		$	69,365		$	20,331		29.3	%
Gross margin		44.8	%		38.6	%

Gross profit as a percentage of net sales, gross margin, ~~increased to 39.4%~~was 44.8% in the ~~2017~~2020 quarter ~~from 28.2%~~compared to 38.6% in the ~~2016~~2019 quarter ~~an improvement of 11.2%. Gross profit~~and reflects the increase in gross margin for Trex Residential and Trex Commercial to 45.6% and 33.6%, respectively, in the ~~2016~~2020 quarter ~~included a $9.8 million~~compared to 40.2% and 20.5%, respectively, in the 2019 quarter. The increase in Trex Residential gross margin in the 2020 quarter compared to the ~~warranty reserve~~2019 quarter was primarily due to

non-recurrence

of Enhance startup costs related to ~~surface flaking. Excluding this charge,~~reduced throughput, equipment failures and other inefficiencies at Trex Residential manufacturing facilities in 2019. Also, a number of manufacturing lines were retrofitted during the ~~2017~~ quarter to allow production of the reduced weight Enhance profile. We expect to be essentially at the original design target for Enhance by the end of the third quarter of 2020. The increase in gross margin ~~increased by 2.0%, reflecting~~at Trex Commercial was primarily due to

non-recurrence

of legacy low margin contracts coupled with a ~~3.1% improvement~~mix of higher margin contracts in ~~residential through~~the 2020 quarter, and initiatives aimed at improving project estimating, project management, and manufacturing cost ~~reduction initiatives, lower sales~~savings initiatives.

Table of ~~excess polyethylene film, lower cost raw materials and increased capacity utilization, partially offset by the gross margin contribution from commercial products.~~

Contents

Selling, General and Administrative Expenses

   Three Months Ended September 30, $ Change    % Change
         2017             2016
   (dollars in thousands)
Selling, general and administrative expenses
   $ 24,919 $ 19,379 $ 5,540    28.6 %
% of total net sales
   17.8 % 18.3 %


	Three Months Ended March 31,						$ Change		% Change
	2020			2019			$ Change		% Change
	(dollars in thousands)
Selling, general and administrative expenses	$	34,561		$	30,166		$	4,395		14.6	%
% of total net sales		17.3	%		16.8	%

The ~~$5.5 million~~ increase in selling, general and administrative expenses in the ~~2017~~2020 quarter compared to the ~~2016~~2019 quarter ~~resulted~~ primarily ~~from an increase resulting from the SC Company acquisition and an~~represented a $3.3 million increase in ~~incentive compensation,~~personnel related expenses and ~~$1.2~~a $1.1 million ~~related to marketing,~~increase in branding and advertising spend in support of our market growth ~~strategies. As a percentage of net sales, total selling, general and administrative expenses decreased by 0.5% in the 2017 quarter compared to the 2016 quarter.~~

programs.

Provision for Income Taxes

   Three Months Ended September 30, $ Change    % Change
         2017             2016
   (dollars in thousands)
Provision for income taxes
   $ 10,208 $ 2,702 $ 7,506    278 %
Effective tax rate
   33.7 % 25.8 %


	Three Months Ended March 31,						$ Change		% Change
	2020			2019			$ Change		% Change
	(dollars in thousands)
Provision for income taxes	$	13,255		$	7,700		$	5,555		72.1	%
Effective tax rate		23.8	%		19.6	%

The effective tax rate for the ~~2017~~2020 quarter ~~increased by 7.9%~~was 23.8% compared to the effective tax rate for the ~~2016~~2019 quarter of 19.6%. The 4.2% increase was primarily due to ~~the tax effects of higher~~a current year decrease in excess tax benefits ~~related to~~from the ~~settlement or vesting~~exercise of restricted stock or restricted stock units recognized in income tax expense during the 2016 quarter compared to the 2017 quarter. In 2016, we adopted Financial Accounting Standards Board Accounting Standards Update~~No. 2016-09,~~ “~~Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~~~.” The standard requires that excess tax benefits of the settlement or vesting of time-based restricted stock or time-based restricted stock units~~share-based payments and ~~performance-based restricted stock or performance-based restricted stock units be recorded within income tax expense. Prior to adoption this amount would have been recorded as~~ an increase in ~~additionalpaid-in~~ ~~capital. As a result of adoption of the standard, the provision for income taxes for the 2016 quarter was adjusted to $2.7 million from the $3.6 million previously reported.~~

non-deductible

executive compensation.

Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)^{1 (in
(in thousands)}

Reconciliation of net income (GAAP) to EBITDA

(non-GAAP):

Three Months Ended September 30
   2017
Residential    2017
Commercial    2017
Total    2016
Total
Net income (loss)
   $ 20,173    $ (75 )    $ 20,098    $ 7,787
Interest
   59    —    59    77
Taxes
   10,208    —    10,208    2,702
Depreciation and amortization
   3,639    881    4,520    3,444








EBITDA
   $ 34,079    $ 806    $ 34,885    $ 14,010

   Three Months Ended September 30,    $ Change    % Change
   2017    2016
   (dollars in thousands)
Total EBITDA
   $ 34,885    $ 14,010    $ 20,875    149 %
Residential EBITDA
   $ 34,079    $ 14,010    $ 20,069    143 %
Commercial EBITDA
   $ 806    —    $ 806    N/A

The Company uses EBITDA to assess performance as it believes EBITDA facilitates performance comparison between its reportable segments by eliminating interest, taxes, depreciation and amortization charges to income. Total EBITDA increased 149% to $34.9 million for the 2017 quarter compared to $14.0 million for the 2016 quarter. EBITDA in the 2016 quarter included a $9.8 million increase to warranty reserve related to surface flaking. Excluding this charge, the 2017 quarter increase in Total EBITDA was 46.5%, with Residential EBITDA growth of 43.1% and Commercial EBITDA contributing 3.4%. The 43.1% Residential EBITDA growth was driven by increased revenue and EBITDA margin expansion.

~~Nine Months Ended September 30, 2017 Compared To The Nine Months Ended September 30, 2016~~

~~Net Sales~~

   Nine Months Ended September 30,    $ Change    % Change
         2017                2016
   (dollars in thousands)
Total net sales
   $ 442,941    $ 384,294    $ 58,647    15.3 %
Residential net sales
   $ 433,790    $ 384,294    $ 49,496    12.9 %
Commercial net sales
   $ 9,151    —    $ 9,151    N/A

The 15.3% increase in total net sales in the 2017 nine-month period compared to the 2016 nine-month period was primarily due to volume growth of our Trex branded decking and railing products. Volume growth was positively impacted by continued strength in the remodeling sector and the healthy demand across our full suite of outdoor living products, which we believe resulted from our marketing programs aimed at taking market share from wood. The increase in net sales from volume growth of our decking and railing products was offset by the ongoing reduction in the sale of recycled polyethylene film.

~~Gross Profit~~

   Nine Months Ended September 30, $ Change    % Change
         2017             2016
   (dollars in thousands)
Cost of sales
   $ 250,473 $ 235,312 $ 15,161    6.4 %
% of net sales
   56.5 % 61.2 %


	Three Months Ended March 31, 2020
	Trex Residential			Trex 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, 2019
	Trex Residential			Trex Commercial		Total
Net income	$	31,255		$	300	$	31,555
Interest income, net		(56	)		—		(56	)
Income tax expense		7,600			100		7,700
Depreciation and amortization		3,268			126		3,394

EBITDA	$	42,067		$	526	$	42,593

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 ~~the business~~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 ~~supplemental~~ information ~~to investors~~ regarding the operating performance of the ~~Company. Total EBITDA may be considered anon-GAAP~~ ~~measure~~Company and ~~should be considered in addition to, not as a substitute for, net income.~~its reportable segments.

Gross profit
$ 192,468 $ 148,982 $ 43,486 29.2 %
Gross margin
43.5 % 38.8 %

~~Gross profit as a percentage~~

Table of net sales, gross margin, increased to 43.5% in the 2017 nine-month period compared to 38.8% in the 2016 nine-month period, an improvement of 4.7%. Gross profit in the 2016 nine-month period included a $9.8 million increase to the warranty reserve related to surface flaking. Excluding this charge, the 2017 nine-month gross margin increased 2.2% reflecting a 2.6% improvement in residential through cost reduction initiatives, lower sales of excess polyethylene film, lower cost raw materials and increased capacity utilization, partially offset by the gross margin contribution from commercial products.

~~Selling, General and Administrative Expenses~~

   Nine Months Ended September 30, $ Change    % Change
   2017 2016
   (dollars in thousands)
Selling, general and administrative expenses
   $ 75,409 $ 64,786 $ 10,623    16.4 %
% of net sales
   17.0 % 16.9 %

As a percentage of net sales, selling, general and administrative expenses increased minimally during the 2017 nine-month period compared to the 2016 nine-month period. The $10.6 million increase was primarily attributable to a $3.7 million increase in marketing, branding and advertising spend, a $1.5 million write off of research and development and other assets, $0.8 million increase in research and development as we continue to support growth, and an increase resulting from the SC Company acquisition.

~~Provision for Income Taxes~~

   Nine Months Ended September 30, $ Change    % Change
   2017 2016
   (dollars in thousands)
Provision for income taxes
   $ 39,715 $ 27,871 $ 11,844    42.5 %
Effective tax rate
   34.1 % 33.5 %

The effective tax rate increased 0.6% during the 2017 nine-month period compared to the effective tax rate during the 2016 nine-month period primarily due to the effect of lower excess tax benefits in the 2017 nine-month period compared to the 2016 nine-month period.

~~Reconciliation of net income (GAAP) to EBITDA(non-GAAP):~~

Nine Months Ended September 30
   2017
Residential    2017
Commercial    2017
Total    2016
Total
Net income (loss)
   $ 76,904    $ (75 )    $ 76,829    $ 55,217
Interest
   515    —    515    1,108
Taxes
   39,715    —    39,715    27,871
Depreciation and amortization
   11,087    881    11,968    10,609








EBITDA
   $ 128,221    $ 806    $ 129,027    $ 94,805

~~Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (in thousands)~~

   Nine Months Ended September 30,    $ Change    % Change
   2017    2016
   (dollars in thousands)
Total EBITDA
   $ 129,027    $ 94,805    $ 34,222    36.1 %
Residential EBITDA
   $ 128,221    $ 94,805    $ 33,416    35.2 %
Commercial EBITDA
   $ 806    $ —    $ 806    N/A

Contents


	Three Months Ended March 31,				$ Change		% Change
	2020		2019		$ Change		% Change
	(dollars in thousands)
Total EBITDA	$	58,986	$	42,593	$	16,393		38.5	%
Trex Residential EBITDA	$	56,950	$	42,067	$	14,883		35.4	%
Trex Commercial EBITDA	$	2,036	$	526	$	1,510		287.1	%

The Company uses EBITDA to assess performance as it believes EBITDA facilitates performance comparison between the Company’s and its competitors and between its reportable segments by eliminating interest, income taxes, and depreciation and amortization charges to income. Total EBITDA increased ~~36.1%~~38.5% to ~~$129.0~~$59.0 million for the ~~2017 nine-month period~~2020 quarter compared to ~~$94.8~~$42.6 million for the ~~2016 nine-month period.~~2019 quarter. The increase was primarily driven by a 35.4% increase in Trex Residential EBITDA due to net sales and gross margin and by an increase in ~~the 2016 nine-month period included a $9.8 million increase to warranty reserve~~Trex Commercial EBITDA primarily related to ~~surface flaking. Excluding this charge, the 2017 nine-month period~~an increase in Total EBITDA was 23.3%, with Residential EBITDA growth of 22.5% and Commercial EBITDA contributing 0.8%. The 22.5% Residential EBITDA growth was driven by increased revenue and EBITDA margin expansion.

gross margin.

LIQUIDITY AND CAPITAL RESOURCES

We finance operations and growth primarily with cash flows from operations, borrowings under our revolving credit facility, operating leases and normal trade credit terms from operating activities.

At ~~September 30, 2017,~~March 31, 2020 we had ~~$25.5~~$5.3 million of cash and cash equivalents.

ources and Uses of Cash.

The following table summarizes our cash flows from operating, investing and financing activities (in thousands):

   Nine Months Ended
September 30,
   2017    2016
Net cash provided by operating activities
   $ 92,837    $ 83,579
Net cash used in investing activities
   $ (82,631 )    $ (4,185 )
Net cash used in financing activities
   $ (3,329 )    $ (62,452 )




Net increase in cash and cash equivalents
   $ 6,877    $ 16,942


	Three Months Ended March 31,
	2020			2019
Net cash used in operating activities	$	(108,768	)	$	(109,990	)
Net cash used in investing activities		(20,597	)		(8,647	)
Net cash used in financing activities		(14,129	)		20,845

Net decrease in cash and cash equivalents	$	(143,494	)	$	(97,792	)

Operating Activities

~~Net cash provided by operating activities~~

Cash used in operations was ~~$92.8~~$108.8 million induring the ~~2017 nine-month period~~2020 quarter compared to ~~net~~ cash ~~provided by operating activities~~used in operations of ~~$83.6~~$110 million induring the ~~2016 nine-month period.~~2019 quarter. The ~~net increase~~slight decrease in cash ~~provided by operating activities in the 2017 nine-month period compared to the 2016 nine-month period~~flows from operations was primarily due to ~~an increase in~~higher working capital ~~of $12.3 million. This increase was offset by a $21.6 million increase~~investment in ~~net income.~~

accounts receivable.

Investing Activities

Capital expenditures in the ~~2017 nine-month period~~2020 quarter were ~~$11.1~~$22.7 million ~~consisting~~ primarily ~~of $8.1 million~~ for capacity expansion at our Virginia and Nevada facilities and general plant cost reduction initiatives and $2.2 million for equipment and new product development. Capital expenditures in the 2016 nine-month period were $8.5 million primarily consisting of $3.3 million for the purchase of equipment, land adjacent to our Winchester, Virginia manufacturing facility, and Trex University (our~~state-of-the-art~~ training facility), $2.6 million for general plant cost reduction initiatives, and $2.3 million for process and productivity improvement. Also, in January 2016, the Company sold a portion of the Olive Branch, Mississippi, facility that contained the buildings for $4.2 million.

other production improvements.

Financing Activities

Net cash used in financing activities was ~~$3.3~~$14.1 million in the ~~2017 nine-month period compared to net cash used in financing activities~~2020 quarter primarily for repurchases of ~~$62.5 million in the 2016 nine-month period. The $59.1 million decrease was primarily due to $54.7 million in~~our common stock ~~repurchase activity in the 2016 nine-month period.~~

under our Stock Repurchase ~~Programs.~~

Program of $39.1 million, offset by net borrowings under our revolving credit facility of $28.5 million.

Amendment of Restated Certificate of Incorporation.

Stock Repurchase Program.

On ~~October 22, 2015,~~February 16, 2018, the Board of Directors adopted a ~~new~~ stock repurchase program of up to ~~3.15~~5.8 million shares of the Company’s outstanding common stock ~~(October 2015 Stock~~(Stock Repurchase Program). ~~This authorization terminated on December~~As of March 31, ~~2016. The~~2020, the Company had repurchased ~~a total of 1,578,952 shares for $53.3 million under the October 2015 Stock Repurchase Program.~~

~~On February 16, 2017, the Board of Directors authorized a common stock repurchase program of up to 2.96~~1.4 million shares of the Company’s outstanding common stock ~~(February 2017~~under the Stock Repurchase ~~Program).~~Program.

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Due to the volatility and uncertainty in the stock market associated with the

COVID-19

pandemic, we suspended repurchases of our common stock under the Stock Repurchase Program on March 12, 2020. As of the date of this report, the ~~Company has made no repurchases under the February 2017~~ Stock Repurchase ~~Program.~~

Program remains in effect and we may determine to resume repurchases at any time.

Indebtedness.

Our ~~Third~~Fourth Amended and Restated Credit Agreement ~~as amended,~~(Fourth Amended Credit Agreement) provides us with revolving loan capacity in a collective maximum principal amount of $250 million from January 1 through June 30 of each year, and a maximum principal amount of $200 million from July 1 through December 31 of each year throughout the term, which ends ~~January 12, 2021.~~November 5, 2024. At ~~September 30, 2017,~~March 31, 2020, we had no$28.5 million in outstanding indebtedness under the revolving credit facility and borrowing capacity under the facility of ~~$200~~$221.5 million.

Compliance with Debt Covenants. ~~To remain~~

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 ~~contained within our debt agreements, we must maintain specified financial ratios based on levels~~as of ~~debt, fixed charges, and earnings (excluding extraordinary gains and extraordinarynon-cash~~ ~~losses) before interest, taxes, depreciation and amortization. At September 30, 2017, we were in compliance with these covenants.~~March 31, 2020. Failure to comply with ~~our loan~~the financial covenants ~~might cause our lenders to accelerate our~~could be considered a default of repayment obligations ~~under~~and, among other remedies, could accelerate payment of any amounts outstanding.

Although the impact that the

COVID-19

pandemic will have on our ~~credit facility, which may be declared payable immediately based on a default.~~

Weliquidity for fiscal year 2020 is uncertain, we have stress tested our financials and we believe that cash on hand, cash from operations and borrowings expected to be available under our revolving credit facility 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. ~~We currently estimate that~~

In June 2019, we announced a new capital expenditure program to increase production capacity at our Trex Residential facilities in Virginia and Nevada. The new multi-year capital ~~expenditures~~expenditure program is projected at approximately $200 million between now and 2021, and involves the construction of a new decking facility at the existing Virginia site and the installation of additional production lines at the Nevada site. The Nevada capacity is projected to come

on-line

by the end of the second quarter 2020, while the Virginia capacity will begin to come online in ~~2017~~the first quarter of 2021. The investment will ~~be $15~~allow us to ~~$20 million. Our~~increase production output for future projected growth related to our strategy of converting wood demand to Trex Residential wood-alternative composite decking. When completed these investments will increase our capacity by approximately 70 percent. In addition, our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, upgrading equipment, and acquisitions which fit ~~out~~our long-term ~~outdoor products~~ growth strategy as we continue to evaluate opportunities that would be a good strategic fit for Trex, and return of capital to shareholders.

Our capital expenditure guidance for 2020 is $140 million to $160 million.

Inventory in Distribution Channels.We sell our Trex Residential decking and ~~residential~~ 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 ~~changes~~increases in the levels of inventory in the distribution channels at ~~September 30, 2017~~March 31, 2020 compared to inventory levels at ~~September 30, 2016.~~

~~Product Warranty.~~ ~~We continue to receive and settle claims related to products manufactured at our Nevada facility prior to 2007~~March 31, 2019 that ~~exhibit surface flaking, which has had a material adverse effect on cash flow from operations, and regularly monitor the adequacy of the warranty reserve.~~

In the 2017 nine-month period and the 2016 nine-month period we paid $4.4 million and $4.2 million, respectively, to settle surface flaking claims. We estimate that the number of claims received will continue to decline over time and that the average settlement cost per claim will increase slightly, primarily due to inflation. If the level of claims received or average settlement cost per claim differs materially from our expectations, it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flowwould adversely impact net sales in future periods.

~~Business Acquisition.~~~~On July 31, 2017, through our wholly-owned subsidiary,~~

Seasonality

. The operating results for Trex Commercial Products, Inc., we entered into a definitive agreement with SC Company and on that date acquired certain assets and liabilities of SC Company for $71.8 million in cash. The purchase price is subject to adjustment pending final determination of working capital. We used cash on hand and $30.0 million from our existing revolving credit facility to acquire the business.

~~Seasonality~~~~. Our operating results~~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 ~~our~~its products to a later period. As part of ~~our~~its normal business practice and consistent with industry practice, ~~we have~~Trex Residential has historically offered incentive programs to ~~our~~its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of ~~our~~its product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs.

~~CRITICAL ACCOUNTING POLICIES AND ESTIMATES~~

~~In addition~~ The operating results for Trex Commercial have not historically varied from quarter to ~~the critical accounting policies included in the Company’s Annual Report on Form10-K~~ ~~for the year ended December 31, 2016, critical accounting policies and estimates also include the following policies subsequent to and in connection with the SC Company acquisition:~~

~~Revenue Recognition~~

~~We recognize revenue using the percentage~~quarter as a result of ~~completion method measured~~seasonality. However, they are driven by the ~~ratio~~timing of ~~direct costs incurred to date to estimated total costs for~~individual projects, which may vary significantly each contract. Contract costs include all direct material, labor, subcontract and certain indirect costs. Administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are recognized when such losses are determined. Changes in job performance, conditions and estimated profitability may result

in revisions to costs and income and are recognized in the period they are determined. Revenues recognized in excess of amounts billed are classified under current assets as costs and estimated earnings in excess of billings. Billings in excess of revenues are classified under current liabilities as billings in excess of costs and estimated earnings.

~~Goodwill~~

~~The Company evaluates the recoverability of goodwill in accordance with Accounting Standard Codification Topic 350, “~~~~Intangibles – Goodwill and Other~~,” annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount. Goodwill is considered to be impaired when the net book value of the reporting unit exceeds its estimated fair value. The Company first assesses qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount to determine if it should proceed with the evaluation of goodwill for impairment. If the Company proceeds with the~~two-step~~ impairment test, the Company first compares the fair value of the reporting unit to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and step two of the impairment analysis is performed. In step two of the analysis, an impairment loss is recorded equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value should such a circumstance arise. The Company measures fair value of the reporting unit based on a present value of future discounted cash flows and a market valuation approach.

period.

Item 3.

3. Quantitative and Qualitative Disclosures About Market Risk

For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” in Part II, Item 7A of the Company’s Annual Report on Form

10-K

for the year ended December 31, ~~2016.~~2019. There were no material changes to the Company’s market risk exposure during the ~~nine~~three months ended ~~September 30, 2017.~~

March 31, 2020.

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Item 4.

4. Controls and Procedures

The Company’s management, with the participation of its President and Chief Executive Officer, who is the Company’s principal executive officer, and its ~~Vice President and~~Acting Chief Financial Officer, who is the Company’s principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2017. We have excluded Trex Commercial Products, Inc., our wholly-owned subsidiary which is included in our consolidated financial statements, from our assessment of internal control over financial reporting as of September 30, 2017, because it was formed to acquire certain assets and assume certain liabilities of Staging Concepts Acquisition, LLC and Stadium Consolidation, LLC in a business combination on JulyMarch 31, ~~2017.~~2020. Based on this evaluation, the President and Chief Executive Officer and the ~~Vice President and~~Acting Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective. ~~In addition, there~~There have been no changes in the Company’s internal control over financial reporting during the ~~nine-month~~three-month period ended ~~September 30, 2017~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II

OTHER INFORMATION

~~Item 1.~~

~~Legal Proceedings~~

Item 1. Legal Proceedings

Item 2.

1A. Risk Factors

The Company’s business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary from recent results or from anticipated future results. Other than the supplemental risk factor set forth below, there have been no material changes to the risk factors disclosed in Part I – Item 1A, Risk Factors of our Form

10-K

for the year ended December 31, 2019.


Risk				Discussion
Description: Our business, results of operations and financial condition may be disrupted and adversely affected by global public health pandemics, including the strain of coronavirus known as COVID-19. Impact: If our employees or the employees of our suppliers or transportation providers are unable to work because of illness related to the COVID-19 pandemic, or if we or our suppliers or transportation providers are forced to temporarily cease operations, either on a voluntary or mandatory basis, then we may have a period of reduced operations and be unable to supply our customers in a timely manner, which could have a material negative impact on our business. If the COVID-19 outbreak disrupts the operations of our distributors and retail outlets and negatively impacts economies in the United States, Canada and the rest of the world, our business, results of operations and financial condition may be adversely affected.				In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. It spread to other countries, including the United States, and efforts to contain COVID-19 have intensified. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Our business, results of operations and financial condition may be adversely affected if COVID-19 interferes with the ability of our employees, suppliers and other business partners to perform their respective responsibilities and obligations relative to the conduct of our business. We continue to monitor the recent outbreak of COVID-19 and evaluate its impact on our business, including new information as it emerges concerning its severity and any actions to prevent, contain or treat it, among others. The extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted.

Item	2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table provides information relating to the purchases of our common stock during the ~~quarter~~three months ended ~~September 30, 2017~~March 31, 2020 in accordance with Item 703 of Regulation

S-K:

Period
   (a)
Total Number of
Shares (or Units)
Purchased (1)    (b)
Average Price Paid
per Share (or Unit)
($)    (c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs    (d)
Maximum number of
Shares (or Units) that
May Yet Be
Purchased Under the
Plan or Program
July 1, 2017 – July 31, 2017
   —    —    Not applicable    Not applicable
August 1, 2017 – August 31, 2017
   918    $ 73.76    Not applicable    Not applicable
September 1, 2017 – September 30, 2017
   —    —    Not applicable    Not applicable








Quarter ended September 30, 2017
   918       Not applicable


Period	(a) Total Number of Shares (or Units) Purchased (1)		(b) Average Price Paid per Share (or Unit) ($)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)		(d) Maximum number of Shares (or Units) that May Yet Be Purchased Under the Plan or Program
January 1, 2020 – January 31, 2020		47,062	$	96.61		42,238		4,798,382
February 1, 2020 – February 29, 2020		71,626	$	101.46		38,292		4,760,090
March 1, 2020 – March 31, 2020		361,479	$	86.08		361,479		4,398,611

Quarterly period ended March 31, 2020		480,167				442,009

Table of Contents

(1)

~~Shares~~Includes shares withheld by, or delivered to, the Company pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s 2014 Stock Incentive Plan allowing the Company to withhold, or the recipient to deliver to the Company, the number of shares having the fair value equal to tax withholding due.

(2)

On February 16, 2018, the Company’s Board of Directors authorized a common stock repurchase program of up to 5.8 million shares of the Company’s outstanding common stock (Stock Repurchase Program). The Stock Repurchase Program was publicly announced on February 21, 2018. During the three months ended March 31, 2020, the Company repurchased 442,009 shares under the Stock Repurchase Program.

Due to the volatility and uncertainty in the stock market associated with the

COVID-19

pandemic, we suspended repurchases of our common stock under the Stock Repurchase Program on March 12, 2020. As of the date of this report, the Stock Repurchase Program remains in effect and we may determine to resume repurchases at any time.

~~Item 5.~~

~~Other Information~~

Item 5. Other Information

Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on April 29, 2020. Only holders of the Company’s common stock at the close of business on March 2, 2020 (Record Date) were entitled to vote at the Annual Meeting. As of the Record Date, there were 58,206,523 shares of common stock entitled to vote. A

total of 55,433,633 shares of common stock (95.24%), constituting a quorum, were represented in person or by valid proxies at the Annual Meeting.

The stockholders voted on four proposals at the Annual Meeting. The proposals are described in detail in the Company’s definitive proxy statement dated March 17, 2020. The final results for the votes regarding each proposal are set forth below.

Proposal 1:

The Company’s stockholders elected four directors to the Board to serve for a three-year term until the 2023 annual meeting of stockholders. The votes regarding this proposal were as follows:


	For		Against		Abstain		Broker Non-Votes
Jay M. Gratz		48,040,385		2,538,485		62,250		4,792,513
Kristine L. Juster		48,961,427		1,175,968		503,725		4,792,513
Ronald W. Kaplan		47,377,257		3,201,360		62,503		4,792,513
Gerald Volas		49,121,078		1,010,571		509,471		4,792,513

Proposal 2:

The Company’s stockholders approved, on an advisory basis, the compensation of the Company’s executive officers named in the Company’s definitive proxy statement dated March 17, 2020. The votes regarding this proposal were as follows:


For	Against	Abstain	Broker Non-Votes
49,322,107	946,485	372,528	4,792,513

Proposal 3:

The Company’s stockholders approved the Fourth Certificate of Amendment to the Restated Certificate of Incorporation of the Company to increase the number of authorized shares of common stock, $0.01 par value per share, from 120 million to 180 million. The votes regarding this proposal were as follows:

Table of Contents


For	Against	Abstain	Broker Non-Votes
50,004,012	5,353,216	76,405	—

Proposal 4:

The Company’s stockholders ratified the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2020. The votes regarding this proposal were as follows:


For	Against	Abstain	Broker Non-Votes
54,467,137	904,751	61,745	—

Amendment of Restated Certificate of Incorporation

The foregoing description of certain terms and conditions in the Amendment is qualified in its entirety by reference to the full text of the Restated Certificate of Incorporation of the Company, which is filed as Exhibit 3.1 to this Form

10-Q,

the First Amendment of the Restated Certificate of Incorporation of the Company, which is filed as Exhibit 3.2, the Second Amendment of the Restated Certificate of Incorporation, which is filed as Exhibit 3.3, the Third Amendment of the Restated Certificate of Incorporation of the Company, which is filed as Exhibit 3.4, and the Fourth Amendment of the Restated Certificate of Incorporation, which is filed as Exhibit 3.5, all of which are incorporated herein by reference in their entirety.

~~Item 6.~~

~~Exhibits~~

~~The number and description~~

Item 6. Exhibits

See Exhibit Index at the end of the ~~following exhibits coincide with~~Quarterly Report on Form

10-Q

for the information required by this Item ~~601~~which is incorporated herein by reference.

Table of ~~RegulationS-K:~~



~~2.1~~		~~Asset Purchase Agreement by and among Trex Commercial Products, Inc., Staging Concepts Acquisition, LLC, and Stadium Consolidation, LLC. Filed as Exhibit 2.1 to the Company’s Current Report on Form8-K~~ ~~filed July 31, 2017 and incorporated herein by reference.~~

~~3.1~~		~~Restated Certificate of Incorporation of Trex Company, Inc. (Company). Filed as Exhibit 3.1 to the Company’s Registration Statement on FormS-1~~ ~~(No.333-63287)~~ ~~and incorporated herein by reference.~~

~~3.2~~		~~Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated April 30, 2014. Filed as Exhibit 3.2 to the Company’s Quarterly Report on Form10-Q~~ ~~for the quarterly period ended March 31, 2014 and incorporated herein by reference.~~

~~3.3~~		~~Amended and RestatedBy-Laws~~ ~~of the Company. Filed as Exhibit 3.2 to the Company’s Current Report on Form8-K~~ ~~filed May 7, 2008 and incorporated herein by reference.~~

~~31.1~~		~~Certification of Chief Executive Officer of Trex Company, Inc. pursuant to Rule13a-14(a)~~ ~~under the Securities Exchange Act of 1934. Filed herewith.~~

~~31.2~~		~~Certification of Chief Financial Officer of Trex Company, Inc. pursuant to Rule13a-14(a)~~ ~~under the Securities Exchange Act of 1934. Filed herewith.~~

32		~~Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). Furnished herewith.~~

~~101.INS~~		~~XBRL Instance Document. Filed.~~

~~101.SCH~~		~~XBRL Taxonomy Extension Schema Document. Filed.~~

~~101.CAL~~		~~XBRL Taxonomy Extension Calculation Linkbase Document. Filed.~~

~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document. Filed.~~

~~101.LAB~~		~~XBRL Taxonomy Extension Label Linkbase Document. Filed.~~

~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase Document. Filed.~~

Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	TREX COMPANY, INC.

~~Date: October 30, 2017~~	~~By:~~
Date: May 4, 2020	By:	/s/ Bryan H. Fairbanks
		Bryan H. Fairbanks
		~~Vice~~ President and Chief ~~Financial~~Executive Officer
		(Duly Authorized ~~Officer and Principal Financial~~ Officer)

Table of Contents

EXHIBIT INDEX

Incorporated by reference

Exhibit

No.

Description

Form

Exhibit

Filing Date

File No.

3.1

Restated Certificate of Incorporation of Trex Company, Inc.

S-1/A

3.1

March 24, 1999

333-63287

3.2

Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated April 30, 2014.

10-Q

3.2

May 5, 2014

001-14649

3.3

Second Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated May 2, 2018.

10-Q

3.3

May 7, 2018

001-14649

3.4

Third Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated May 1, 2019.

8-K

3.1

May 1, 2019

001-14649

3.5*

Fourth Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated April 29, 2020.

3.6

Amended and Restated By-Laws of Trex Company, Inc.

8-K

3.2

May 1, 2019

001-14649

10.1***

Amended and Restated 1999 Incentive Plan for Outside Directors.

8-K

10.1

February 25, 2020

001-14649

10.2***

Change-in-Control Severance Agreement, dated as of February 21, 2020, by and between Trex Company, Inc. and Bryan H. Fairbanks.

8-K

10.2

February 25, 2020

001-14649

10.3***

Severance Agreement, dated as of February 21, 2020, by and between Trex Company, Inc. and Bryan H. Fairbanks.

8-K

10.3

February 25, 2020

001-14649

31.1*

Certification of Chief Executive Officer of Trex Company, Inc. pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2*

Certification of Chief Financial Officer of Trex Company, Inc. pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32**

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

101.INS*

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*

Inline XBRL Taxonomy Extension Schema Document.

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Table of Contents

~~Exhibit~~

~~Number~~

~~Exhibit Description~~

~~2.1~~

~~Asset Purchase Agreement by and among Trex Commercial Products, Inc., Staging Concepts Acquisition, LLC, and Stadium Consolidation, LLC. Filed as Exhibit 2.1 to the Company’s Current Report on Form8-K~~ ~~filed July 31, 2017 and incorporated herein by reference.~~

~~3.1~~

~~Restated Certificate of Incorporation of Trex Company, Inc. (Company). Filed as Exhibit 3.1 to the Company’s Registration Statement on FormS-1~~ ~~(No.333-63287)~~ ~~and incorporated herein~~

Incorporated by ~~reference.~~reference

~~3.2~~

Exhibit

No.

~~Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated April 30, 2014. Filed as Exhibit 3.2 to the Company’s Quarterly Report on Form10-Q~~ ~~for the quarterly period ended March 31, 2014 and incorporated herein by reference.~~

~~3.3~~

Description

~~Amended and RestatedBy-Laws~~ ~~of the Company. Filed as Exhibit 3.2 to the Company’s Current Report on~~

Form~~8-K~~ ~~filed May 7, 2008 and incorporated herein by reference.~~

~~31.1~~

~~Certification of Chief Executive Officer of Trex Company, Inc. pursuant to Rule13a-14(a)~~ ~~under the Securities Exchange Act of 1934. Filed herewith.~~

~~31.2~~

Exhibit

~~Certification of Chief Financial Officer of Trex Company, Inc. pursuant to Rule13a-14(a)~~ ~~under the Securities Exchange Act of 1934. Filed herewith.~~

Filing Date

~~Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). Furnished herewith.~~

File No.

~~101.INS~~

~~XBRL Instance Document. Filed.~~

~~101.SCH~~

~~XBRL Taxonomy Extension Schema Document. Filed.~~

~~101.CAL~~

~~XBRL Taxonomy Extension Calculation Linkbase Document. Filed.~~

~~101.DEF~~

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document. ~~Filed.~~

~~101.LAB~~

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document. ~~Filed.~~

~~101.PRE~~

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document. ~~Filed.~~

104.1*

Cover Page Interactive Data File – The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

*	Filed herewith

**	Furnished herewith

***	Management contract or compensatory plan or agreement


	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Net sales	$	140,194	$	106,168	$	442,941	$	384,294
Cost of sales		84,910		76,223		250,473		235,312

Gross profit		55,284		29,945		192,468		148,982
Selling, general and administrative expenses		24,919		19,379		75,409		64,786

Income from operations		30,365		10,566		117,059		84,196
Interest expense, net		59		77		515		1,108

Income before income taxes		30,306		10,489		116,544		83,088
Provision for income taxes		10,208		2,702		39,715		27,871

Net income	$	20,098	$	7,787	$	76,829	$	55,217

Basic earnings per common share	$	0.68	$	0.27	$	2.61	$	1.88

Basic weighted average common shares outstanding		29,404,049		29,295,284		29,385,722		29,419,958

Diluted earnings per common share	$	0.68	$	0.26	$	2.60	$	1.86

Diluted weighted average common shares outstanding		29,578,216		29,516,718		29,563,497		29,635,796

Comprehensive income	$	20,098	$	7,787	$	76,829	$	55,217


	September 30, 2017			December 31, 2016
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	25,541		$	18,664
Accounts receivable, net		70,802			48,039
Contract retainage		1,893			—
Inventories		26,029			28,546
Prepaid expenses and other assets		3,912			10,400
Revenues in excess of billings		4,706			—

Total current assets		132,883			105,649

Property, plant and equipment, net		102,788			103,286
Goodwill and other intangibles		72,544			10,523
Other assets		2,981			1,972

Total assets	$	311,196		$	221,430

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	15,960		$	10,767
Accrued expenses and other liabilities		41,327			34,693
Accrued warranty		6,725			5,925
Billings in excess of revenues		1,353			—
Customer deposits		953			—

Total current liabilities		66,318			51,385

Deferred income taxes		894			894
Non-current accrued warranty		29,733			31,767
Other long-term liabilities		2,676			3,223

Total liabilities		99,621			87,269

Commitments and contingencies		—			—

Stockholders’ equity:
Preferred stock, $0.01 par value, 3,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.01 par value, 80,000,000 shares authorized; 34,918,427 and 34,894,233 shares issued and 29,424,746 and 29,400,552 shares outstanding at September 30, 2017 and December 31, 2016, respectively		349			349
Additionalpaid-in capital		120,667			120,082
Retained earnings		264,071			187,242
Treasury stock, at cost, 5,493,681 shares at September 30, 2017 and December 31, 2016		(173,512	)		(173,512	)

Total stockholders’ equity		211,575			134,161

Total liabilities and stockholders’ equity	$	311,196		$	221,430


	Nine Months Ended September 30,
	2017			2016
Operating Activities
Net income	$	76,829		$	55,217
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,065			10,893
Stock-based compensation		3,913			3,806
Loss (gain) on disposal of property, plant and equipment		1,720			(189	)
Othernon-cash adjustments		(405	)		(285	)
Changes in operating assets and liabilities:
Accounts receivable		(14,407	)		1,580
Contract retainage		55			—
Inventories		4,860			6,597
Prepaid expenses and other assets		2,987			(771	)
Revenues in excess of billings		(1,243	)		—
Accounts payable		1,203			(6,761	)
Accrued expenses and other liabilities		(1,430	)		5,005
Billings in excess of revenues		(399	)		—
Customer deposits		(609	)		—
Income taxes receivable/payable		7,698			8,487

Net cash provided by operating activities		92,837			83,579

Investing Activities
Expenditures for property, plant and equipment		(11,108	)		(8,534	)
Proceeds from sales of property, plant and equipment		—			4,349
Acquisition of business		(71,523	)		—

Net cash used in investing activities		(82,631	)		(4,185	)

Financing Activities
Borrowings under line of credit		201,000			242,700
Principal payments under line of credit		(201,000	)		(249,700	)
Repurchases of common stock		(3,617	)		(55,185	)
Financing costs		—			(485	)
Proceeds from employee stock purchase and option plans		288			218

Net cash used in financing activities		(3,329	)		(62,452	)

Net increase in cash and cash equivalents		6,877			16,942
Cash and cash equivalents, beginning of period		18,664			5,995

Cash and cash equivalents, end of period	$	25,541		$	22,937

Supplemental Disclosure:
Cash paid for interest	$	416		$	849
Cash paid for income taxes, net	$	32,016		$	19,435


	Three Months Ended September 30, 2016
	As Reported		Adjusted
	(in thousands, except share and per share data)
Provision for income taxes	$	3,591	$	2,702
Net Income	$	6,898	$	7,787
Basic net income per share	$	0.24	$	0.27
Diluted net income per share	$	0.23	$	0.26
Diluted weighted average common shares outstanding		29,457,653		29,516,718


	Nine Months Ended September 30, 2016
	As Reported			Adjusted
	(in thousands, except share and per share data)
Provision for income taxes	$	29,510		$	27,871
Net Income	$	53,578		$	55,217
Basic net income per share	$	1.82		$	1.88
Diluted net income per share	$	1.81		$	1.86
Diluted weighted average common shares outstanding		29,581,578			29,635,796
Cash flows provided by operating activities	$	81,880		$	83,579
Cash flows used in financing activities	$	(60,573	)	$	(62,452	)


Accounts receivable, net	$	8,357
Contract retainage		1,948
Inventories, net		2,344
Prepaid expenses and other assets		1,223
Revenues in excess of billings		3,463
Fixed assets, net		1,264
Intangible assets		4,900
Goodwill		57,938
Accounts payable		(3,990	)
Accrued liabilities and other expenses		(2,329	)
Billings in excess of revenues		(1,752	)
Customer Deposits		(1,562	)

Total estimated consideration	$	71,804


	Nine Months Ended September 30
	2017		2016		2017		2016
	Actual				Pro Forma
Net sales	$	442,941	$	384,294	$	475,076	$	427,043
Net income	$	76,829	$	55,217	$	77,570	$	54,978
Basic earnings per common share	$	2.61	$	1.88	$	2.64	$	1.87
Diluted earnings per common share	$	2.60	$	1.86	$	2.62	$	1.86


	September 30, 2017		December 31, 2016
Work-in-process	$	580	$	—
Raw materials		1,990		—

Total FIFO inventories	$	2,570	$	—


	September 30, 2017		December 31, 2016
Prepaid expenses	$	3,190	$	6,209
Income tax receivable		—		4,024
Other		722		167

Total prepaid expenses and other assets	$	3,912	$	10,400


	2017
Beginning balance, January 1	$	10,523
Goodwill recognized from acquisition of SC Company		57,938

Ending balance, September 30	$	68,461


	Net Carrying Amount (in thousands)			Amortization Period
				(in months)
Intangible assets:
Customer backlog	$	4,000			12
Trade names and trademarks		900			12

Total intangible assets		4,900

Accumulated amortization:
Customer backlog		(683	)
Trade name		(134	)

Total accumulated amortization		(817	)

Intantible assets, net	$	4,083


	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Stock appreciation rights		17,957		—		14,156		6,174
Restricted stock		330		46		110		15


	Stock Awards Granted		Weighted-Average Grant Price Per Share
Time-based restricted stock units		36,105	$	72.50
Performance-based restricted stock units (a)		43,307	$	57.54
Stock appreciation rights		18,739	$	70.75


	Nine Months Ended September 30, 2017
Weighted-average fair value of grants	$	27.97
Dividend yield		0	%
Average risk-free interest rate		2.0	%
Expected term (years)		5
Expected volatility		42.2	%


	Nine Months Ended September 30, 2017
	Residential		Commercial				Total
Net sales	$	433,790	$	9,151			$	442,941
Net income (loss)	$	76,904	$	(75	)		$	76,829
EBITDA	$	128,221	$	806			$	129,027
Depreciation and amortization	$	11,087	$	881			$	11,968
Income tax expense	$	39,715	$	—			$	39,715
Capital expenditures	$	11,068	$	40			$	11,108
Total assets	$	232,663	$	78,533		��	$	311,196


	Three Months Ended September 30, 2017
	Residential		Commercial			Total
Net income (loss)	$	20,173	$	(75	)	$	20,098
Interest		59		—			59
Taxes		10,208		—			10,208
Depreciation and amortization		3,639		881			4,520

EBITDA	$	34,079	$	806		$	34,885


	Three Months Ended March 31, 2020
	Surface Flaking			Other Residential			Total
Beginning balance, January 1	$	19,024		$	6,470		$	25,494
Provisions and changes in estimates		—			321			321
Settlements made during the period		(557	)		(168	)		(725	)

Ending balance, March 31	$	18,467		$	6,623		$	25,090


	Three Months Ended September 30,				$ Change		% Change
	2017		2016		$ Change		% Change
	(dollars in thousands)
Total net sales	$	140,194	$	106,168	$	34,026		32.0	%
Residential net sales	$	131,043	$	106,168	$	24,875		23.4	%
Commercial net sales	$	9,151		—	$	9,151		N/A


Three Months Ended September 30	2017 Residential		2017 Commercial			2017 Total		2016 Total
Net income (loss)	$	20,173	$	(75	)	$	20,098	$	7,787
Interest		59		—			59		77
Taxes		10,208		—			10,208		2,702
Depreciation and amortization		3,639		881			4,520		3,444

EBITDA	$	34,079	$	806		$	34,885	$	14,010


	Nine Months Ended September 30,				$ Change		% Change
	2017		2016		$ Change		% Change
	(dollars in thousands)
Total net sales	$	442,941	$	384,294	$	58,647		15.3	%
Residential net sales	$	433,790	$	384,294	$	49,496		12.9	%
Commercial net sales	$	9,151		—	$	9,151		N/A