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~~June 30, ~~2017~~

2022

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

For the transition period from

Commission File Number:

001-14649

Trex Company, ~~Inc.~~

Inc.

(Exact name of registrant as specified in its charter)


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)

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

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 ☒ No ☐

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 ☒ No ☐

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.:

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 ☐ No ☒

The number of shares of the registrant’s common stock, par value ~~$.01~~$0.01 per share, outstanding at ~~October 17, 2017~~July 22, 2022 was ~~29,424,889~~ 110,263,432

shares.

Table of Contents

TREX COMPANY, INC.

INDEX


				Page

PART I FINANCIAL INFORMATION			2

Item 1.	Condensed Consolidated Financial Statements		2

	~~Item 1. Financial~~Condensed Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 2022 and June 30, 2021 (unaudited)		2

~~Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months~~ ~~Ended September 30, 2017 and 2016 (unaudited)~~		2
Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017 (unaudited)~~2022 and December 31, ~~2016~~2021 (unaudited)			3

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2022 and June 30, 2021 (unaudited)		4

	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~ June 30, 2021 (unaudited)		4
~~Notes to Condensed Consolidated Financial Statements (unaudited)~~			5

	Notes to Condensed Consolidated Financial Statements (unaudited)		6

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		2628

Item 4.	Controls and Procedures		28

PART II OTHER INFORMATION			29

Item ~~4. Controls and Procedures~~1.	Legal Proceedings		2629

~~PART II OTHER INFORMATION~~ Item 2.		27

~~Item 1. Legal Proceedings~~			27

~~Item 2.~~ Unregistered Sales of Equity Securities and Use of Proceeds			2729

Item 5.	Other Information		2729

Item 6.	Exhibits		2830

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 June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Net sales	$	386,249		$	311,596		$	725,477		$	557,120
Cost of sales		228,872			193,323			433,188			343,046

Gross profit		157,377			118,273			292,289			214,074
Selling, general and administrative expenses		39,568			36,899			79,529			68,949
Gain on insurance proceeds		—			(983	)		—			(1,720	)

Income from operations		117,809			82,357			212,760			146,845
Interest (income) expense, net		(116	)		13			(104	)		10

Income before income taxes		117,925			82,344			212,864			146,835
Provision for income taxes		29,009			20,978			52,737			36,925

Net income	$	88,916		$	61,366		$	160,127		$	109,910

Basic earnings per common share	$	0.79		$	0.53		$	1.41		$	0.95

Basic weighted average common shares outstanding		113,099,561			115,362,757			113,864,741			115,512,231

Diluted earnings per common share	$	0.79		$	0.53		$	1.40		$	0.95

Diluted weighted average common shares outstanding		113,259,514			115,662,626			114,052,447			115,839,183

Comprehensive income	$	88,916		$	61,366		$	160,127		$	109,910

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

thousands, except share data)


	June 30, 2022			December 31, 2021
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	16,648		$	141,053
Accounts receivable, net		178,084			151,096
Inventories		100,872			83,753
Prepaid expenses and other assets		23,645			25,152

Total current assets		319,249			401,054
Property, plant and equipment, net		505,395			460,365
Operating lease assets		36,250			34,571
Goodwill and other intangible assets, net		18,791			19,001
Other assets		7,609			5,330

Total assets	$	887,294		$	920,321

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	57,825		$	24,861
Accrued expenses and other liabilities		74,698			58,041
Accrued warranty		6,300			5,800

Total current liabilities		138,823			88,702
Deferred income taxes		43,967			43,967
Operating lease liabilities		29,239			28,263
Non-current accrued warranty		22,230			22,795
Other long-term liabilities		11,560			11,560

Total liabilities		245,819			195,287

Commitments and contingencies		0—			0—

Stockholders’ equity:
Preferred stock, $0.01 par value, 3,000,000 shares authorized; NaN issued and outstanding		—			—
Common stock, $0.01 par value, 360,000,000 shares authorized; 140,798,762 and 140,734,753 shares issued and 111,563,381 and 115,148,152 shares outstanding at June 30, 2022 and December 31, 2021, respectively		1,408			1,407
Additional paid-in capital		129,109			127,787
Retained earnings		1,106,175			946,048
Treasury stock, at cost, 29,235,381 and 25,586,601 shares at June 30, 2022 and December 31, 2021, respectively		(595,217	)		(350,208	)

Total stockholders’ equity		641,475			725,034

Total liabilities and stockholders’ equity	$	887,294		$	920,321

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, 2021		115,148,152		$	1,407	$	127,787		$	946,048		25,586,601	$	(350,208	)	$	725,034
Net income		—			—		—			71,211		—		—			71,211
Employee stock plans		9,081			—		523			—		—		—			523
Shares withheld for taxes on awards		(35,856	)		—		(2,912	)		—		—		—			(2,912	)
Stock-based compensation		79,926			1		2,225			—		—		—			2,226
Repurchases of common stock		(833,963	)		—		—			—		833,963		(75,017	)		(75,017	)

Balance, March 31, 2022		114,367,340		$	1,408	$	127,623		$	1,017,259		26,420,564	$	(425,225	)	$	721,065
Net income		—			—		—			88,916		—		—			88,916
Employee stock plans		8,834			—		429			—		—		—			429
Stock-based compensation		2,024			—		1,057			—		—		—			1,057
Repurchases of common stock		(2,814,817	)		—		—			—		2,814,817		(169,992	)		(169,992	)

Balance, June 30, 2022		111,563,381		$	1,408	$	129,109		$	1,106,175		29,235,381	$	(595,217	)	$	641,475


	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, 2020		115,799,503		$	1,406	$	126,087		$	737,311		24,777,502	$	(276,273	)	$	588,531
Net income		—			—		—			48,545		—		—			48,545
Employee stock plans		28,286			—		460			—		—		—			460
Shares withheld for taxes on awards		(38,212	)		—		(4,045	)		—		—		—			(4,045	)
Stock-based compensation		76,094			—		2,176			—		—		—			2,176
Repurchases of common stock		(504,275	)		—		—			—		504,275		(45,523	)		(45,523	)

Balance, March 31, 2021		115,361,396		$	1,406	$	124,678		$	785,855		25,281,777	$	(321,796	)	$	590,143
Net income		—			—		—			61,366		—		—			61,366
Employee stock plans		20,341			—		400			—		—		—			400
Shares withheld for taxes on awards		(13,491	)		—		(1,446	)		—		—		—			(1,446	)
Stock-based compensation		17,210			1		2,132			—		—		—			2,133
Repurchases of common stock		(40,751	)		—		—			—		40,751		(3,820	)		(3,820	)

Balance, June 30, 2021		115,344,705		$	1,407	$	125,764		$	847,221		25,322,528	$	(325,616	)	$	648,776

See Notes to Condensed Consolidated Financial Statements (Unaudited).

Table of Contents

TREX COMPANY, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Six Months Ended
June 30,


2022

2021

Operating Activities

Net income    $ 160,127 $ 109,910
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization    21,804 15,702
Stock-based compensation    3,282 4,308
Gain on disposal of property, plant and equipment    (43 ) (1,083 )
Other
non-cash
adjustments
   (365 ) (226 )
Changes in operating assets and liabilities:
Accounts receivable    (26,988 ) (157,117 )
Inventories    (17,119 ) (8,994 )
Prepaid expenses and other assets    949 (6,878 )
Accounts payable    32,943 14,907
Accrued expenses and other liabilities    13,175 10,763
Income taxes receivable/payable    2,227 466

Net cash provided by (used in) operating activities    189,992 (18,242 )

Investing Activities

Expenditures for property, plant and equipment    (66,606 ) (94,831 )
Proceeds from sales of property, plant and equipment    45 1,314

Net cash used in investing activities    (66,561 ) (93,517 )

Financing Activities

Borrowings under line of credit    —   286,000
Principal payments under line of credit    —   (236,500 )
Repurchases of common stock    (247,921 ) (54,832 )
Proceeds from employee stock purchase and option plans    951 860
Financing costs    (866 ) —

Net cash used in financing activities    (247,836 ) (4,472 )

Net decrease in cash and cash equivalents    (124,405 ) (116,231 )
Cash and cash equivalents, beginning of period    141,053 121,701

Cash and cash equivalents, end of period    $ 16,648 $ 5,470

Supplemental Disclosure:
Cash paid for interest, net of capitalized interest    $ —   $ —
Cash paid for income taxes, net    $ 48,915 $ 36,457

See Notes to Condensed Consolidated Financial Statements

(Unaudited).

Table of Contents

TREX COMPANY, INC.

Notes to Condensed Consolidated Financial Statements

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~

2021

(Unaudited)

1.	BUSINESS AND ORGANIZATION

Trex Company, Inc. ~~(Company)~~(Trex), a Delaware corporation, was incorporated on September 4, 1998. Together, Trex and its wholly-owned subsidiary, Trex Commercial Products, Inc., are referred to as the Company. The Company operates in 2 reportable segments, Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). Trex Residential, the Company’s principal business based on net sales, is the world’s largest manufacturer of high-performance,

low-maintenance

wood-alternative decking and residential railing and outdoor living products ~~with more than 25 years of product experience which are~~and accessories, marketed under the brand name Trex^{®. The Company manufactures and distributes high-performance,low-maintenance wood/plastic composite outdoor living products and related accessories.
, with morethan
30 years of product experience. 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 SC Company is presented in Note 6. 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 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 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,~~ for all periods presented. Intercompany accounts and transactions have been eliminated in consolidation.

The Condensed Consolidated Statements of Comprehensive Income 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 presented in Note 6.

~~The~~unaudited consolidated results of operations for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2017.~~ 2022. The Company’s results of operations are affected by a number of factors, including, but not limited to, the cost to manufacture and distribute products, cost of raw materials, inflation, consumer spending and preferences, interest rates, the impact of any supply chain disruptions, economic conditions, and/or any adverse effects from the

COVID-19

pandemic and geopolitical conflicts.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, ~~2016~~2021 and ~~2015~~2020 and for each of the three years in the period ended December 31, ~~2016~~2021 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, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)No. 2016-09,~~ “~~Compensation – Stock Compensation (Topic 718)~~:~~Improvements to Employee Share-Based Payment Accounting~~.” 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 standard was effective for annual reporting periods beginning after December 15, 2016 and interim periods within that reporting period, with early adoption permitted. The Company elected to early 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,~~November 2021, the FASB issued ASU

No. ~~2017-09,~~2021-10,

“~~Compensation—Stock Compensation~~

Government Assistance (Topic ~~718), Scope Modification Accounting~~832):

Disclosures by Business Entities about Government Assistance

”.” The guidance ~~clarified when~~requires business entities to make annual disclosures about transactions with a government they account for by analogizing to a ~~change~~grant or contribution accounting model, such as IAS 20, ASC

958-605.

The annual disclosure requirements include: the nature of the transactions, the entities related accounting policy used, the line items on the balance sheet and income statement that are affected and the amounts applicable to ~~the~~each financial statement line item, and significant terms orand conditions of ~~a share-based payment award as a modification. Under~~ the ~~new guidance, modification accounting is required only if~~transactions. The disclosure requirements could be applied either prospectively to all transactions in the ~~fair value (or calculated intrinsic value, if those amounts are being used to measure the award under ASC 718), the vesting conditions, or the classification~~scope of the ~~award (as equity~~amendments that are reflected in the financial statements at the date of initial application and new transactions that are entered into after the date of initial application, or ~~liability) changes as a result of the change in terms or conditions.~~retrospectively. The guidance iswas effective prospectively for annual periods beginning on or after December 15, 2017. Early adoption is permitted. The Company intends to adopt the guidance on the effective date and does not believe adoption will have a material impact on its financial condition or results of operations.

~~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 applied prospectively, and is 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 on testing dates after January 1, 2017. The Company intends to adopt the guidance on the effective date and does not believe adoption will have a material impact on its financial condition or results of operations.

~~In August 2016, the FASB issued ASUNo. 2016-15,~~ “~~Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~.” The guidance is intended to reduce diversity in practice across all industries in how certain transactions are classified in the statement of cash flows. The guidance is effective for financial statements issued for fiscal years beginning after December 15, ~~2017, and interim periods within those fiscal years. Early adoption is~~2021, with early application permitted. ~~The guidance requires application using a retrospective transition method. The Company intends to adopt~~Adoption of the guidance ~~on the effective date and does~~did not ~~believe adoption will~~ have a material ~~impact~~effect on the Company’s consolidated financial statements.

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4.	NEW ACCOUNTING STANDARDS NOT YET ADOPTED

In March 2020, the FASB issued ASU

No. 2020-04,

“

Reference Rate Reform (Topic 848): Facilitation of the Effects of 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 separate from or in addition to changes to the terms of a contract to effect that transition. The guidance is effective upon issuance and generally can be applied as of March 12, 2020 through December 31, 2022. The Company does not expect adoption of the guidance to have a material effect on its consolidated financial statements.

~~In February 2016, the FASB issued ASUNo. 2016-02,~~ “~~Leases (Topic 842)~~~~.” 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 adoption is permitted. The standard must be adopted using the modified retrospective transition method and provides for the option to elect a package of practical expedients upon adoption. The Company intends to adopt the standard in the first quarter of fiscal 2019 and is assessing the impact of adoption of the standard on its consolidated financial statements 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.

~~ACQUISITION~~

INVENTORIES

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.

7.	~~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


	June 30, 2022			December 31, 2021
Finished goods	$	62,271		$	58,401
Raw materials		67,857			56,441

Total FIFO (first-in, first-out) inventories		130,128			114,842
Reserve to adjust inventories to LIFO value		(36,467	)		(36,467	)

Total LIFO inventories	$	93,661		$	78,375

The Company utilizes the LIFO method of accounting related to its Trex Residential wood-alternative decking and residential railing 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 were no0 LIFO inventory liquidations or related impact on cost of sales in the ~~nine~~six months ended ~~September~~June 30, ~~2017 or 2016.~~

2022.

Inventories valued at lower of cost (FIFO method) and net realizable value ~~consist~~were $7.2 million at, June 30, 2022 and $5.4 million at December 31, 2021, 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.~~

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


	June 30, 2022		December 31, 2021
Prepaid expenses	$	14,373	$	15,061
Revenues in excess of billings		7,905		9,109
Income tax receivable		894		406
Other		473		576

Total prepaid expenses and other assets	$	23,645	$	25,152

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

The ~~following table summarizes the activity related to the~~ carrying amount of goodwill ~~during the nine months ended September~~by reportable segment at June 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~~2022 and December 31, 2021 was $14.2 million for Trex Residential. The Company’s intangible assets ~~acquired from SC Company on July 31, 2017~~ consist of ~~the following at September~~domain names. At June 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

2022 and December 31, 2021, intangible assets were $6.3 million and accumulated amortization was $1.7 million and $1.5 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~~six months ended ~~September 31, 2017~~June 30, 2022 and June 30, 2021 was ~~$0.8 million.~~

$0.2 million and $0.2 million, respectively.

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~~10.~~

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


	June 30, 2022		December 31, 2021
Sales and marketing	$	38,945	$	16,439
Compensation and benefits		15,741		25,450
Operating lease liabilities		7,646		7,066
Manufacturing costs		3,923		4,110
Income taxes		2,715		—
Billings in excess of revenues		1,535		1,436
Other		4,193		3,540

Total accrued expenses and other liabilities	$	74,698	$	58,041

~~11.~~

DEBT

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

Revolving Credit Facility

Indebtedness on and after May

18, 2022

. On ~~January 12, 2016,~~May 18, 2022, the Company, ~~entered into a Third Amended and Restated Credit Agreement,~~ as ~~amended, with~~borrower; Trex Commercial Products, Inc. (TCP), as guarantor; Bank of America, N.A. (BOA), as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; Wells Fargo Bank, National Association (Wells Fargo), as lender and Syndication Agent; Regions Bank, PNC Bank, National Association, and TD Bank, N.A. (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner, entered into a Credit Agreement (Credit Agreement) to amend and restate the Fourth Amended and Restated Credit Agreement dated as of November 5, 2019.

Under the Credit Agreement, the Lenders agreed to provide the Company with one or more Revolving Loans in a collective maximum principal amount of $400,000,000 (Loan Limit) throughout the term, which ends May 18, 2027 (Term). Included within the Loan Limit are sublimits for a Letter of Credit ~~Issuer,~~facility in an amount not to exceed $60,000,000; and Swing Line Loans in an aggregate principal amount at any time outstanding not to exceed $20,000,000. The Revolving Loans, the Letter of Credit facility and the Swing Line Loans are for the purpose of raising working capital and supporting general business operations.

The Facility provide

the Company, in the aggregate, the ability to borrow an amount up to the Loan Limit during the Term. The Company is not obligated to borrow any amount under the Loan Limit. Within the Loan Limit, the Company may borrow, repay and reborrow at any time or from time to time while the Notes are in effect. Base Rate Loans (as defined in the Credit Agreement) under the Revolving Loans and the Swing Line Loans accrue interest at the Base Rate plus the Applicable Rate (as defined in the Credit Agreement) and Term SOFR Loans for the Revolving Loans accrue interest at the rate per annum equal to the sum of Term SOFR for such interest period plus the Applicable Rate (as defined in the Credit Agreement). The Base Rate for any day is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by BOA as its prime rate, and (c) the Term SOFR plus 1.0% subject to certain interest rate floors. Repayment of all then outstanding principal, interest, fees and costs is due at the end of the Term.

The Company and BofA Securities, Inc. as a sustainability coordinator, are entitled to establish specified key performance indicators (KPIs) with respect to certain environmental, social and governance targets of the Company and its subsidiaries. The sustainability coordinator and the Company may amend the Credit Agreement for the purpose of incorporating the KPIs and other related provisions, unless the Lenders object to such amendment on or prior to the date that is ten business days after the date on which such amendment is posted for review by the Lenders. Based on the performance of the Company and its subsidiaries against the KPIs, certain adjustments (increase, decrease or no adjustment) to otherwise applicable pricing will be made; provided that the amount of such adjustments shall not exceed certain aggregate caps as in the definitive loan documentation.

Under the terms of the Security and Pledge Agreement, the Company and TCP, subject to certain permitted encumbrances, as collateral security for the above-stated loans and all other present and future indebtedness of the Company owing to the Lenders grants to BOA, as Administrative Agent for the Lenders, a continuing security interest in certain collateral described and defined in the Security and Pledge Agreement but excluding the Excluded Property (as defined in the Security and Pledge Agreement).

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Indebtedness prior to May

18, 2022

. On November 5, 2019, the Company entered into a Fourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) as borrower, Trex Commercial Products, Inc., as guarantor; Bank of America, N.A. as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; and certain other lenders including ~~Citibank,~~Wells Fargo Bank, N.A., ~~Capital One, N.A.~~who is also Syndication Agent, and Truist Bank, 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.~~

November 5, 2024.

On May 26, 2020, the Company entered into a First Amendment to the Original Credit Agreement (the First Amendment) to provide for an additional $100 million line of credit through May 26, 2022. As a matter of convenience, the parties incorporated the amendments to the Original Credit Agreement made by the First Amendment into a new Fourth Amended and Restated Credit Agreement (New Credit Agreement). In the New Credit Agreement, the revolving commitments under the Original Credit Agreement are referred to as Revolving A Commitments and the new $100 million line of credit is referred to as Revolving B Commitments. In the New Credit Agreement, all of the material terms and conditions related to the original line of credit (Revolving A Commitments) remained unchanged from the Original Credit Agreement.

The Company’s revolving credit facility executed November 5, 2019 was completely replaced by the Company’s revolving credit facility executed May 18, 2022. The Company had no0 outstanding borrowings under its revolving credit facility and ~~remaining~~ available borrowing capacity of ~~$200~~$400 million at ~~September~~June 30, ~~2017.~~

2022.

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 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.~~June 30, 2022. 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 less than 1 year to 7 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 six months ended June 30, 2022 and June 30, 2021, total operating lease expense was $4.2 million and $4.1 million, respectively. The weighted average remaining lease term at June 30, 2022 and December 31, 2021 was 5.7 years and 5.8 years, respectively. The weighted average discount rate at June 30, 2022 and December 31, 2021 was 2.18% and 2.47%, respectively.

The following table includes supplemental cash flow information for the six months ended June 30, 2022 and June 30, 2021 and supplemental balance sheet information at June 30, 2022 and December 31, 2021 related to operating leases (in thousands):

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	Six Months Ended June 30,
Supplemental cash flow information	2022		2021
Cash paid for amounts included in the measurement of operating lease liabilities	$	4,334	$	4,131
Operating ROU assets obtained in exchange for lease liabilities	$	6,714	$	7,047



Supplemental balance sheet information	June 30, 2022		December 31, 2021
Operating lease ROU assets	$	36,250	$	34,571
Operating lease liabilities:
Accrued expenses and other current liabilities	$	7,646	$	7,066
Operating lease liabilities		29,239		28,263

Total operating lease liabilities	$	36,885	$	35,329

The following table summarizes maturities of operating lease liabilities at June 30, 2022 (in thousands):


Maturities of operating lease liabilities
2022	$	4,273
2023		7,612
2024		6,799
2025		5,463
2026		4,886
Thereafter		10,156

Total lease payments		39,189
Less imputed interest		(2,304	)

Total operating lease liabilities	$	36,885

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~~June 30, ~~2017~~2022 and December 31, ~~2016.~~

2021.

~~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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Numerator:
Net income available to common shareholders	$	88,916	$	61,366	$	160,127	$	109,910

Denominator:
Basic weighted average shares outstanding		113,099,561		115,362,757		113,864,741		115,512,231
Effect of dilutive securities:
Stock appreciation rights and options		96,179		193,466		110,253		200,263
Restricted stock		63,774		106,403		77,453		126,689

Diluted weighted average shares outstanding		113,259,514		115,662,626		114,052,447		115,839,183

Basic earnings per share	$	0.79	$	0.53	$	1.41	$	0.95

Diluted earnings per share	$	0.79	$	0.53	$	1.40	$	0.95

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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
June 30,

Six Months Ended
June 30,


2022

2021

2022

2021

Stock appreciation rights    47,303    15,029    38,789    11,105
Restricted stock    63,131    —      38,823    11,540

Stock Repurchase ~~Programs~~

Program

On ~~October 22, 2015,~~February 16, 2018, the Trex Board of Directors adopted a stock repurchase program of up to ~~3,150,000~~11.6 million shares of ~~the Company’s~~its outstanding common stock (October 2015 Stock Repurchase Program). This authorization terminated on December 31, 2016. The Company repurchased 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 2,960,000 shares of the Company’s outstanding common stock (February 2017 Stock~~(Stock Repurchase Program). As of ~~the date~~June 30, 2022, Trex has repurchased 7.3 million shares of ~~this report, the Company has made no repurchases~~its outstanding common stock under the ~~February 2017~~ Stock Repurchase Program.

First Certificate of Amendment to the Restated Certificate of Incorporation

At the annual meeting of stockholders of Trex held on May 5, 2022, its stockholders approved an amendment of the Trex Restated Certificate of Incorporation (Amendment), effective as of May 5, 2022. The Board of Directors of Trex unanimously approved the Amendment on February 23, 2022, subject to stockholder approval. The Amendment increases the number of shares of common stock, par value $.01 per share, that Trex is authorized to issue from 180 million shares to 360 million shares. The Amendment was filed with the Delaware Secretary of State on May 5, 2022.

~~14.~~

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 composite 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 $36 million as of June 30, 2022. The Company will recognize this revenue as contracts are completed, which is expected to occur within the next 24 months.

For the three months and six months ended June 30, 2022 and June 30, 2021, 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).

Table of Contents


Three Months Ended June 30, 2022	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	$	373,922	$	—	$	373,922
Products transferred over time and fixed price contracts		—		12,327		12,327

	$	373,922	$	12,327	$	386,249


Three Months Ended June 30, 2021	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	$	298,632	$	—	$	298,632
Products transferred over time and fixed price contracts		—		12,964		12,964

	$	298,632	$	12,964	$	311,596


Six Months Ended June 30, 2022	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	$	701,117	$	—	$	701,117
Products transferred over time and fixed price contracts		—		24,360		24,360

	$	701,117	$	24,360	$	725,477


Six Months Ended June 30, 2021	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	$	531,702	$	—	$	531,702
Products transferred over time and fixed price contracts		—		25,418		25,418

	$	531,702	$	25,418	$	557,120

14.	STOCK-BASED COMPENSATION

The Company has one stock-based compensation plan, the 2014 Stock Incentive Plan (Plan), approved by ~~the Company’s~~Trex stockholders in April 2014. The Plan amended and restated in its entirety the Trex Company, Inc. 2005 Stock Incentive Plan. The Plan is administered by the Compensation Committee of the ~~Company’s~~Trex 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~~Trex common stock that may be issued under the Plan is ~~6,420,000.~~

25,680,000 and as of June 30,

2022

, the total number of shares available for future issuance is 11,070,560.

Table of Contents

The following table summarizes the Company’s stock-based compensation grants for the ~~nine~~six months ended ~~September~~June 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

2022:


	Stock Awards Granted		Weighted-Average Grant Price Per Share
Time-based restricted stock units		39,001	$	81.85
Performance-based restricted stock units (a)		72,152	$	76.14
Stock appreciation rights		32,971	$	82.01

(a)

Includes ~~25,986~~47,072 of target performance-based restricted stock unit awards granted during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, and adjustments of ~~1,071, 5,396~~8,160, 11,684, and ~~10,854~~5,236 to grants due to the actual performance level achieved for restricted stock and restricted stock units awarded in ~~2014, 2015,~~2021, 2020, and ~~2016,~~2019, 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~~six months ended ~~September~~June 30, ~~2017~~2022 and June 30, 2021 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 %


	Six Months Ended June 30, 2022			Six Months Ended June 30, 2021
Weighted-average fair value of grants	$	33.9		$	51.84
Dividend yield		0	%		0	%
Average risk-free interest rate		1.9	%		0.6	%
Expected term (years)		5			5
Expected volatility		44.9	%		58.7	%

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


	Three Months Ended June 30,					Six Months Ended June 30,
	2022			2021		2022		2021
Stock appreciation rights	$	196		$	144	$	350	$	258
Time-based restricted stock and restricted stock units		959			754		1,806		1,441
Performance-based restricted stock and restricted stock units		(151	)		1,165		1,007		2,440
Employee stock purchase plan		53			69		119		169

Total stock-based compensation	$	1,057		$	2,132	$	3,282	$	4,308

Total unrecognized compensation cost related to unvested awards as of ~~September~~June 30, ~~2017~~2022 was ~~$4.8~~$10.4 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~~six months ended ~~September~~June 30, ~~2017~~2022 was 24.8% and ~~2016~~ was ~~34.1% and 33.5%, respectively, which resulted in expense of $39.7 million and $27.9 million, respectively. The increase of 0.6% in~~comparable to the effective tax rate ~~was primarily due to lower excess~~for the six months ended June 30, 2021, of 25.1%, which resulted in income tax ~~benefits in 2017 compared to 2016. In fiscal year 2016, 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 share-based awards be recognized in the tax provision instead~~expense of ~~in equity.~~

$52.7 million and $36.9 million, respectively.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~September~~June 30, ~~2016,~~2021, the Company realized ~~$1.4~~$0.1 million and ~~$1.7~~$1.2 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~~June 30, ~~2017,~~2022, the Company maintains a valuation allowance of ~~$4.1~~$2.2 million against deferred tax assets primarily related to state tax credits it estimates will expire before they are realized.

Table of Contents

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~~June 30, ~~2017,~~2022, for certain tax jurisdictions tax years ~~2013~~2017 through ~~2016~~2021 remain subject to examination. The Company believes that adequate provisions have been made for all tax returns subject to examination. 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.

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, income 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, income taxes, and depreciation and amortization charges to income. The below segment data for the ~~nine~~three months and six months ended ~~September~~June 30, ~~2017,~~2022 and June 30, 2021 includes data for Trex Residential ~~Products for the nine-month period~~ and ~~data~~Trex Commercial (in thousands):

Segment Data:


	Three Months Ended June 30, 2022							Three Months Ended June 30, 2021
	Trex Residential		Trex Commercial			Total		Trex Residential		Trex Commercial		Total
Net sales	$	373,922	$	12,327		$	386,249	$	298,632	$	12,964	$	311,596
Net income (loss)	$	89,437	$	(521	)	$	88,916	$	61,089	$	277	$	61,366
EBITDA	$	129,550	$	(410	)	$	129,140	$	91,008	$	627	$	91,635
Depreciation and amortization	$	11,049	$	282		$	11,331	$	9,020	$	258	$	9,278
Income tax expense (benefit)	$	29,180	$	(171	)	$	29,009	$	20,886	$	92	$	20,978
Capital expenditures	$	44,251	$	67		$	44,318	$	36,514	$	224	$	36,738
Total assets	$	846,112	$	41,182		$	887,294	$	807,713	$	91,107	$	898,820

Reconciliation of Net Income to EBITDA:


	Three Months Ended June 30, 2022									Three Months Ended June 30, 2021
	Trex Residential			Trex Commercial			Total			Trex Residential		Trex Commercial		Total
Net income (loss)	$	89,437		$	(521	)	$	88,916		$	61,089	$	277	$	61,366
Interest (income) expense, net		(116	)		—			(116	)		13		—		13
Income tax expense (benefit)		29,180			(171	)		29,009			20,886		92		20,978
Depreciation and amortization		11,049			282			11,331			9,020		258		9,278

EBITDA	$	129,550		$	(410	)	$	129,140		$	91,008	$	627	$	91,635

Table of Contents

Segment Data:


	Six Months Ended June 30, 2022							Six Months Ended June 30, 2021
	Trex Residential		Trex Commercial			Total		Trex Residential		Trex Commercial		Total
Net sales	$	701,117	$	24,360		$	725,477	$	531,702	$	25,418	$	557,120
Net income (loss)	$	161,652	$	(1,525	)	$	160,127	$	109,833	$	77	$	109,910
EBITDA	$	236,031	$	(1,466	)	$	234,565	$	161,973	$	575	$	162,548
Depreciation and amortization	$	21,240	$	565		$	21,805	$	15,231	$	472	$	15,703
Income tax expense (benefit)	$	53,243	$	(506	)	$	52,737	$	36,899	$	26	$	36,925
Capital expenditures	$	66,534	$	72		$	66,606	$	93,077	$	1,754	$	94,831
Total assets	$	846,112	$	41,182		$	887,294	$	807,713	$	91,107	$	898,820

Reconciliation of Net Income to EBITDA:


	Six Months Ended June 30, 2022									Six Months Ended June 30, 2021
	Trex Residential			Trex Commercial			Total			Trex Residential		Trex Commercial		Total
Net income (loss)	$	161,652		$	(1,525	)	$	160,127		$	109,833	$	77	$	109,910
Interest (income) expense, net		(104	)		—			(104	)		10		—		10
Income tax expense (benefit)		53,243			(506	)		52,737			36,899		26		36,925
Depreciation and amortization		21,240			565			21,805			15,231		472		15,703

EBITDA	$	236,031		$	(1,466	)	$	234,565		$	161,973	$	575	$	162,548

17.	SEASONALITY

The operating results 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

~~Reconciliation of 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

~~17.~~

~~SEASONALITY~~

~~The Company’s 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 ~~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 each quarterly 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. Depending on the product and its use, the Company also warrants its Trex Commercial products will be free of manufacturing defects for one to three years.

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.

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.

Table of Contents

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 six months ended June 30, 2022, was significantly lower than the number of claims received in the ~~nine~~six months ended ~~September~~June 30, ~~2017 was~~2021 and lower than ~~claims received in the nine months ended September 30, 2016, continuing the historical year-over-year decline in incoming claims, and consistent with~~ the Company’s ~~expectations. The average settlement~~expectations for 2022. Average cost per claim experienced in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 was ~~lower~~significantly higher than that experienced in the six months ended June 30, 2021 and higher than the Company’s expectations for the current year. The elevated average ~~settlement~~ cost per claim experienced ~~during~~in the ~~nine~~six months ended ~~September~~June 30, ~~2016 and consistent with~~2022, was primarily the result of the closure of two large claims, which were considered in the Company’s ~~expectations for 2017.~~estimation of its surface flaking warranty reserve. The Company believes its reserve at ~~September~~June 30, ~~2017~~2022 is sufficient to cover future surface flaking obligations.

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 consolidated 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.~~increase. 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 an 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~~$1.7 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.~~

Six Months Ended June 30, 2022


Surface
Flaking

Other
Residential

Total

Beginning balance, January 1    $    18,542    $    10,053    $    28,595
Provisions and changes in estimates    —      2,369    2,369
Settlements made during the period    (1,345 )    (1,089 )    (2,434 )

Ending balance, June 30    $ 17,197    $ 11,333    $ 28,530


Six Months Ended June 30, 2021


Surface
Flaking

Other
Residential

Total

Beginning balance, January 1    $ 21,325    $ 8,148    $ 29,473
Provisions and changes in estimates    —      2,429    2,429
Settlements made during the period    (1,536 )    (875 )    (2,411 )

Ending balance, June 30    $ 19,789    $ 9,702    $ 29,491

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.

Arkansas Facility

In October 2021, the Company announced plans to add a third U.S.-based Trex Residential manufacturing facility in Little Rock, Arkansas. The new campus will sit on approximately 300 acres of land and will address increased demand for Trex Residential outdoor living products. Construction began on the new facility in the second quarter of 2022, and in July 2022, the Company entered into a design-build agreement. As previously announced, the Company anticipates spending approximately $400 million on the facility and the budget for the design-build agreement is contained within this amount. Construction for the new facility will be funded primarily through the Company’s ongoing cash generation or its line of credit. The first production output is anticipated in 2024.

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Item 2.

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

The following management discussion should be read in conjunction with the Trex Company, Inc. ~~(Company, we or our)~~(Trex) Annual Report on Form
10-K
for the year ended December 31, ~~2016~~2021 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.

Trex has one wholly-owned subsidiary, Trex Commercial Products, Inc. Together, Trex and Trex Commercial Products, Inc. are referred to as the Company, we or our.

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~~2021 filed with the SEC. 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;~~products and raw materials; the Company’s ability to obtain raw materials, including scrap polyethylene, wood fiber, and other materials used in making our products, at acceptable prices; increasing inflation in the macro-economic environment; 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; material adverse impacts from global public health pandemics, including the strain of coronavirus known as

COVID-19;

and material adverse impacts related to labor shortages or increases in labor costs.

OVERVIEW

The following MD&A is intended to help the reader understand the operations and current business environment of the Company. The MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes thereto contained in “
Item 1. Condensed Consolidated Financial Statements
” of this report. MD&A includes the following sections:

Operations and ~~Products:~~~~Trex~~Products

— a general description of our business, a brief overview of our reportable segments’ products, and a discussion of our operational highlights.

Financial Highlights for the three months ended June

30, 2022 –

a summary of the financial highlights for the quarterly period ended June 30, 2022, a description of relevant financial statement line items, and a general discussion of factors that may affect our operations.

Results of Operations

— an analysis of our consolidated results of operations for the three months and six months in the period ended June 30, 2022 compared to three months and six months in the period ended June 30, 2021, respectively.

Liquidity and Capital Resources

— an analysis of cash flows; contractual obligations, and a discussion of our capital and other cash requirements.

OPERATIONS AND PRODUCTS

The Company ~~Inc.~~ currently operates in two ~~business~~reportable segments: Trex Residential Products (Trex Residential), the Company’s principal business based on net sales, and Trex Commercial ~~Products.~~

Products (Trex Commercial). Refer to Note 16,

Segments

, in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1.

Condensed Consolidated Financial Statements

of this Quarterly Report on Form

10-Q

for additional information. The Company is focused on using renewable resources within both our Trex Residential ~~Products~~ and Trex Commercial segments.

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Trex Residential

is the world’s largest manufacturer of high-performance composite decking and residential railing products, which are marketed under the brand name Trex^{®
and manufactured in the United States. We offer a comprehensive set of aesthetically appealing and durable,low-maintenance
product offerings in the decking, residential railing, 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 Residential 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 Residential 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® . In addition, our Trex Transcend decking product can also be used as cladding. Our high-performance,low-maintenance,eco-friendly composite decking products are comprised of a blend of 95 percent recycledreclaimed wood fibers and recycled plasticpolyethylene film and feature a protective polymer shell for enhanced protection against fading, staining, mold and scratching.}}} We also offer accessories to our decking products, including Trex Hideaway^{® and Trex DeckLighting™ , an outdoor lighting system. Trex DeckLighting is a hidden fastening systemline of energy-efficient LED dimmable deck lighting, which is designed for grooved boards.}

use on posts, floors and steps. The line includes a post cap light, deck rail light, riser light and a recessed deck light.

Railing

Our residential railing products are Trex Transcend
®
Railing, Trex Select
®
Railing, Trex Enhance
®
Railing and Trex Signature^{®
aluminum railing. Trex Transcend Railing, made 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 40 percent recycled content, is available in three colors and designed for consumers who want a sleek, contemporary look.}

~~Porch~~
Fencing

~~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.~~
~~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

is a leading national provider of custom-engineered railing and staging systems. Trex Commercial ~~Products~~designs and engineers custom solutions, which are prevalent in professional and collegiate sports facilities, commercial and high-rise applications, performing arts, sports, and event production and rentals. With a team of devoted engineers, and industry-leading reputation for quality and dedication to customer service, Trex Commercial markets to architects, specifiers, contractors, and building owners.

Table of Contents

Trex offers the following ~~products:~~

products through Trex Commercial:



*Architectural Railing Systems*		Our architectural railing systems are pre-engineered guardrails with options to accommodate styles ranging from classic and elegant wood top rail combined with sleek stainless components and glass infill, to modern and minimalist stainless cable and rod infill choices.

*~~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		Our Trex Signature aluminum railings, made from a minimum of 40 percent recycled content, are a versatile, cost-effective and low-maintenance choice for a variety of interior and exterior applications that we believe blend form, function and style. 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. The strength and durability of Trex Signature railings make them a choice for any commercial setting, from high-rise condominiums and resort projects to public walkways and balconies. Aluminum railings come in a variety of colors and stock lengths to accommodate project needs.

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~~

Operational Highlights:

Trex Residential Begins Production of New Product

. On May 16, 2022, we announced the expansion of our premium Trex Residential decking line with the introduction of Transcend
®
Lineage
™
. The new Transcend Lineage boards feature an elevated aesthetic with subtle, elegant graining, available in two new color options that expand the Transcend collection with nature-inspired tones and texturing that today’s homeowners are seeking. Like all Trex Residential decking, Lineage boards are made from 95% recycled and reclaimed content and engineered with a proprietary, high-traffic formulation and ultra-durable integrated shell. Transcend Lineage decking launched in
mid-May
and will be sold nationwide through Trex Residential dealers and major home centers. Production and sale of the new Transcend Lineage boards began in May 2022.

Trex Residential Arkansas Facility

. Construction began on the new Trex Residential Arkansas manufacturing facility in the second quarter 2022. The new campus will sit on approximately 300 acres of land and will address increased demand for Trex Residential outdoor living products. In July 2022, the Company entered into a design-build agreement and, as previously announced, anticipates spending approximately $400 million on the facility. The budget for the ~~three~~design-build agreement is contained within this amount. The first production output is anticipated in 2024.

Strategic Investments in the Six Months Ended June

30, 2022.

During the six months ended ~~September~~June 30, ~~2017:~~

2022, we made strategic investments to enhance the support of our Trex Residential brand and channel partners, including the debut of our new “We See It Too” marketing campaign. We also launched Trex Academy, an online multimedia content hub dedicated to helping the Trex Residential

Do-It-Yourself

customer bring their deck dreams to life by providing

how-to

content. In addition, we are investing to drive margin enhancement through supply chain and manufacturing cost out programs, and recently hired a new director at Trex Residential to lead a team dedicated to spearheading these initiatives.

Publication of 2021 Environmental, Social and Governance Report

. On June 23, 2022, the Company published its 2021 Environmental, Social and Governance (ESG) report. The annual ESG report highlights how the Company is “Building a Better Tomorrow Together” through a broad spectrum of initiatives to address its most material ESG priorities. Highlights include:

Investing to reduce environmental impact and advance sustainability;

Prioritizing employee safety and career growth;

Nurturing a diverse, equitable and inclusive workplace;

Conducting business responsibly through strong governance and ethics; and

Adding value to the communities where we operate.

Russian Invasion of Ukraine

. The conflict between Russia and Ukraine has not directly affected our business and results of operations. We have no operations in Russia or Ukraine but continue to monitor the potential economic impact of the conflict on supply chains, commodity and fuel prices, and prices of raw materials. We cannot predict the impact of the continued conflict on the global economy, our industry or our business.

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FINANCIAL HIGHLIGHTS FOR THE THREE MONTHS ENDED JUNE

30, 2022

◾

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~~

Increase in net sales of ~~$140.2~~24%, or $74.7 million, to $386.2 million for the three months ended ~~September~~June 30, ~~2017, an increase of 32.0% over net sales of $106.2~~2022 compared to $311.6 million for the three months ended ~~September~~June 30, ~~2016.~~2021.

◾

~~Gross profit as a percentage of~~

Increase in net ~~sales, gross margin, of 39.4%~~income to $88.9 million, or $0.79 per diluted share, for the three months ended ~~September~~June 30, ~~2017, an increase of 11.2% over the gross margin of 28.2%~~2022 compared to $61.4 million, or $0.53 per diluted share, for the three months ended ~~September~~June 30, ~~2016.~~2021.

◾

~~Net~~

Increase in EBITDA (earnings before interest, income tax and depreciation and amortization) of ~~$20.1~~40.9%, or $37.5 million, to $129.1 million for the three months ended ~~September~~June 30, ~~2017, or $0.68 per diluted share,~~2022 compared to ~~$7.8~~$91.6 million ~~or $0.26 per diluted share,~~ for the ~~same period~~three months ended June 30, 2021.

◾

Capital expenditures of $44.3 million at Trex Residential, primarily related to cost reduction initiatives, the new Arkansas manufacturing facility, capacity expansion in ~~2016.~~our existing facilities, our new corporate headquarters, and safety, environmental and general support.

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

◾

Repurchase of 2.8 million shares of our outstanding common stock during the three months ended June 30, 2022 under our Stock Repurchase Program for a total 7.3 million shares repurchased under the program as of June 30, 2022.

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~~terms, price discounts, or volume rebates on specified products and other incentives based on increases in purchases as part of specific promotional programs. The timing of ~~sales~~our incentive programs can significantly impact sales, receivables and inventory levels during the offering period. ~~However,~~In addition, the operating results for Trex Commercial are driven by the timing ~~and terms~~ of ~~the majority of our programs are generally consistent from year to year.~~

individual projects, which may vary each quarterly period.

Gross Profit.

Gross profit represents the difference between net sales and cost of sales. Cost of sales consists of raw ~~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. We continue to receive and settle claims for 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 claims received in the nine months ended September 30, 2017 was lower than the claims received in the nine months ended September 30, 2016, continuing the historical year-over-year decline in incoming claims, and consistent with our expectations. The average settlement cost per claim experienced in the nine months ended June 30, 2017 decreased compared to the average settlement cost per claim experienced during the nine months ended June 30, 2016, and was consistent with expectations for 2017. We believe that our reserve at September 30, 2017 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

~~(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,~~

Product Warranty.

We warrant that our Trex Residential products will be free from material defects in workmanship and materials for warranty periods ranging from 10 years to 25 years, depending on the product and its use. If there is a breach of such warranties, we have an obligation either to replace the defective product or refund the purchase price. Depending on the product and its use, we also warrant our Trex Commercial ~~Products,~~products will be free of manufacturing defects for periods ranging from 1 year to 3 years.

We continue to receive and settle claims for decking products manufactured at our ~~newly-formed, wholly-owned subsidiary, acquired certain assets~~Trex Residential Nevada facility prior to 2007 that exhibit surface flaking and ~~assumed certain liabilities of SC Company for $71.8 million in cash, subject~~maintain a warranty reserve 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 solutionsprovide for the ~~commercial~~settlement of these claims. We monitor surface flaking claims activity each quarter for indications that our estimates require revision. Typically, a majority of surface flaking claims received in a fiscal year are received during the summer outdoor season, which spans the second and ~~multifamily markets,~~third fiscal quarters.

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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 ~~provides staging, acoustical~~variances to annual claims expectations are more meaningful. Our actuarial analysis is based on currently known facts and ~~seating systems~~a number of assumptions. Projecting future events such as the number of claims to be received, the number of claims that will require payment and the average cost of claims could cause the actual warranty liabilities to be higher or lower than those projected, which could materially affect our financial condition, results of operations or cash flows.

The number of incoming claims received in the six months ended June 30, 2022, was significantly lower than the number of claims received in the six months ended June 30, 2021 and lower than our expectations for ~~commercial markets, including sports stadiums~~2022. Average cost per claim experienced in the six months ended June 30, 2022 was significantly higher than that experienced in the six months ended June 30, 2021 and ~~performing arts venues. As a~~higher than our expectations for the current year. The elevated average cost per claim experienced in the six months ended June 30, 2022, was primarily the result of the ~~purchase, we~~closure of two large claims, which were considered in our estimation of the surface flaking warranty reserve. We believe the reserve at June 30, 2022 is sufficient to cover future surface flaking obligations. Refer to Note 18,

Commitments and Contingencies, Product Warranty

, in the Notes to the Condensed Consolidated Financial Statements in Part I. Item 1.

Condensed Consolidated Financial Statements

of this Quarterly Report on Form

10-Q

for additional information.

We estimate that the annual number of claims received will ~~gain access~~decline over time and that the average cost per claim will increase. If the level of claims received or average cost per claim differs materially from expectations, it could result in additional increases or decreases to ~~growing commercial markets, expand~~the warranty reserve and a decrease or increase in earnings and cash flows in future periods. We estimate that a 10% change in the expected number of remaining claims to be settled with payment or the expected cost to settle claims may result in approximately a $1.7 million change in the surface flaking warranty reserve.

The following table details surface flaking claims activity related to our ~~custom design and engineering capabilities, and add the contract architect and specifier communities as new channels for its products.~~ warranty:


	Six Months Ended June 30,
	2022			2021
Claims open, beginning of period		1,759			1,799
Claims received (1)		292			523
Claims resolved (2)		(304	)		(515	)

Claims open, end of period		1,747			1,807

Average cost per claim (3)	$	5,233		$	3,610

(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.

RESULTS OF OPERATIONS

General.

Our ~~consolidated~~ results of operations ~~include~~are affected by a number of factors, including, but not limited to, the ~~operating results~~cost to manufacture and distribute products, cost of raw materials, inflation, interest rates, consumer spending and preferences, the ~~acquired business following the date~~impact of ~~acquisition. Our consolidated balance sheet at September 30, 2017 includes the acquired assets~~any supply chain disruptions, economic conditions, and any ~~liabilities assumed.~~

adverse effects from the

COVID-19

pandemic and geopolitical conflicts.

Strong sales growth at Trex Residential continued through the second quarter reflecting an increase in average price per unit and volume growth from strong secular trends, including growth in the outdoor living category, and the successful execution of our

wood-to-composite

market share conversion strategy. Price increases to address inflationary pressures were absorbed by the market and also benefitted net sales. In late June we experienced a reduction in demand from our distribution partners, spurred by concerns over a potential easing in consumer demand due to rising interest rates, declining consumer sentiment and expectations of a general slowing in the economy. We expect our channel partners to meet demand partially through inventory drawdown, rather than reordering product. We believe the drawdown will likely impact the next two quarters. In response to this new environment, we immediately took measures to manage a production slowdown, including selective labor force and production optimization, as well as other coast reduction actions.

Below is ~~our~~the discussion and analysis of our operating results and material changes in our operating results for the three months ended ~~September~~June 30, ~~2017 (2017~~2022 (2022 quarter) compared to the three months ended ~~September~~June 30, ~~2016 (2016~~2021 (2021 quarter), and for the ~~nine~~six months ended ~~September~~June 30, ~~2017 (2017 nine-month~~ 2022 (2022

six-month

period) compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016 (2016 nine-month~~ 2021 (2021

six-month

period).

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Three Months Ended ~~September~~June 30, ~~2017~~2022 Compared To The Three Months ~~September~~Ended June 30, ~~2016~~

2021

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 June 30,				$ Change			% Change
	2022		2021		$ Change			% Change
	(dollars in thousands)
Total net sales	$	386,249	$	311,596	$	74,653			24.0	%
Trex Residential net sales	$	373,922	$	298,632	$	75,290			25.2	%
Trex Commercial net sales	$	12,327	$	12,964	$	(637	)		(4.9	)%

Total net sales increased by 24.0% in the ~~2017~~2022 quarter compared to the ~~2016~~2021 quarter reflecting a 25.2% increase in Trex Residential net sales and a 4.9% decrease in Trex Commercial net sales. The increase in Trex Residential net sales was primarily due to an increase in average price per unit of 20.3% and an increase in volume of 4.0%. The increase in price was due ~~primarily~~ to ~~volume~~price increases taken in 2021 and 2022 on certain products to address inflationary pressures across many key raw materials, labor and transportation. The sustained broad-based demand continued to reflect strong secular trends, including growth in ~~our Trex branded decking and railing products. The volume growth was positively impacted by continued strength in~~ the ~~remodeling sector,~~outdoor living category. In addition, we continue to execute on our ~~marketing programs aimed at taking~~

wood-to-composite

market share conversion strategy and drive consumers from wood decking to our

eco-friendly

Trex decking. The increase in sales also reflected channel inventory build. Over the last four quarters the channel has continued to build and restock inventory. This was due, in part, to strong consumer demand, but was also a consequence of improved product availability following more than two years of the ~~healthy demand across our full suite of outdoor living products with decking~~capacity constraints 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.

product allocations.

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 June 30,						$ Change		% Change
	2022			2021			$ Change		% Change
	(dollars in thousands)
Cost of sales	$	228,872		$	193,323		$	35,549		18.4	%
% of total net sales		59.3	%		62.0	%
Gross profit	$	157,377		$	118,273		$	39,104		33.1	%
Gross margin		40.7	%		38.0	%

Gross profit as a percentage of net sales, gross margin, ~~increased to 39.4%~~was 40.7% in the ~~2017~~2022 quarter ~~from 28.2%~~compared to 38.0% in the ~~2016 quarter, an improvement of 11.2%.~~2021 quarter. Gross ~~profit~~margin for Trex Residential and Trex Commercial was 41.7% and 12.6%, respectively, in the ~~2016~~2022 quarter ~~included a $9.8 million~~compared to 38.7% and 21.6%, respectively, in the 2021 quarter. The increase ~~to the warranty reserve related to surface flaking. Excluding this charge, the 2017 quarter~~in consolidated gross margin ~~increased~~was driven primarily by ~~2.0%, reflecting~~ a ~~3.1% improvement in residential through~~10.8% increase from pricing realization at Trex Residential and a continuing focus on cost ~~reduction initiatives, lower sales of excess polyethylene film, lower cost~~reductions, offset by inflationary pressures on raw materials, labor and ~~increased capacity utilization, partially offset by the gross margin contribution from commercial products.~~

transportation.

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 June 30,						$ Change		% Change
	2022			2021			$ Change		% Change
	(dollars in thousands)
Selling, general and administrative expenses	$	39,568		$	36,899		$	2,669		7.2	%
% of total net sales		10.2	%		11.8	%

The ~~$5.5 million~~ increase in selling, general and administrative expenses in the ~~2017~~2022 quarter compared to the ~~2016~~2021 quarter ~~resulted~~was primarily ~~from an increase resulting from~~ the ~~SC Company acquisition and an~~result of a $5.6 million increase in ~~incentive compensation,~~marketing and ~~$1.2~~branding spend and a $1.8 million increase in technology and other operating expenses, offset by a $4.4 million decrease in personnel related to marketing, 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.

expenses.

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 June 30,						$ Change		% Change
	2022			2021			$ Change		% Change
	(dollars in thousands)
Provision for income taxes	$	29,009		$	20,978		$	8,031		38.3	%
Effective tax rate		24.6	%		25.5	%

The effective tax rate for the ~~2017~~2022 quarter ~~increased by 7.9%~~of 24.6% was relatively unchanged compared to the effective tax rate of 25.5% for the ~~2016 quarter primarily due to the tax effects~~2021 quarter.

Table of higher excess tax benefits related to the settlement or vesting 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 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. 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.~~

Contents

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.


	Three Months Ended June 30, 2022
	Trex Residential			Trex Commercial			Total
Net income (loss)	$	89,437		$	(521	)	$	88,916
Interest (income) expense, net		(116	)		—			(116	)
Income tax expense (benefit)		29,180			(171	)		29,009
Depreciation and amortization		11,049			282			11,331

EBITDA	$	129,550		$	(410	)	$	129,140


	Three Months Ended June 30, 2021
	Trex Residential		Trex Commercial		Total
Net income	$	61,089	$	277	$	61,366
Interest expense, net		13		—		13
Income tax expense		20,886		92		20,978
Depreciation and amortization		9,020		258		9,278

EBITDA	$	91,008	$	627	$	91,635


	Three Months Ended June 30,					$ Change			% Change
	2022			2021		$ Change			% Change
	(dollars in thousands)
Total EBITDA	$	129,140		$	91,635	$	37,505			40.9	%
Trex Residential EBITDA	$	129,550		$	91,008	$	38,542			42.4	%
Trex Commercial EBITDA	$	(410	)	$	627	$	(1,037	)		(165.4	)%

Total EBITDA increased ~~149%~~40.9% to ~~$34.9~~$129.1 million for the ~~2017~~2022 quarter compared to ~~$14.0~~$91.6 million for the ~~2016~~2021 quarter. ~~EBITDA in the 2016 quarter included a $9.8 million~~The 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~~a 42.4% increase in Trex Residential EBITDA, primarily due to the pricing actions coupled with cost reductions, production efficiencies and ~~EBITDA margin expansion.~~

~~Nine~~spending controls.

Six Months Ended ~~September~~June 30, ~~2017~~2022 Compared To The ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~

2021

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~~


	Six Months Ended June 30,				$ Change			% Change
	2022		2021		$ Change			% Change
	(dollars in thousands)
Total net sales	$	725,477	$	557,120	$	168,357			30.2	%
Trex Residential net sales	$	701,117	$	531,702	$	169,415			31.9	%
Trex Commercial net sales	$	24,360	$	25,418	$	(1,058	)		(4.2	)%

Total net sales increased by 30.2% in the ~~2017 nine-month~~ 2022

six-month

period compared to the ~~2016 nine-month~~ 2021

six-month

period reflecting a 31.9% increase in Trex Residential net sales and a 4.2% decrease in Trex Commercial net sales. The increase in Trex Residential net sales was primarily due to an increase in average price per unit of 19.1% and an increase in volume ~~growth~~ of ~~our~~10.7%. The increase of 31.9% in Trex ~~branded decking~~Residential net sales during the 2022

six-month

period was primarily driven by sustained broad-based demand and ~~railing products. Volume growth~~market share gains from wood and was ~~positively~~also impacted by ~~continued strength~~our price increases taken in ~~the remodeling sector~~2021 and ~~the healthy demand~~2022 to address inflationary pressures 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~~many key raw materials, labor 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 %

transportation.

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 its reportable segments.

Non-GAAP

financial measures should be ~~considered~~viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP and are not meant to be considered superior to or a substitute for ~~net income.~~our GAAP results.

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

Table of Contents

Gross Profit


	Six Months Ended June 30,						$ Change		% Change
	2022			2021			$ Change		% Change
	(dollars in thousands)
Cost of sales	$	433,188		$	343,046		$	90,142		26.3	%
% of total net sales		59.7	%		61.8	%
Gross profit	$	292,289		$	214,074		$	78,215		36.5	%
Gross margin		40.3	%		38.4	%

Gross profit as a percentage of net sales, gross margin, ~~increased to 43.5%~~was 40.3% in the ~~2017 nine-month~~ 2022

six-month

period compared to ~~38.8%~~38.4% in the ~~2016 nine-month period, an improvement of 4.7%.~~2021

six-month

period. Gross ~~profit~~margin for Trex Residential and Trex Commercial products in the ~~2016 nine-month~~ 2022

six-month

period ~~included a $9.8 million~~were 41.3% and 11.5%, respectively, compared to 39.3% and 19.4%, respectively, in the 2021

six-month

period. The increase ~~to the warranty reserve related to surface flaking. Excluding this charge, the 2017 nine-month~~in consolidated gross margin ~~increased 2.2% reflecting~~was driven primarily by a ~~2.6% improvement in residential through~~10.8% increase from pricing realization at Trex Residential and a continuing focus on cost ~~reduction initiatives, lower sales of excess polyethylene film, lower cost~~reductions, offset by inflationary pressures on raw materials, labor and ~~increased capacity utilization, partially offset by the gross margin contribution from commercial products.~~

transportation.

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,~~


	Six Months Ended June 30,						$ Change		% Change
	2022			2021			$ Change		% Change
	(dollars in thousands)
Selling, general and administrative expenses	$	79,529		$	68,949		$	10,580		15.3	%
% of total net sales		11.0	%		12.4	%

The $10.6 million increase in selling, general and administrative expenses ~~increased minimally during~~in the ~~2017 nine-month~~ 2022

six-month

period compared to the ~~2016 nine-month period. The $10.6 million increase was~~2021

six-month

period resulted primarily ~~attributable to~~from a ~~$3.7~~$10.4 million increase in marketing and 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.

spend.

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 %


	Six Months Ended June 30,						$ Change		% Change
	2022			2021			$ Change		% Change
	(dollars in thousands)
Provision for income taxes	$	52,737		$	36,925		$	15,812		42.8	%
Effective tax rate		24.8	%		25.1	%

The effective tax rate ~~increased 0.6% during~~for the ~~2017 nine-month~~ 2022

six-month

period ~~compared~~was comparable to the effective tax rate ~~during~~for 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~~ 2021

six-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~~

(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

~~The Company uses~~

Reconciliation of net income (GAAP) to 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.~~

(non-GAAP):

EBITDA represents net income before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP). We have included data with respect to EBITDA because management believes it facilitates performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of our core operating performance because it eliminates interest, income taxes, and depreciation and amortization charges to net income or loss. In relation to competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets. For these reasons, management believes that EBITDA provides important information regarding the operating performance of the Company and its reportable segments.

Table of Contents


	Six Months Ended June 30, 2022
	Trex Residential			Trex Commercial			Total
Net income (loss)	$	161,652		$	(1,525	)	$	160,127
Interest income, net		(104	)		—			(104	)
Income tax expense (benefit)		53,243			(506	)		52,737
Depreciation and amortization		21,240			565			21,805

EBITDA	$	236,031		$	(1,466	)	$	234,565


	Six Months Ended June 30, 2021
	Trex Residential		Trex Commercial		Total
Net income	$	109,833	$	77	$	109,910
Interest expense, net		10		—		10
Income tax expense		36,899		26		36,925
Depreciation and amortization		15,231		472		15,703

EBITDA	$	161,973	$	575	$	162,548


	Six Months Ended June 30,					$ Change			% Change
	2022			2021		$ Change			% Change
	(dollars in thousands)
Total EBITDA	$	234,565		$	162,548	$	72,017			44.3	%
Trex Residential EBITDA	$	236,031		$	161,973	$	74,058			45.7	%
Trex Commercial EBITDA	$	(1,466	)	$	575	$	(2,041	)		(355.0	)%

Total EBITDA increased ~~36.1%~~44.3% to ~~$129.0~~$234.6 million for the ~~2017 nine-month~~ 2022

six-month

period compared to ~~$94.8~~$162.5 million for the ~~2016 nine-month~~ 2021

six-month

period. ~~EBITDA in the 2016 nine-month period included a $9.8 million~~The increase to warranty reserve related to surface flaking. Excluding this charge, the 2017 nine-month period 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~~a 45.7% increase in Trex Residential EBITDA, ~~margin expansion.~~

primarily due to the increase in net sales at Trex Residential.

LIQUIDITY AND CAPITAL RESOURCES

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

At ~~September~~June 30, ~~2017,~~2022 we had ~~$25.5~~$16.6 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


	Six Months Ended June 30,
	2022			2021
Net cash provided by (used in) operating activities	$	189,992		$	(18,242	)
Net cash used in investing activities		(66,561	)		(93,517	)
Net cash used in financing activities		(247,836	)		(4,472	)

Net decrease in cash and cash equivalents	$	(124,405	)	$	(116,231	)

Operating Activities

~~Net cash~~

Cash provided by ~~operating activities~~operations was ~~$92.8~~$190 million induring the ~~2017 nine-month~~ 2022

six-month

period compared to ~~net~~ cash ~~provided by operating activities~~used in operations of ~~$83.6~~$18.2 million induring the ~~2016 nine-month~~ 2021

six-month

period. The ~~net~~ increase of $208.2 million in cash provided by operating activities ~~in the 2017 nine-month period compared to the 2016 nine-month period~~ was primarily due to an increase in ~~working capital~~net sales at Trex Residential and higher collection of ~~$12.3 million. This increase was offset by a $21.6 million increase~~accounts receivables in ~~net income.~~

the 2022

six-month

period compared to the 2021

six-month

period.

Table of Contents

Investing Activities

Capital expenditures in the ~~2017 nine-month~~ 2022

six-month

period were ~~$11.1~~$66.5 million ~~consisting~~at Trex Residential, primarily ~~of $8.1 million for general plant~~related to cost reduction initiatives, ~~and $2.2 million for equipment and~~the 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, VirginiaArkansas manufacturing facility, capacity expansion in our existing facilities, our new corporate headquarters, and ~~Trex University (ourstate-of-the-art~~ ~~training facility), $2.6 million for~~safety, environmental and 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.

support.

Financing Activities

Net cash used in financing activities ~~was $3.3~~of $247.8 million in the ~~2017 nine-month~~ 2022

six-month

period ~~compared to net cash used in financing activities~~consisted primarily of ~~$62.5 million in the 2016 nine-month period. The $59.1 million decrease was primarily due to $54.7 million in stock repurchase activity in the 2016 nine-month period.~~

repurchases of our common stock.

Stock Repurchase ~~Programs.~~

Program.

On ~~October 22, 2015,~~February 16, 2018, the Trex Board of Directors adopted a ~~new~~ stock repurchase program of up to ~~3.15~~11.6 million shares of ~~the Company’s~~its outstanding common stock (October 2015 Stock Repurchase Program). This authorization terminated on December 31, 2016. The Company 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 million shares of the Company’s outstanding common stock (February 2017 Stock~~(Stock Repurchase Program). As of ~~the date of this report,~~June 30, 2022, the Company has ~~made no repurchases~~repurchased 7.3 million shares under the ~~February 2017~~ Stock Repurchase Program.

~~Indebtedness.~~ ~~Our Third~~

Indebtedness On and After May

18, 2022

. On May 18, 2022, the Company, as borrower; Trex Commercial Products, Inc. (TCP), as guarantor; Bank of America, N.A. (BOA), as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; Wells Fargo Bank, National Association (Wells Fargo), as lender and Syndication Agent; Regions Bank, PNC Bank, National Association, and TD Bank, N.A. (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner, entered into a Credit Agreement (Credit Agreement) to amend and restate the Fourth Amended and Restated Credit Agreement dated as ~~amended,~~of November 5, 2019.

Under the Credit Agreement, the Lenders agreed to provide the Company with one or more Revolving Loans in a collective maximum principal amount of $400,000,000 (Loan Limit) throughout the term, which ends May 18, 2027 (Term). Included within the Loan Limit are sublimits for a Letter of Credit facility in an amount not to exceed $60,000,000; and Swing Line Loans in an aggregate principal amount at any time outstanding not to exceed $20,000,000. The Revolving Loans, the Letter of Credit facility and the Swing Line Loans are for the purpose of raising working capital and supporting general business operations.

The Facility provides the Company, in the aggregate, the ability to borrow an amount up to the Loan Limit during the Term. The Company is not obligated to borrow any amount under the Loan Limit. Within the Loan Limit, the Company may borrow, repay and reborrow at any time or from time to time while the Notes are in effect. Base Rate Loans (as defined in the Credit Agreement) under the Revolving Loans and the Swing Line Loans accrue interest at the Base Rate plus the Applicable Rate (as defined in the Credit Agreement) and Term SOFR Loans for the Revolving Loans accrue interest at the rate per annum equal to the sum of Term SOFR for such interest period plus the Applicable Rate (as defined in the Credit Agreement). The Base Rate for any day is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by BOA as its prime rate, and (c) the Term SOFR plus 1.0% subject to certain interest rate floors. Repayment of all then outstanding principal, interest, fees and costs is due at the end of the Term.

Indebtedness Prior to May

18, 2022.

Our Fourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) provides us with revolving loan capacity in a collective maximum principal amount of $250 million from January 1 through June 30 of each year, and a maximum principal amount of $200 million from July 1 through December 31 of each year throughout the term, which ends ~~January 12, 2021.~~November 5, 2024.

Table of Contents

On May 26, 2020, the Company entered into a First Amendment to the Original Credit Agreement (the First Amendment) to provide for an additional $100 million line of credit. As a matter of convenience, the parties incorporated the amendments to the Original Credit Agreement made by the First Amendment into a new Fourth Amended and Restated Credit Agreement (New Credit Agreement). In the New Credit Agreement, the revolving commitments under the Original Credit Agreement are referred to as Revolving A Commitments and the new $100 million line of credit is referred to as Revolving B Commitments. In the New Credit Agreement, all of the material terms and conditions related to the original line of credit (Revolving A Commitments) remained unchanged from the Original Credit Agreement.

The Company entered into the First Amendment, as borrower; Trex Commercial Products, Inc. (TCP), as guarantor; Bank of America, N.A. (BOA), as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; and certain other lenders including Wells Fargo Bank, N.A. (Wells Fargo), who is also Syndication Agent; Truist Bank (Truist); and Regions Bank (Regions) (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner. The First Amendment further provides that the New Credit Agreement is amended and restated by changing Schedule 2.01 to add applicable Lender percentages related to the Revolving B Commitment for BOA of 47.5%, Well Fargo of 28.0% and Regions of 24.5%.

The Company’s revolving credit facility executed November 5, 2019 was completely replaced by the Company’s revolving credit facility executed May 18, 2022. At ~~September~~June 30, ~~2017,~~2022, we had no outstanding ~~indebtedness~~borrowings under the revolving credit ~~facility~~facilities and borrowing capacity under the ~~facility~~facilities of ~~$200~~$400 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~~June 30, ~~2017, we were in compliance with these covenants.~~2022. 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 our credit facility, which may be declared payable immediately based on a default.~~

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

We believe that cash on hand, cash from operations and borrowings expected to be available under our revolving credit ~~facility~~facilities, as amended, will provide sufficient funds to fund planned capital expenditures, make scheduled principal and interest payments, fund warranty payments, and meet other cash requirements. We currently expect to fund future capital expenditures from operations and financing activities. The actual amount and timing of future capital requirements may differ materially from our estimate depending on the demand for Trex products and new market developments and opportunities.

Capital Requirements. ~~We currently estimate that our capital expenditures~~

In October 2021, we announced plans to add a third U.S.-based Trex Residential manufacturing facility in ~~2017~~Little Rock, Arkansas. The new campus will sit on approximately 300 acres of land and will address increased demand for Trex Residential outdoor living products. Construction began on the new facility in the second quarter 2022, and in July 2022, the Company entered into a design-build agreement. As previously announced, the Company anticipates spending approximately $400 million on the facility and the budget for the design-build agreement is contained within this amount. Construction for the new facility will be ~~$15~~funded primarily through the Company’s ongoing cash generation or its line of credit. The first production output is anticipated in 2024.

Our capital expenditure guidance for 2022 is $170 million to ~~$20~~$180 million. ~~Our~~In addition to the construction of our third facility in Arkansas, our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, upgrading equipment and support systems, 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.~~

shareholders

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 significant changes in the levels of inventory in the distribution channels at September 30, 2017 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 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 flow 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~~quarterly period.

Table 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.

Contents

Item 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.~~2021. There were no material changes to the Company’s market risk exposure during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~

2022.

Item 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 Senior Vice President and 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~~June 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 July 31, 2017.2022. Based on this evaluation, the President and Chief Executive Officer and the Senior Vice President and 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~~

six-month

period ended ~~September~~June 30, ~~2017~~2022, 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 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~~June 30, ~~2017~~2022 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
April 1, 2022 – April 30, 2022		1,168,344	$	64.21		1,168,344		5,985,816
May 1, 2022 – May 31, 2022		—		—		—		5,985,816
June 1, 2022 – June 30, 2022		1,646,473	$	57.68		1,646,473		4,339,343

Quarterly period ended June 30, 2022		2,814,817				2,814,817

(1)

~~Shares~~

During the three months ended June 30, 2022, no shares were withheld by, or delivered to, the Company pursuant to provisions in agreements with recipients of restricted stock granted under the ~~Company’s~~Trex 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 Trex Board of Directors authorized a common stock repurchase program of up to 11.6 million shares of its outstanding common stock (Stock Repurchase Program). The Stock Repurchase Program was publicly announced on February 21, 2018. The Company purchased 2,814,817 shares of its common stock under the Stock Repurchase Program during the three months ended June 30, 2022.

Item 5.

Other Information

~~N/A~~

~~Item 6.~~ ~~Exhibits~~

First Certificate of Amendment to the Restated Certificate of Incorporation

At the annual meeting of stockholders of Trex held on May 5, 2022, its stockholders approved an amendment of the Trex Restated Certificate of Incorporation (Amendment), effective as of May 5, 2022. The Trex Board of Directors unanimously approved the Amendment on February 23, 2022, subject to stockholder approval. The Amendment increases the number ~~and~~of shares of common stock, par value $.01 per share, that Trex is authorized to issue from 180 million shares to 360 million shares. The Amendment was filed with the Delaware Secretary of State on May 5, 2022.

The foregoing description of certain terms and conditions in the ~~following exhibits coincide with Item 601~~Amendment is qualified in its entirety by reference to the full text of ~~RegulationS-K:~~

the Restated Certificate of Incorporation of Trex, which is filed as Exhibit 3.1 to this Form

10-Q

and the First Amendment of the Restated Certificate of Incorporation of Trex, which is filed as Exhibit 3.2, both of which are incorporated herein by reference in their entirety.

Table of Contents

Trex Residential Earns Top Honors in Builder Brand Use Study.

For the fourth time in the

15-year

history of the Builder Brand Use Study, the Company earned top honors across all of the measured criteria for the Composite/PVC Decking category and outperformed all other brands in the Deck Railing category as well. The annual Builder Brand Use Study measures the attitudes of builders, developers, and contractors toward the products they recognize, use, and trust. The results of this year’s study are based on input from more than 850 building professionals who, for the 15th consecutive year, voted Trex #1 for “brand familiarity,” “brand used during the past two years,” and “brand used most” in the Composite/PVC Decking category. Trex also secured top honors for the same criteria in the Deck Railing category. Additionally, Trex received the highest score for “Product Quality” among the 27 composite and PVC decking brands included in the study.

Item 6.

~~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.~~ Exhibits

See Exhibit Index at the end of the Quarterly Report on Form

10-Q

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

Table of 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~~August 8, 2022	By:	/s/ ~~Bryan H. Fairbanks~~Dennis C. Schemm
		~~Bryan H. Fairbanks~~Dennis C. Schemm
		Senior Vice President and Chief Financial Officer
		( Duly Authorized Officer and Principal Financial ~~Officer)~~Officer )

Table of Contents

EXHIBIT INDEX


		Incorporated by reference
Exhibit Number	Description	Form		Exhibit		Filing Date		File No.

3.1	Restated Certificate of Incorporation of Trex Company, Inc. dated July 28, 2021.		10-Q		3.6		August 2, 2021		001-14649

3.2	First Certificate of Amendment to the Restated Certificate of Incorporation of Trex Company, Inc. dated May 5, 2022		10-Q		3.2		May 9, 2022		001-14649

3.3	Amended and Restated By-Laws of the Company.		8-K		3.2		May 1, 2019		001-14649

4.1	Credit Agreement dated as of May 18, 2022 between the Company, as borrower; Trex Commercial Products, Inc., as guarantor, Bank of America, N.A., as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer; Wells Fargo Bank, National Association, as lender and Syndication Agent, Regions Bank, PNC Bank, National Association, and TD Bank, N.A., arranged by BofA Securities, Inc. as Sole Lead Arranger and Sole Bookrunner.		8-K		4.1		May 20, 2022		001-14649

4.2	Note dated May 18, 2022 payable by the Company to Bank of America, N.A. in the amount of the lesser of $180,000,000 or the outstanding revolver advances made by Bank of America, N.		8-K		4.2		May 20, 2022		001-14649

4.3	Note dated May 18, 2022 payable by the Company to Wells Fargo Bank, National Association in the amount of the lesser of $120,000,000 or the outstanding revolver advances made by Wells Fargo Bank, N.A.		8-K		4.3		May 20, 2022		001-14649

4.4	Note dated May 18, 2022 payable by the Company to Regions Bank in the amount of the lesser of $40,000,000 or the outstanding revolver advances made by Regions Bank.		8-K		4.4		May 20, 2022		001-14649

4.5	Note dated May 18, 2022 payable by the Company to PNC Bank, National Association in the amount of the lesser of $30,000,000 or the outstanding revolver advances made by PNC Bank, National Association.		8-K		4.5		May 20, 2022		001-14649

4.6	Note dated May 18, 2022 payable by the Company to TD Bank, N.A. in the amount of the lesser of $30,000,000 or the outstanding revolver advances made by TD Bank, N.A.		8-K		4.6		May 20, 2022		001-14649

4.7	Security and Pledge Agreement dated as of May 18, 2022 between the Company, as debtor, Trex Commercial Products, Inc., as additional obligor; and Bank of America, N.A. as Administrative Agent (including Notices of Grant of Security Interest in Copyrights and Trademarks).		8-K		4.7		May 20, 2022		001-14649

10.1	AIA document A141 – 2014 Agreement dated July 7, 2022 by and between Trex Company, Inc. and Gray Construction, Inc.		8-K		10.1		July 12, 2022		001-14649

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

31.2*	Certification of Chief Financial Officer of the Company 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. § 1350).

Table of Contents

~~Exhibit~~

~~Number~~

Incorporated by reference

Exhibit

Number

Description

Form

Exhibit

Filing Date

File No.

~~2.1~~

101.INS*

~~Asset Purchase Agreement by and among Trex Commercial Products, Inc., Staging Concepts Acquisition, LLC, and Stadium Consolidation, LLC. Filed as Exhibit 2.1 to~~ Inline XBRL Instance Document—the ~~Company’s Current Report on Form8-K~~ ~~filed July 31, 2017 and incorporated herein by reference.~~instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

~~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~~

101.SCH*

~~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.~~

~~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~~

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

~~101.CAL~~

101.CAL*

Inline 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.


	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


	Six Months Ended June 30, 2022
	Surface Flaking			Other Residential			Total
Beginning balance, January 1	$	18,542		$	10,053		$	28,595
Provisions and changes in estimates		—			2,369			2,369
Settlements made during the period		(1,345	)		(1,089	)		(2,434	)

Ending balance, June 30	$	17,197		$	11,333		$	28,530

		use on posts, floors and steps. The line includes a post cap light, deck rail light, riser light and a recessed deck light.

*Railing*		Our residential railing products are Trex Transcend ® Railing, Trex Select ® Railing, Trex Enhance ® Railing and Trex Signature^{® aluminum railing. Trex Transcend Railing, made 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 40 percent recycled content, is available in three colors and designed for consumers who want a sleek, contemporary look.}

*~~Porch~~* Fencing		~~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.~~

*~~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.


	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

Large accelerated filer

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Non-accelerated filer

Smaller reporting company

Emerging growth company