☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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) |
Title of each class: | Name of each exchange on which registered: | |
Common Stock, par value $0.01 per share | New York Stock Exchange |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Large accelerated filer ☒ | Accelerated filer | ☐ | ||||
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Non-accelerated filer ☐ | Smaller reporting company | ☐ | ||||
Emerging growth company | ☐ |
58,192,180.
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Document | Part of 10-K into which incorporated | |
Proxy Statement relating to Registrant’s
20 20 Annual Meeting of Stockholders | Part III |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock | TREX | New York Stock Exchange |
PagePART IItem 1. 1 7 Item 1B. 11Item 2. 11 3.1B. 12 Item 4. 12 PART II Item 5. 13 Item 6. 15 7.6. 18 Item 7A. 29 Item 8. 30 Item 9. 30 Item 9A. 30Item 9B. 33 PART III 10.9B. 33 Item 11. 33 12.11. 33 Item 13. 33 Item 14. 33 PART IV Item 15. 34 F-1
segments: Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). through Trex Commercial: We believe that attracting wholesale distributors, who are committed to our products and marketing approach and can effectively sell higher value products to contractor-oriented lumber yards and other retail outlets, is important to our future growth. Our distributors are able to provide value-added service in marketing our products because they sell premium wood decking products and other innovative building materials that typically require product training and personal selling efforts. We typically appoint two distributors 2019. Sales to Lowe’s stores exceeded 10% of sales in 2019. Products manufactured at our Trex Commercial manufacturing facility in Minnesota are primarily manufactured from aluminum and stainless steel. Our primary manufacturing process for these products involves cutting, machining, welding and finishing. We use Six Sigma and Lean Manufacturing methodologies throughout our Company within our plant operations and in the planning and execution of certain projects. Company. competitive pricing. We (a division of Fortune Brands, Inc.). As part of its normal business practice and consistent with industry practice, Trex Residential Products has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of its product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs. The operating results for Trex Commercial have not historically varied from quarter to quarter as a result of seasonality. However, they are driven by the timing of individual projects, which may vary significantly each period. and Corporate Governance The Company has internal standards related to hiring practices that encourage diversity, formal programs to provide skill development for our employees, and anti-discrimination standards. The Company has not had any serious complaints or claims over the last three years. We have adopted a Human Rights Policy across all of our operations that sets forth our values related to working conditions and human rights and underscores our philosophy about the way we conduct our business. The policy is available at make capital investments where necessary. In The equipment and machinery we use in our operations consist principally of plastic and wood conveying and processing equipment. We own all of our manufacturing equipment. We lease some 2016 First Quarter Second Quarter Third Quarter Fourth Quarter 2015 First Quarter Second Quarter Third Quarter Fourth Quarter 2019. Trex Company, Inc. Russell 2000 Index S&P 600 Building Products 2019. Statement of Comprehensive Income Data: Net sales Cost of sales Gross profit Selling, general and administrative expenses Income from operations Interest expense, net Income before income taxes Provision (benefit) for income taxes Net income Basic earnings per share Basic weighted average shares outstanding Diluted earnings per share Diluted weighted average shares outstanding Cash Flow Data: Cash provided by operating activities Cash used in investing activities Cash used in financing activities Other Data (unaudited): EBITDA (6) Balance Sheet Data: Cash and cash equivalents and restricted cash Working capital Total assets Total debt Total stockholder’s equity Net income Plus interest expense, net Plus income tax provision (benefit) Plus depreciation and amortization EBITDA operates; cyber-attacks, security breaches or other security vulnerabilities; and the impact of upcoming data privacy laws and the EU General Data Protection Regulation and the related actual or potential costs and consequences. As part of In addition, the operating results for Trex Commercial have not historically varied from quarter to quarter as a result of seasonality, but are driven by the timing of individual projects, which may vary significantly each period. the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates. 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 current year. 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 Claims unresolved beginning of period Claims received (1) Claims resolved (2) Claims unresolved end of period Average cost per claim (3) any contract was recorded. 2018. 2018 Net sales Cost of sales % of net sales Gross profit Gross margin Selling, general and administrative expenses % of net sales Interest expense % of net sales Provision for income taxes Effective tax rate Net sales 2018. Cost of sales % of net sales Gross profit Gross margin increase was hampered due to under absorption of manufacturing overhead as a result of lower net sales. Selling, general and administrative expenses % of net sales Interest expense % of net sales miscellaneous expenses. Provision for income taxes Effective tax rate U.S. Securities and Exchange Commission on February 14, 2019. Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities Net increase (decrease) in cash and cash equivalents production improvements and $2.2 million for general support initiatives. Program. business. As part of its normal business practice and consistent with industry practice, Trex Residential has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of its product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs. The operating results for Trex Commercial have not historically varied from quarter to quarter as a result of seasonality. However, they are driven by the timing of individual projects, which may vary significantly each period. Repayment of all then outstanding principal, interest, fees and costs is due on November 5, 2024. America Merrill Lynch as Sole Lead Arranger and Sole Bookrunner. The Third Amended Credit Agreement Purchase commitments (1) Operating leases Total contractual cash obligations arrangements. seasonal borrowing needs. We may determine that it is necessary or desirable to obtain financing through bank borrowings or the issuance of debt or equity securities to address such contingencies or changes to our business plan. Debt financing would increase our level of indebtedness, while equity financing would dilute the ownership of our stockholders. There can be no assurance as to whether, or as to the terms on which, we would be able to obtain such financing, which would be restricted by covenants contained in our existing debt agreements. Independent Registered Public Accounting Firm of Trex Company, Inc. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 24, 2020 Item. Independent Registered Public Accounting Firm of Trex Company, Inc. In our opinion, the consolidated financial statements 24, 2020 Net sales Cost of sales Gross profit Selling, general and administrative expenses Income from operations Interest expense, net Income before income taxes Provision for income taxes Net income Basic earnings per common share Basic weighted average common shares outstanding Diluted earnings per common share Diluted weighted average common shares outstanding Comprehensive income ASSETS Current Assets: Cash and cash equivalents Accounts receivable, net Inventories Prepaid expenses and other assets Deferred income taxes Total current assets Property, plant and equipment, net Goodwill and other intangibles Other assets Total Assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable Accrued expenses Accrued warranty Line of Credit Total current liabilities Deferred income taxes Non-current accrued warranty Other long-term liabilities Total Liabilities 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; 34,894,233 and 34,819,259 shares issued and 29,400,552 and 30,904,530 shares outstanding at December 31, 2016 and 2015, respectively Additional paid-in capital Retained earnings Treasury stock, at cost, 5,493,681 and 3,914,729 shares at December 31, 2016 and 2015, respectively Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity Balance, December 31, 2013 Net income Employee stock purchase and option plans Shares withheld for taxes on share-based payment awards Stock-based compensation Excess tax benefits from stock compensation Shares repurchased under our publicly announced share repurchase programs Balance, December 31, 2014 Net income Employee stock purchase and option plans Shares withheld for taxes on share-based payment awards Stock-based compensation Excess tax benefits from stock compensation Shares repurchased under our publicly announced share repurchase programs Balance, December 31, 2015 Net income Employee stock purchase and option plans Shares withheld for taxes on share-based payment awards Stock-based compensation Shares repurchased under our publicly announced share repurchase programs Balance, December 31, 2016 Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Stock-based compensation (Gain) Loss on disposal of property, plant and equipment Excess tax benefits from stock compensation Other non-cash adjustments Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other assets Accounts payable Accrued expenses and other liabilities Income taxes receivable/payable Net cash provided by operating activities Investing Activities Expenditures for property, plant and equipment Proceeds from sales of property, plant and equipment Purchase of acquired company, net of cash acquired Notes receivable, net Net cash used in investing activities Financing Activities Financing costs Borrowings under line of credit Principal payments under line of credit Repurchases of common stock Proceeds from employee stock purchase and option plans Excess tax benefits from stock compensation Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosures of cash flow information: Cash paid for interest Cash paid for income taxes, net 2018. October 31 of each year. However, actual results could differ from the Company’s estimates and projections, which would affect the assessment of impairment. As of December 31, and no material impairment loss on any contract was recorded. of predetermined performance measures. Stock-based compensation expense is included in “Selling, general and administrative expenses” in the accompanying Consolidated Statements of Comprehensive Income. At December 31, 2018 there were 0 production costs included in prepaid expenses. 2018. results of operations. Company’s leases do not provide an implicit rate that can be readily determined, the Company used its incremental borrowing rate based on the information available at the implementation date in determining the present value of lease payments. Finished goods Raw materials Total FIFO (first-in, first out) inventories Reserve to adjust inventories to LIFO value Total LIFO inventories market. accounting related to its Trex Commercial products. Prepaid expenses Income tax receivable Assets held for sale Other Total prepaid expenses and other assets Building and improvements Machinery and equipment Furniture and fixtures Forklifts and tractors Computer equipment Construction in process Land Total property, plant and equipment Accumulated depreciation Total property, plant and equipment, net 2021. Sales and marketing costs Compensation and benefits Manufacturing costs Rent obligations Other Total accrued expenses pursuant to and in accordance with the terms of the collateral documents as referenced in the Third Amended Credit Agreement. Numerator: Net income Denominator: Basic weighted average shares outstanding Effect of dilutive securities: SARS and options Restricted stock Diluted weighted average shares outstanding Basic earnings per share Diluted earnings per share Restricted stock and stock options Stock appreciation rights Program 12,840,000. Time-based restricted stock and time-based restricted stock units Performance-based restricted stock and performance-based restricted stock units Stock appreciation rights Employee stock purchase plan Total stock-based compensation Nonvested at December 31, 2013 Granted Vested Forfeited Nonvested at December 31, 2014 Granted Vested Forfeited Nonvested at December 31, 2015 Granted Vested Forfeited Nonvested at December 31, 2016 Nonvested at December 31, 2014 Granted Vested Forfeited Nonvested at December 31, 2015 Granted Vested Forfeited Nonvested at December 31, 2016 Dividend yield Average risk-free interest rate Expected term (years) Expected volatility Outstanding at December 31, 2013 Granted Exercised Canceled Outstanding at December 31, 2014 Granted Exercised Canceled Outstanding at December 31, 2015 Granted Exercised Canceled Outstanding at December 31, 2016 Vested at December 31, 2016 Exercisable at December 31, 2016 Outstanding at December 31, 2013 Granted Exercised Canceled Outstanding at December 31, 2014 Granted Exercised Canceled Outstanding at December 31, 2015 Year Ending December 31, 2017 2018 2019 2020 2021 Thereafter Total minimum lease payments 2017, respectively. Current income tax provision: Federal State Deferred income tax provision: Federal State Total income tax provision U.S. Federal statutory taxes State and local taxes, net of U.S. Federal benefit Permanent items Excess tax benefits from vesting or settlement of stock compensation awards Domestic production activities deduction Federal credits Other Total income tax provision Deferred tax assets: Net operating losses Warranty reserve Stock-based compensation Accruals not currently deductible and other Inventories State tax credit carryforwards Gross deferred tax assets, before valuation allowance Valuation allowance Gross deferred tax assets, after valuation allowance Deferred tax liabilities: Depreciation and other Gross deferred tax liabilities Net deferred tax (liability) asset As of December 31, 2019, 2018 and 2017, respectively, related to share-based compensation awards. Beginning balance, January 1 Net rental payments Accretion of discount (Decrease) increase in net estimated contract termination costs Ending balance, December 31 2023. use. The Company further warrants that Trex Transcend Depending on the product and its use, the Company also warrants its Trex Commercial products will be free of manufacturing defects for the current year. Beginning balance, January 1 Changes in estimates related to pre-existing warranties Settlements made during the period Ending balance, December 31 Net sales Gross profit Net income Basic net income per share Basic weighted average common shares outstanding Diluted net income per share Diluted weighted average common shares outstanding activity and can shift demand for its products to a later period. The operating results for Trex Commercial have not historically varied from quarter to quarter as a result of seasonality; however, they are driven by the timing of individual projects, which may vary significantly each period. Descriptions Year ended December 31, 2016: Warranty reserve Income tax valuation allowance Year ended December 31, 2015: Warranty reserve Income tax valuation allowance Year ended December 31, 2014: Warranty reserve Income tax valuation allowance thousands) s/ James E. Cline s/ Bryan H. FairbanksItem 1. 1998, and1998. The Company is the world’s largest manufacturer of wood-alternativecomposite decking and railing products, which are marketed under the brand name Trex We operatea singletwo reportable segment.pleasing, high performanceappealing and low maintenance outdoor living productsdurable, porch, fencing, steel deck framing, and outdoor lighting categories. We believe that the range and variety of our product offerings allow consumers to design much of their outdoor living space using Trex® brand products. A majority of ourthe products arescrap polyethylene. Ourrecycled polyethylene film, making Trex the largest recycler of waste polyethylene plastic film in North America. Trex Residential products come in a wide selectionare sold to distributors and home centers for final resale primarily to the residential market.Decking EnhanceSelectSelectEnhancerecycledreclaimed wood fibers and recycled plastic film and feature a protective polymer shell for enhanced protection against fading, staining, mold and scratching.boards. We haveboards, and Trex DeckLightingproduct in development,line of energy-efficient LED dimmable deck lighting, which is designed for use on posts, floors and steps. The line includes a high performance decking product that will be focused on the top end of the market with outstanding aestheticspost cap light, deck rail light, riser light and performance capabilities.a recessed deck light. ® aluminum railing, made from a minimum of 50 percent recycled content, is available in three colors and designed for consumers who want a sleek, contemporary look.Porch Our Trex Transcend Porch Flooring and Railing System is an integrated system of porch components and accessories.Fencing OutdoorLightingOur 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.We are a licensor in a number of licensing agreements with third parties to manufacture and sell products under the trademark. Our licensed products are:Trex Outdoor Furniture™A line of outdoor furniture products manufactured and sold by PolyWood, Inc.Trex RainEscape®An above joist deck drainage system manufactured and sold by DriDeck Enterprises, LLC.Trex CustomCurve®A system manufactured and sold by Curvelt, LLC that allows contractors to heat and bend Trex Products while on the job site.Trex Pergola™Pergolas made from low maintenance cellular PVC product, manufactured by Home & Leisure, Inc. dba Structureworks Fabrication.Diablo® Trex BladeA specialty saw blade for wood-plastic composite decking manufactured and sold by Freud America, Inc.Trex SpiralStairs™ and Structural Steel PostsAn ultimate staircase alternative and structural steel posts for use with all deck substructures manufactured and sold by M. Cohen and Sons, Inc. dba The Iron Shop.Trex Outdoor Kitchens, Cabinetry and Storage™Outdoor kitchens, cabinetry and storage manufactured and sold by NatureKast Products, LLC.TrexResidential products offer a number of significant aesthetic advantages over wood while eliminating many of wood’s major functional disadvantages, which include warping, splitting and other damage from moisture. OurIn addition to resisting fading and surface staining, Trex Residential products require no sanding, staining are resistant toor sealing, resist moisture damage, provide a splinter-free surface and need nodo not require chemical treatment against rot or insect infestation. These qualities result in low maintenance products when compared to the on-going maintenance requirements for a wood deck and make Trex products less costly than wood over the life of the deck. Trex products are stain resistant and color fast. Special characteristics (including resistance to splitting, the ability to bend, and ease and consistency of machining and finishing) facilitate deck, railing, and fencing installation, reduce contractor call-backs and afford customersconsumers a wide range of design options. 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. Trex decking products do not have the tensile strength of wood and, as a result, are not used as primary structural members in posts, beams or columns used in a deck’s substructure. However, Trex does offer the Trex Elevations steel deck framing system.Duringsecond half of 2014, we entered the specialty materials market.Trex trademark. Our specialty product is made from plasticlicensed products are:linear low-density polyethylene pelletleading national provider of custom-engineered railing and staging systems. Trex Commercial 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 use in blown film, profile extrusionthe performing arts, sports, and moldingevent production and compounding applications. Our entry into this adjacent market leverages our core recyclingrental market. With a team of devoted engineers, and extrusion capabilities. Our initial manufacturing line commenced operations duringan industry-leading reputation for quality and dedication to customer service, Trex Commercial markets to architects, specifiers, contractors, and building owners.second quarter of 2014 and during 2015 we added three additional lines. The Company remains in the early stages of specialty market penetration and is working on developingfollowing products that it believes will drive that market.We distribute our products as follows:on a non-exclusive basis to distribute Trex products within a specified area.area to sell only Trex Residential decking products on an exclusive basis. The distributor purchases our products at prices in effect at the time we ship the product to the distributor. Sales to two of our distributors, Boise Cascade Company and U.S. Lumber Group, LLC, each exceeded 10% of gross sales in 2016. “do-it-yourself” Trex productsprocess requiresprocesses require significant capital investment, expertise and time to develop. We have continuously invested the capital necessary to expand our manufacturing throughput and improve our manufacturing processes. We have also broadened the range of raw materials that we can use to produce a consistent and high-quality finished product. In connection with national building code listings, we maintain a quality control testing program.utilize Six Sigmaconduct supply chain assessments when considered necessary in relation to the significance of the purchase and Lean Manufacturing methodologies withinbusiness opportunity for the Company. Assessments includeplant operations. We also use these methodologies throughoutVendor and Customer Code of Conduct and Ethics, our Company inCode of Conduct and Ethics, and our Human Rights Policy apply to all suppliers of the planning and execution of projects that are important to our success.Suppliers2016,2019, we purchased substantially all of our reclaimed wood fiber requirements under purchase orders, which do not involve long-term supply commitments. All of our polyethylene purchases are under short-term supply contracts thataverage generally have a term of approximately one to two years for which pricing is negotiated as needed, or under purchase orders that do not involve long-term supply commitments. •Reclaimed Wood Fiber: Cabinet and flooring manufacturers are our preferred suppliers of reclaimed wood fiber because the reclaimed wood fiber produced by these operations contains little contamination and is low in moisture. These facilities generate reclaimed wood fiber as a byproduct of their manufacturing operations. If the reclaimed wood fiber meets our specifications, our reclaimed wood fiber supply agreements generally require us to purchase at least a specified minimum and at most a specified maximum amount of reclaimed wood fiber each year.fiber. Depending on our needs, the amount of reclaimed wood fiber that we actually purchase within the specified range under any supply agreement may vary significantly from year to year.•Scrap Polyethylene: The polyethylene we consumed in 2016 was primarily composed of scrap plastic film and plastic bags. We will continue to seek to meet our future needs for scrap polyethylene from the expansion of our existing supply sources and the development of new sources. We believe our use of multiple sources provides us with a cost advantage and facilitates an environmentally responsible approach to our procurement of polyethylene. Our ability to source and use a wide variety of polyethylene from third party distribution and manufacturing operations is important to our cost strategy. We maintain this ability through the continued expansion of our plastic reprocessing operations in combination with the advancement of our proprietary material preparation and extrusion processes.ResearchDevelopmentglass components. We use multiple sources for each material to ensure consistent availability of material and Trainingmaintain researchpurchase substantially all of our aluminum, stainless steel and development operations in the Trex Technical Center in Winchester, Virginia. Our research and development efforts focus on innovation and developing new products, lowering the cost of manufacturing our existing products and redesigning existing product lines to increase efficiency and enhance performance. For the years ended December 31, 2016, 2015 and 2014, research and development costs were $3.7 million, $1.5 million and $2.3 million, respectively, and have been included in “Selling, general and administrative expenses” in the accompanying Consolidated Statements of Comprehensive Income.During 2016, we launched glass under purchase orders, which do not involve long-term supply commitments.WinchesterVirginia manufacturing plant. Trex University isplant designed to educate and train retailers, contractors and other partners on the benefits of Trex Residential aesthetically pleasing, high performance and low maintenance high-performance,goal isgoals are to perpetuate our position as the leading producer of branded superior wood-alternativecomposite decking, railing and other outdoor living products, by increasingexpand our addressable market to achieve growth against wood and appeal to consumers who have not previously considered composites, and to extend our position as a leading national provider of custom-engineered railing and staging systems for the commercial and multi-family market, including performing arts venues and sports stadiums. To achieve our long-term goals, we intend to increase our market share and expandingexpand into new product categories and geographic markets through the design, creation and marketing of high-performance,quality. Also, wequality, and by expanding our sales to commercial building projects. We will continue to explore opportunities that leverage our manufacturing and extrusion expertise and are tied to our recycling heritage. To attain these goals, weWe intend to employ the following long-term strategies:•Innovation: Bring to the market new products that address unmet consumer and trade professional needs. Provide a compelling value proposition through ease of installation, low maintenance, long-term durability and superior aesthetics.•Brand: Expand preference and commitment for the Trex brand with both the consumer and trade professional. Deliver on the brand’s promise of superior quality, functionality, pleasing aesthetics and overall performance in outdoor living products. Leverage online efforts to extend the Trex brand digital presence, both nationally and globally.•Channelsstrategies to achieve our goals:our wood-alternative outdoor living products, thereby making our products available wherever our customers choose to purchase their decking, railing, porch, steel deck framing and outdoor lighting products.products, and by continuing to develop our commercial market penetration for our railing and staging systems.•Quality: Continuously advance the quality of all operational and business processes, with the goal of achieving superior product quality and service levels, thereby giving us a sustainable competitive advantage.•Cost: Through capital investments and process engineering, continuously seek to lower the cost to manufacture Trex products. Investments in plastic recycling capabilities will allow us to expand our ability to use a wider breadth of waste materials thereby lowering our raw material costs. We plan to continue to achieve significant improvements in manufacturing productivity by reducing waste and improving our production process, from raw materials preparation through extrusion into finishing and packaging.•Customer Service: Through our commitment to superior customer service, continually deliver consistently outstanding, personalized service to all of our customers and prospects in all target segments.manysome of the disadvantages of other wood products.Advanced Environmental Recycling Technologies,The Azek Building Products, Inc., CPG International LLC and Fiberon LLC.Seasonalitynet sales, gross profitprimary competition for our products in the commercial and incomemulti-family market consists of companies that provide components to assemble guard rails, including C.R. Laurence Co., Inc., a CRH Group company, regional railing and metal fabricators, and Wenger Corporation. Our ability to compete depends on our product design advantages, relationships with architects and general contractors, and competitive manufacturing costs.operationsfamiliarity with project and customer requirements, technical product requirements, and contractor and architect relationships.Such variations are often attributable to seasonal trends in the demand for our products. We have historicallyexperienced lower net sales during the fourth quarter due to the holiday season. Also, seasonal,Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift net salesdemand for its products to a later period.StateStates of Nevada.Nevada, and Minnesota. Our compliance efforts include safety awareness and training programs for our production and maintenance employees.2016, we2019, Trex Residential had approximately 8301,173 full-time employees, approximately 630933 of whom were employed in ourits manufacturing operations, and Trex Commercial had 159 full-time employees, 62 of whom were employed in its manufacturing operations. Our employees are not covered by collective bargaining agreements. We believe that our relationships with our employees are favorable.www.trex.com. Item 1A. Risk Factors following:We may not be ablefollowing. If applicable to grow unless we increase market acceptance of our products, compete effectively and develop new products and applications.Our primary competition consists of wood products, which constitute a substantial majority of decking, railing, porches, fencing, and deck framing sales. Since wood-alternative products were introduced to the market in the late 1980s, their market acceptance has increased. Our ability to grow will depend, in part, on our success in continuing to convert demand for wood products into demand for wood-alternative Trex products. To increase our market share, we must overcome:lack of awareness of the enhanced value of wood-alternative products in general and Trex brand products in particular;resistance of many consumers and contractors to change from well-established wood products;consumer lack of awareness that the greater initial expense of Trex products compared to wood is a one-time cost that is reduced over time as Trex products have lower maintenance costs and a longer life span than wood;established relationships existing between suppliers of wood products and contractors and homebuilders;actual and perceived quality issues with first generation wood-alternative products; andcompetition from other wood-alternative manufacturers.Our failure to compete successfully in such markets could have a material adverse effect on our ability to replace wood or increase our market share amongst wood-alternatives. Many of the conventional lumber suppliers with which we compete have established ties to the building and construction industry and have well-accepted products. Our ability to compete depends, in part, upon a number of factors outside our control, including the ability of competitors to develop new alternatives that are more competitive with Trex products.In addition, substantially all of our revenues are derived from sales of our proprietary wood/polyethylene composite material. Althoughparticular segment, we have developed, and continue to develop, new products made from other materials, if we should experience significant problems, real or perceived, with acceptance ofspecified the Trex wood/polyethylene composite material, our lack of product diversification could have a significant adverse impact on our net sales levels.Our prospects for sales growth and profitability may be adversely affected if we fail to maintain product quality and product performance at an acceptable cost.In order to expand our net sales and sustain profitable operations we must maintain the quality and performance of our products. If we are unable to produce high-quality products at standard manufacturing ratesand yields, unit costs may be higher. A lack of product performance could impede acceptance of our products in the marketplace and negatively affect our profitability. We continue to receive and settle claims and maintain a warranty reserve related to material produced at our Nevada facility prior to 2007 that exhibits surface flaking. We have limited our financial exposure by settling a nationwide class action lawsuit that lessens our exposure to provide replacement product and partial labor reimbursement. However, because the establishment of reserves is an inherently uncertain process involving estimates of the number of future claims and the average cost of claims, our ultimate losses may differ from our warranty reserve. Increases to the warranty reserve and payments for related claims have had a material adverse effect on our profitability and cash flows. Future increases to the warranty reserve could have a material adverse effect on our profitability and cash flows.A number of class action lawsuits alleging defects in our products have been brought against us, all of which have been settled. In the event future lawsuits relating to alleged product quality issues are brought against us, such lawsuits may be costly and could cause adverse publicity, which in turn could result in a loss of consumer confidence in our products and reduce our sales. Product quality claims could increase our expenses, have a material adverse effect on demand for our products and decrease net sales, net income and liquidity.Our business is subject to risks in obtaining the raw materials we use at acceptable prices.The manufacture of our products requires substantial amounts of wood fiber and scrap polyethylene. Our business strategy is to create a substantial cost advantage over our competitors by using reclaimed wood fibers and scrap polyethylene. Our business could suffer from the termination of significant sources of raw materials, the payment of higher prices for raw materials, the quality of available raw materials, or from the failure to obtain sufficient additional raw materials to meet planned increases in production.Our ability to obtain adequate supplies of reclaimed wood fibers and scrap polyethylene depends on our success in developing new sources that meet our quality requirements, maintaining favorable relationships with suppliers and managing the collection of supplies from geographically dispersed locations.Certain of our customers account for a significant portion of our sales, and the loss of one or more of these customers could have an adverse effect on our business.A limited number of our customers account for a significant percentage of our sales. Specifically, sales through our 15 largest customers accounted for approximately 90% of gross sales during fiscal year 2016, 89% during fiscal year 2015 and 86% during fiscal year 2014.We expect that a significant portion of our sales will continue to be sold through a small number of customers, and certain customers will continue to account for a significant portion of our sales. The loss of a significant customer could have a significant negative impact on our business, results of operations and financial condition.We have limited ability to control or project inventory build-ups in our distribution channel that can negatively affect our sales in subsequent periods.The seasonal nature of, and changing conditions in, our industry can result in substantial fluctuations in inventory levels of Trex products carried in our two-step distribution channel. We have limited ability to control or precisely project inventory build-ups, which can adversely affect our net sales levels in subsequent periods. We make the substantial majority of our sales to wholesale distributors, who, in turn, sell our products to local dealers. Because of the seasonal nature of the demand for our products, our distribution channel partners must forecast demand for our products, place orders for the products, and maintain Trex product inventories in advance of the prime deck-building season, which generally occurs in the latter part of the first calendar quarter through the third calendar quarter. Accordingly, our results for the second and third quarters are difficult to predict and past performance will not necessarily indicate future performance. Inventory levels respond to anumber of changing conditions in our industry, including product price increases, increases in the number of competitive producers, the rapid pace of product introduction and innovation, changes in the levels of home-building and remodeling expenditures and the cost and availability of consumer credit.The demand for our products is negatively affected by adverse weather conditions.Our products are generally purchased shortly before installation and used in outdoor environments. As a result, there is a correlation between the amount of product we sell and weather conditions during the time they are to be installed. Adverse weather conditions may interfere with ordinary construction, delay projects or lead to cessation of construction involving our products. These interferences may shift sales to subsequent reporting periods or decrease overall sales, given the limited decking season in many locations. Prolonged adverse weather conditions could have a negative impact on our results of operations and liquidity.We depend on third parties for transportation services and the lack of availability of transportation and/or increases in cost could materially adversely affect our business and operations.Our business depends on the transportation of both finished goods to our distributors and the transportation of raw materials to us. We rely on third parties for transportation of these items. In particular, a significant portion of our finished goods are transported by flatbed trucks, which are occasionally in high demand (especially at the end of calendar quarters) and/or subject to price fluctuations based on market conditions and the price of fuel.If the required supply of transportation services is unavailable when needed, we may be unable to sell our products at full value, or at all. Similarly, if any of these providers were unavailable to deliver raw materials to us in a timely manner, we may be unable to manufacture our products in response to customer demand. This could harm our reputation, negatively impact our customer relationships and have a material adverse effect on our financial condition and results of operations. In addition, a material increase in transportation rates or fuel surcharges could have a material adverse effect on our profitability.The demand for our products is influenced by general economic conditions and could be adversely affected by economic downturns.The demand for our products is influenced by the general health of the economy, the level of home improvement activity and, to a much lesser extent, new home construction. These factors are affected by home equity values, credit availability, consumer confidence and spending habits, employment, interest rates, inflation and general economic conditions. Devaluation in home equity values can adversely affect the availability of home equity withdrawals and result in decreased home improvement spending. We cannot predict general economic conditions or the home remodeling and new home construction environments. Any economic downturn could reduce consumer income or equity capital available for spending on discretionary items, which could adversely affect the demand for our products.We have significant capital invested in property, plant and equipment that may become obsolete or impaired and result in a charge to our earnings.We have made and may continue to make significant capital investments to improve or expand our manufacturing capabilities. These investments sometimes involve the implementation of new technology and replacement of existing equipment at our manufacturing facilities, which may result in charges to our earnings if the existing equipment is not fully depreciated. Significant replacement of equipment or changes in the expected cash flows related to our assets could result in reduced earnings or cash flows in future periods.Our ability to continue to obtain financing on favorable terms, and the level of any outstanding indebtedness, could adversely affect our financial health and ability to compete.Our ability to continue to obtain financing on favorable terms may limit our discretion on some business matters, which could make it more difficult for us to expand, finance our operations and engage in other business activities that may be in our interest. In addition, the operating and financial restrictions imposed by our senior credit facility may limit our ability to:incur additional indebtedness and additional liens on our assets;engage in mergers or acquisitions or dispose of assets;enter into sale-leaseback transactions;pay dividends or make other distributions;voluntarily prepay other indebtedness;enter into transactions with affiliated persons;make investments; andchange the nature of our business.Any additional indebtedness we may incur in the future could subject us to similar or even more restrictive conditions.At certain periods during the year, we borrow significant amounts on our senior credit facility for working capital purposes. In addition, we may borrow on the senior credit facility to pursue strategic opportunities or other general business matters. Accordingly, our future level of indebtedness could have important consequences. For example, it may:increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations;require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;limit our ability to borrow additional funds to alleviate liquidity constraints, as a result of financial and other restrictive covenants in our indebtedness;limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;place us at a competitive disadvantage relative to companies that have less indebtedness; andlimit our ability to refinance our principal secured indebtedness.Our ability to make future principal and interest payments, borrow and repay amounts under our senior credit facility and continue to comply with our loan covenants will depend primarily on our ability to generate sufficient cash flow from operations. Our failure to comply with our loan covenants might cause our lenders to accelerate our repayment obligations under our senior credit facility, which may be declared payable immediately based on a default. To remain in compliance with our credit facility, we must maintain specified financial ratios based on our levels of debt, fixed charges, and earnings (excluding extraordinary gains and extraordinary non-cash losses) before interest, taxes, depreciation and amortization, all of which arerespective segment subject to the risksrisk factor.Item 1B. Unresolved Staff Comments Item 2. Properties We lease our corporate headquarters in Winchester, Virginia, which consists of approximately 36,000 square feet of office space, under a lease that expires in March 2020. In addition, we lease 55,047 square feet of office and storage space in Dulles, Virginia, that we do not occupy. We have sublet all of the office space for the remainder of the term of the lease obligation, which expires in mid-2019. For a description of our financial reporting in connection with the Dulles lease agreement, see Note 13 to our Consolidated Financial Statements appearing elsewhere in this report.approximately 92 acres of landand lease certain properties, as noted in Winchester, the below table:
Footage/
Owned
Expiration
Datesthe buildings on this land. The site includes our researchequipment and development technical facility and manufacturing facility, which contains approximately 465,000 square feet of space, and outside open storage. We own approximately 37 acres of land in Fernley, Nevada and the buildings on this land. The site includes our manufacturing facility, which contains approximately 240,000 square feet of space, and outside open storage. These facilities provide adequate capacity for current and anticipated future consumer demand.September 2007,2019, we suspended operations at our Olive Branch, Mississippi facility (Olive Branch facility) and consolidated all of our manufacturing operations into our Winchester and Fernley sites. In January 2016, we sold a portion of the Olive Branch facility that contained the buildings. As of the date of this report, we continue to own approximately 62 acres of undeveloped land at the Olive Branch facility.We leasespent a total of $67 million on capital expenditures, including $60 million related to capacity expansion and general plant cost reduction initiatives, $5 million for other production improvements and $2 million for general support initiatives. In order to keep pace with demand, in June 2019 we announced a new multi-year capital expenditure program projected at approximately 1.4$200 million square feetbetween 2019 and 2021. The program will increase production capacity by at least 70% at our Trex Residential facilities in Virginia and Nevada and will bring further manufacturing efficiencies to our production operations. In the third quarter of warehouse2019, we installed two additional lines in our Nevada facility and facility space under leases with expiration dates ranging from 2017three new lines will begin ramping up in Nevada in the second quarter of 2020. One new production line was operational in Virginia in the fourth quarter of 2019, and a new building being constructed in Virginia is scheduled to 2026. start ramping up production by early 2021 at the latest. These investments will allow us to increase production output for future projected growth related to our strategy of converting wood demand to Trex Residential composite decking.theseour leases, see Note 10 to our Consolidated Financial Statements appearing elsewhere in this report.forklift equipment, primarily forklifts, at our facilities under operating leases.We regularly evaluate our various facilities and equipment and make capital investments where necessary. In 2016, we spent a total of $14.6 million on capital expenditures, primarily related to equipment purchases, the purchase of land adjacent to our Winchester, Virginia manufacturing facility, Trex University (our state-of-the-art training facility), general plant cost reduction initiatives, process and productivity improvements . We estimate that our capital expenditures in 2017 will be approximately $15 million to $20 million. We expect to use these expenditures principally to support cost reduction initiatives, new product launches in current and adjacent categories and general business support.Item 3. Legal Proceedings Item 4. Mine Safety Disclosures. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The table below shows the reported high and low sale prices of our common stock for each quarter during 2016 and 2015 as reported by the NYSE. High Low $ 48.14 $ 31.11 50.62 39.74 64.36 44.38 72.21 50.81 High Low $ 55.13 $ 38.05 57.72 46.72 50.16 31.73 44.17 33.72
Total Number of
Shares (or Units)
Purchased (1)
Average Price Paid
per Share (or Unit)
($)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
Maximum number of
Shares (or Units) that
May Yet Be
Purchased Under the
Plan or Program $ $ $ (1) During the three months ended December 31, 2019, 3,570 shares were withheld by, or delivered to, the Company pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s 2014 Stock Incentive Plan allowing the Company to withhold, or the recipient to deliver to the Company, the number of shares having the fair value equal to tax withholding due. (2) On February 16, 2018, the Company’s Board of Directors authorized a common stock repurchase program of up to 5.8 million shares of the Company’s outstanding common stock (Stock Repurchase Program). The Stock Repurchase Program was publicly announced on February 21, 2018. During the three months ended December 31, 2019, the Company repurchased 124,939 shares under the Stock Repurchase Program. 20112014 in (1) the Company’s common stock, (2) the Russell 2000 Index and (3) the S&P 600 Building Products, and assumes reinvestment of dividends and market capitalization weighting as of December 31, 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2016. December 31,
2011 December 31,
2012 December 31,
2013 December 31,
2014 December 31,
2015 December 31,
2016 $ 100.00 $ 162.53 $ 347.25 $ 371.88 $ 332.23 $ 562.45 $ 100.00 $ 116.35 $ 161.52 $ 169.42 $ 161.94 $ 196.45 $ 100.00 $ 129.86 $ 189.32 $ 188.86 $ 226.58 $ 294.05 �� $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 7, 2017,10, 2020, there were approximately 181153 holders of record of our common stock, although we believe that there are a significantly larger number of beneficial owners of our common stock.2016,2019, we submitted to the NYSE in a timely manner the annual certification that our Chief Executive Officer was not aware of any violation by us of the NYSE corporate governance listing standards.Item 6. 2015, 2014, 2013, and 2012 and2015 for each year in the five-year period ended December 31, 2016. Year Ended December 31, (1) 2016 (2) 2015 (3) 2014 2013 (4) 2012 (5) (In thousands, except share and per share data) $ 479,616 $ 440,804 $ 391,660 $ 342,511 $ 307,354 292,521 285,935 251,464 243,893 222,772 187,095 154,869 140,196 98,618 84,582 83,140 77,463 72,370 73,967 71,907 103,955 77,406 67,826 24,651 12,675 1,125 619 878 602 8,946 102,830 76,787 66,948 24,049 3,729 34,983 28,689 25,427 (10,549 ) 1,009 $ 67,847 $ 48,098 $ 41,521 $ 34,598 $ 2,720 $ 2.31 $ 1.53 $ 1.28 $ 1.03 $ 0.08 29,394,559 31,350,542 32,319,649 33,589,682 32,247,184 $ 2.29 $ 1.52 $ 1.27 $ 1.01 $ 0.08 29,612,669 31,682,509 32,751,074 34,273,502 34,129,712 $ 85,293 $ 62,634 $ 58,642 $ 45,208 $ 60,443 (10,202 ) (23,329 ) (12,873 ) (12,697 ) (7,484 ) (62,422 ) (42,854 ) (39,997 ) (30,898 ) (55,326 ) $ 118,136 $ 91,701 $ 82,653 $ 40,597 $ 29,149 $ 18,664 $ 5,995 $ 9,544 $ 3,772 $ 2,159 54,264 38,581 35,787 28,994 10,158 221,430 211,998 195,824 188,157 168,615 — 7,000 — — 5,000 $ 134,161 $ 116,463 $ 113,385 $ 106,616 $ 93,986 $ $ $ $ $ ) ) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ ) ) ) ) ) ) ) ) ) ) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1) All common stock share and per share data in the above table are presented on a post-split basis to reflect the May 7, 2014June 18, 2018 to stockholders of record at the close of business on April 7, 2014.May 23, 2018.2) In January 1, 2019, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. guidance within ASU Nos. 3) On July 31, 2017, the Company’s newly-formed, wholly-owned subsidiary, Trex Commercial Products, Inc. acquired certain assets and assumed certain liabilities of Staging Concepts Acquisition, LLC. The Consolidated Financial Statements include the accounts of Trex Commercial Products, Inc. from the date of acquisition. Also, the tax legislation H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” known as the Tax Cuts and Jobs Act (Act), was enacted on December 22, 2017. Accordingly, we have recognized the tax effects of the Act in our financial statements and related notes as of and for the year ended December 31, 2017. Deferred tax assets that existed as of the enactment date and that reversed after the Act’s effective date of January 1, 2018 were adjusted to reflect the new Federal statutory tax rate of 21%. The effect of the change in tax rate on the deferred tax assets was allocated to continuing operations as a discrete item. We finalized our analysis of the Act in 2018, which did not give rise to new deferred tax amounts. 4) Year ended December 31, 2016 was materially affected by a Financial Accounting Standards Board Accounting Standards Update (ASU)FASB ASU No.Taxes,” and ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.Taxes. Because the Company applied ASU No. Adoption of ASU No. 2016-09 did not have a material impact on the Company’s results of operations and financial condition or cash flows for prior periods. Note 2 to our Consolidated Financial Statements appearing elsewhere in this report discusses the method used to apply each provision of ASU No. 2016-09.3)5)Year ended December 31, 2015 was materially affected by a 4)Year ended December 31, 2013 was materially affected by a pre-tax increase of $20.0 million to the warranty reserve and a $19.9 million income tax benefit resulting from a significant reversal of our valuation allowance, $10.9 million of which was a direct result of the Company’s decision to exit a full valuation allowance.5)Year ended December 31, 2012 was materially affected by a pre-tax increase of $21.5 million to the warranty reserve.6) 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). The Company has included data with respect to EBITDA because management evaluates and projects the performance of the Company’s business using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of the Company’s operating performance, particularly as compared to the operating performance of the Company’s competitors, because this measure eliminates many differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets, as well as some recurring althoughnot Year Ended December 31, 2016 2015 2014 2013 2012 (In thousands) $ 67,847 $ 48,098 $ 41,521 $ 34,598 $ 2,720 1,125 619 878 602 8,946 34,983 28,689 25,427 (10,549 ) 1,009 14,181 14,295 14,827 15,946 16,474 $ 118,136 $ 91,701 $ 82,653 $ 40,597 $ 29,149 $ $ $ $ $ ) ) $ $ $ $ $ Item 7. and the highly competitive markets in which the Company operates.high performance,high-performance, low maintenance, porch, fencing, steel deck framing and outdoor lighting categories. We believe that the range and variety of our products allow consumers to design much of their outdoor living space using Trex brand products.products:composite decking and railing products through Trex Residential:Decking Trex Transcend®Trex Enhance®Trex Select®Railing Signature™ SignaturePorch Transcend Porch Flooring and Railing SystemSeclusionsFencingTrex Seclusions® Outdoor Lighting SystemsTrex DeckLighting™Trex LandscapeLighting™Hidden Fastening System for Specially Grooved BoardsTrex Hideaway®20162019 include:8.8%9%, or $38.8$61.1 million, to $745.3 million in the twelve months ended 2016December 31, 2019 compared to $684.3 million in the twelve months ended 2015.December 31, 2018. Net sales in 20162019 were the highest of any year in our history.Increasegross profit of 20.8%, or $32.2 million. Gross profit in 2016 was2019 compared to 2018, and were the highest of any year in our history.Netof $67.8to $144.7 million, also reflectsreflecting the highest of any year in our history.$85.3 million of positive cashin the twelve months ended 2016 compared to $62.6were $156.4 million in the twelve months ended 2015.December 31, 2019 compared to $138.1 million in the twelve months ended December 31, 2018.Our branding and product differentiation strategy enables us to command premium prices over wood products. OurThe operating results for Trex Residential have historically varied from quarter to quarter, often due to seasonal trends in the demand for outdoor living products. We have historically experienced lower net sales during the fourth quarter due to the holiday season. Also, seasonal,Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift net salesdemand for its products to a later period.ourits normal business practice and consistent with industry practices, we haveTrex Residential has historically provided ouroffered incentive programs to its distributors and dealers incentives to build inventory levels before the start of the prime deck-building season to ensure adequate availability of its product to meet anticipated seasonal consumer demand and to enable production planning. These incentives include prompt payment discounts and favorable payment terms. In addition, we offer price discounts or volume rebates on specified products and other incentives based on increases in purchases as part of specific promotional programs. The timing of sales incentive programs can significantly impact sales, receivables and inventory levels during the offering period. However, the timing and terms of the majority of our programs are generally consistent from year to year.Signature™ Signature2009, 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 flaking defect and communications by us 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.2009. 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.20162019, was slightly lower than our expectations for 2019 and the number of claims received in the year ended December 31, 2015,2018, continuing the historical year-over-year decline in incoming claims, butclaims. Average settlement cost per claim experienced in 2019 was considerably higher than our expectations. Also,expectations for 2019 and the average settlement cost per claim experienced in the year ended December 31, 2016 was higher than the average settlement cost per claim experienced during the year ended December 31, 2015 and higher than our expectation for 2016. As a result and after actuarial review, we revised our estimate and recorded2018 due to an increase toin larger claims settled and changes in the warrantymix of settlement methods. We believe our reserve of $9.8 million during the third quarter of 2016. Based on the facts and circumstances at December 31, 2016, we believe our reserve2019 is sufficient to cover future surface flaking obligations. We note that our annual cash outflows for surface flaking claims declined by $1.5 million, or 21%,obligations and no adjustments were required in 2016 compared to 2015, and declined by $1.7 million, or 19%, in 2015 compared to 2014.$3.4$1.9 million change in the surface flaking warranty reserve. Year Ended December 31, 2016 2015 2014 2,500 2,872 4,249 2,615 2,968 3,212 (2,360 ) (3,340 ) (4,589 ) 2,755 2,500 2,872 $ 2,639 $ 2,521 $ 2,287 ) ) ) $ $ $ (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. 1319 to the Consolidated Financial Statements appearing elsewhere in this report.Inventories. We account for inventories atlowerrecoverability of cost (last-in, first-out,goodwill in accordance with Accounting Standard Codification Topic 350, “LIFO)more frequently if an event occurs or market value. We believe that our current inventory of finished goods will be saleablecircumstances change in the ordinary course of business and, accordingly, haveinterim that would more likely than not established significant reserves for estimated slow moving products or obsolescence. At December 31, 2016,reduce the excessfair value of the replacement cost of inventory overasset below its carrying amount. Goodwill is considered to be impaired when the LIFOnet book value of inventory was approximately $21.4 million.Income Taxes.We recognize deferred tax assets and liabilities based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect during the year in which it is expected that the differences reverse. We assess the likelihood that our deferred tax assets will be realized. Deferred tax assets are reduced by a valuation allowance when, after considering all available positive and negative evidence, it is determined thatreporting unit exceeds its estimated fair value. The Company first assesses qualitative factors to determine if it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. As of December 31, 2016, we have a valuation allowance of $4.1 million against the deferred tax assets related to state tax credits we estimate will expire before they are realized. We will analyze our position in subsequent reporting periods, considering all available positive and negative evidence, in determining the expected realization of our deferred tax assets.Stock-Based Compensation.The fair value of each stock-based award to officers, directors and certain key employees is established on the date of the grant. We calculate the grant date fair value of stock options and stock appreciation rights using the Black-Scholes valuation model. Determining the fair value of these awardsthe reporting unit is judgmental in nature and involvesless than its carrying amount to determine if it should proceed with the useevaluation of significant estimates and assumptions, includinggoodwill for impairment. If the termCompany proceeds with theshare-based awards, risk-free interest ratesreporting 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.vestingdistinct 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 dividend rates,duration of one year or less. Any variable consideration related to the unsatisfied performance obligation is allocated wholly to the unsatisfied performance obligation and recognized when the product ships and the price volatilityperformance obligation is satisfied.our shares.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.usesreviews and updates its estimates regularly and recognizes adjustments in estimated profit on contracts under the historical volatility overcumulativeaverage expected termimpact of the options granted asadjustment on revenue and estimated profit to date on a contract is recognized in the expected volatility. Theperiod the adjustment is identified. Revenues and profits in future periods are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes forfeitures as they occur. We base our fair value estimatesthe total loss in the period it is identified. During the year ended December 31, 2019, no adjustment to any one contract was material to the Company’s Consolidated Financial Statements and no material impairment loss on assumptions we believe to be reasonable but that are inherently uncertain. Actual future results may differ from those estimates.We grant performance-based restricted stock units, the vesting of which is subject to holder’s continuing employment and our achievement of certain performance measures. At each reporting period, we assess actual performance versus the predetermined performance measures, and adjust the stock-based compensation expense to reflect the relative performance achievement. Actual distributed shares are calculated upon conclusion of the service and performance periods.yearsyear ended December 31, 20162019 compared to the year ended December 31, 2015, and December 31, 2015 compared to December 31, 2014.20162019 Compared toTo Year Ended December 31, 2015 Year Ended December 31, $ Change % Change 2016 2015 (dollars in thousands) $ 479,616 $ 440,804 $ 38,812 8.8 % $ $ $ % $ $ $ % $ $ $ ) )% $38.8 million9% increase in total net sales in 2019 compared to 2018 was primarily due to an increase in net sales of 13% at Trex Residential, offset by a 28% decrease in 2016 compared to 2015Trex Commercial net sales. The primary driver of Trex Residential net sales was due primarilyincreased volume growth. Through the first quarter of 2019, and to a $53.2 million increase in sales volume growth of our core Trex branded decking and railing products. Sales volume growth also benefited from the execution of our market growth strategies that we launchedmuch lesser extent in the second quarterand third quarters of this year to highlight the aesthetics, performance and sustainability benefits of2019, Trex composite decking and railing products versus wood. The rollout of our programs in 2016 that aimed to strengthen our brand relationships with consumers and the trade facilitated growth. Such programs include our online tools that assist the consumer throughout the sales process from design to installation, and the launch of our state-of-the-art training facility, Trex University, that educates retailers, contractors and other Trex partners on the benefits of Trex outdoor living products. The increase in sales volume growth was offset by $6.8 million due to the impact of mix and sales discounts, and by a $7.6 million decrease in poly film sales. These sales were curtailed early in 2016 reflecting a change in management’s procurement strategy for scrap poly film purchases.Gross Profit Year Ended December 31, $ Change % Change 2016 2015 (dollars in thousands) $ 292,521 $ 285,935 $ 6,586 2.3 % 61.0 % 64.9 % $ 187,095 $ 154,869 $ 32,226 20.8 % 39.0 % 35.1 % The increase in gross profit in 2016 compared to 2015 was primarily due to reduced raw materials cost, execution of our manufacturing cost improvement initiatives, and increased sales. The drivers for the increase in gross margin, or gross profit as a percentage ofResidential net sales were lower raw materials cost mainly resulting from our revised procurement strategy, other cost saving initiatives designed to ensure we meet increased market demand more efficiently and effectively, and from an increase in capacity utilization in order to achieve appropriate inventory levels to support growth, and other operating efficiencies. The increase in gross profit was partially offset by a $9.8 million increase to the legacy warranty reserve related to the surface flaking issue that affected a portion of products produced at our Nevada plant before 2007 compared to a $5.4 million adjustment in 2015 that related to surface flaking.Selling, General and Administrative Expenses Year Ended December 31, $ Change % Change 2016 2015 (dollars in thousands) $ 83,140 $ 77,463 $ 5,677 7.3 % 17.3 % 17.6 % The increase in selling, general and administrative expenses in 2016 compared to 2015 was attributable to a $2.2 million increase in personnel related expenses of salaries and benefits and incentive compensationconstrained due to improved performance against targets, $2.2 million increase in research and development expenses, and a $1.4 million increase in advertising and branding activities in support of our market growth strategies.Interest Expense Year Ended December 31, $ Change % Change 2016 2015 (dollars in thousands) $ 1,125 $ 619 $ 506 81.7 % 0.2 % 0.1 % The increase in interest expense in 2016 compared to 2015 was due to an $18.3 million increase in average outstanding borrowings during 2016 and a slight increase in the effective interest rate. The increase in borrowings was due to $53.3 million in stock repurchase activitysupply issues primarily caused by new product startup inefficiencies related to our new Enhance decking product. These inefficiencies resulted in lower throughput than was needed to support market demand. Net sales in 2018 were impacted by a $6 million unfavorable charge related to expanded share repurchase program andstocking positions in support of our seasonal working capital needs.Provision for Income Taxes Year Ended December 31, $ Change % Change 2016 2015 (dollars in thousands) $ 34,983 $ 28,689 $ 6,294 21.9 % 34.0 % 37.4 % During 2016 and 2015, our income tax expense consisted of statutory federal and state taxes, permanent bookall residential sales channels. Excluding this impact, Trex Residential net sales increased by 12%. Trex Commercial net sales decreased mainly due to tax differences, federal tax credits, and other miscellaneous tax items. The effective tax rate in 2016 decreased 340 basis pointsfewer large projects compared to the effective tax rate during 2015 due to nondeductible compensation expense recognizedperiod of strong, large project completions experienced in the prior year and the adoption of Financial Accounting Standards Board Accounting Standards Codification No. 2016-09, “Compensation – Stock Compensation (Topic718): Improvements to Employee Share-Based Payment Accounting.” As of January 1, 2016, the Company prospectively applied the guidance related to excess tax benefits and recorded a $1.7 million benefit within income tax expense. Excess tax benefits for 2015 were recorded as an increase to additional paid-in capital.Year Ended December 31, 2015 Compared to Year Ended December 31, 2014Net Sales Year Ended December 31, 2015 2014 $ Change % Change (dollars in thousands) $ 440,804 $ 391,660 $ 49,144 12.5 % The increase in net sales in 2015 compared to 2014 was due to a 10.4% increase in sales volumes and a 2.0% increase in the average price per unit due to a price increase on one line of decking product and, to a lesser extent, product mix. We attribute the increase in sales volumes in 2015 compared to 2014 primarily to market share gains and an increase in demand for wood-alternative products. The increase in average price per unit in 2015 was a result of price increases on some of our 2015 decking products. Year Ended December 31, $ Change % Change 2015 2014 (dollars in thousands) $ 285,935 $ 251,464 $ 34,471 13.7 % 64.9 % 64.2 % $ 154,869 $ 140,196 $ 14,673 10.5 % 35.1 % 35.8 % The increase in gross profit in 2015 compared to 2014 was primarily due to increased sales from market share gains, price increases on some of our decking products and increased demand for wood-alternative products. $ $ $ % % % $ $ $ % % % decreasedwas 41.1% in 20152019 compared to 201443.1% in 2018. Gross margin for Trex Residential and Trex Commercial products in 2019 totaled 42.4% and 23.5%, respectively, compared to 45.6% and 21.8%, respectively, in 2018. The decrease in gross margin was primarily due to a $7.8 million increasedecrease in Trex Residential gross profit related to new product startup costs and manufacturing inefficiencies associated with the slower than normal production ramp up on those products, including reduced line rates, increased material usage and lower manufacturing yields. During March and through the third quarter, we made numerous changes to improve throughput. As a result, our production rates largely returned to planned levels and associated operating inefficiencies have been reduced. We believe these improvements will continue to result in improved throughput and efficiency. The startup costs are largely behind us and we expect continued improvement in throughput and efficiency in future periods. We have begun to reduce material added to the warranty reserve,Enhance product in the majorityfirst quarter of which related2020 and expect to surface flaking. Excludingbe essentially at the adjustment tooriginal design target by the warranty reserve,end of the third quarter in 2020. Trex Commercial gross margin increased 110 basis points in 2015 comparedprimarily due to initiatives aimed at improving project management, estimating and manufacturing. However, the gross margin in 2014. Year Ended December 31, $ Change % Change 2015 2014 (dollars in thousands) $ 77,463 $ 72,370 $ 5,093 7.0 % 17.6 % 18.5 % The increase in selling, $ $ $ % % % 2015 compared2019 were comparable to 2014 was primarily attributable to a $5.8those in 2018. Incentive compensation decreased $4 million increase in personnel related expenses primarily2019. In addition, amortization expense decreased $2.7 million in 2019 due to incentive compensation and severance pay and a $2.6the full amortization of intangible assets acquired as part of the SC Company acquisition in July 2017. The decreases were offset primarily by increases in other personnel expense of $3.6 million, increase$0.7 million in branding activities, such as the launchand advertising spend in support of our new marketing campaign, market growth programs, $0.3 million in research and trade show presentations. These increases were partially offset bydevelopment expenses and an increase in sublease receipts of approximately $1.2 million during 2015 (refer to Note 13 to the Consolidated Financial Statements), a $1.2 million decrease in service fees and $950,000 in other general cost reductions.Interest Expense Year Ended December 31, $ Change % Change 2015 2014 (dollars in thousands) $ 619 $ 878 $ (259 ) (29.5 )% 0.1 % 0.2 % The decrease in interest expense was driven by an increase in capitalized interest during 2015 and a decrease in the effective interest rate. The increase in capitalized interest in 2015 was primarily due to the addition of three manufacturing lines related to our specialty materials operations and expenditures to support potential future expansion. Year Ended December 31, $ Change �� % Change 2015 2014 (dollars in thousands) $ 28,689 $ 25,427 $ 3,262 12.8 % 37.4 % 38.0 % During 2015 and 2014, our income tax expense consisted of statutory federal and state taxes, permanent book to tax differences, federal tax credits, other miscellaneous tax items and an increase to the valuation allowance on our deferred tax asset. $ $ $ % % % 2015excess tax benefits from the exercise of share-based payments.
Trex
Residential
Trex
Commercial
Trex
Consolidated $ $ $ ) ) ) $ $ $
Trex
Residential
Trex
Commercial
Trex
Consolidated $ $ $ ) ) $ $ $ 1 EBITDA represents net income before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP). We have included data with respect to EBITDA because management evaluates the performance of its reportable segments using 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 and, in relation to its competitors, it 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. $ $ $ % $ $ $ % $ $ $ ) )% consistentprimarily driven by a $13 million increase in Trex Residential EBITDA driven by the increase in net sales. The increase was offset by a decrease in EBITDA at Trex Commercial primarily related to a decrease in net sales.effective rate in 2014.2016, 2015,2019, 2018, and 20142017 (in thousands): Year Ended December 31, 2016 2015 2014 $ 85,293 $ 62,634 $ 58,642 $ (10,202 ) $ (23,329 ) $ (12,873 ) $ (62,422 ) $ (42,854 ) $ (39,997 ) $ 12,669 $ (3,549 ) $ 5,772 $ $ $ ) ) ) ) ) ) $ $ $ Net cash$22.7$18.2 million in 20162019 compared to 20152018 primarily due to higher cash receiptsthe increase in gross profit and related increase in net income resulting from the 8.8% increase in net sales during 2016 compared to 2015 coupled with the 390 basis point increasevolume growth, offset by a decrease in gross margin, and a $4.4 million increase due to the timingworking capital investment of income tax payments.Net cash provided by operating$2.9 million.increased $4in 2019 consisted of $67.3 million in 2015 compared to 2014. The increase reflected higher operating cash receipts from increased net sales and an increase in accrued expenses and other liabilities, partially offset by an increase in trade accounts receivable. The $15 million increase in accrued expenses and other liabilities in 2015 was primarily attributed to increases in accrued marketing and other branding activities of $6 million, incentive and other personnel related expenses of $2 million, and miscellaneous other fees and expenses of $6 million. The increase in accrued expenses and other liabilities was offset by an increase in accounts receivable of $12 million in 2015. The increase in accounts receivable was due to an increase in net sales.Investing ActivitiesInvesting activities consist principally of capital expenditures, directedincluding $59.8 million related to new product developmentcapacity expansion and to quick return cost investments to capture manufacturing cost savings. These investments allow us to meet the market’s increased demand and corresponding volume requirements resulting in greater profitability and cash flow. Capital expenditures in 2016 were $14.6 million consisting primarily of $5.6 million for the purchase of, land adjacent to our Winchester, Virginia manufacturing facility, and Trex University (our state-of-the-art training facility), $5.6 million for investments to capturegeneral plant cost reduction initiatives, and $2.7 million for process and productivity improvement. Also, in January 2016, the Company sold a portion of the Olive Branch facility that contained the buildings for $4.2 million and, as of December 31, 2016, continues to own approximately 62 acres of undeveloped land adjacent to the sold properties.During 2015, capital expenditures were $23.3 million compared to $13.0 million for 2014, or an 80% increase. Our 2015 expenditures were primarily comprised of $6.7 million for equipment for our specialty materials operation, $4.2 million for cost reduction and business support activities, $3.9 million for the addition of a Fernley, Nevada reprocessing line, $3.2 million for the purchase of land adjacent to our Winchester, Virginia facility to support potential future expansion, and $2.3$4.9 million for other manufacturing productivity improvements.In January 2016, we increased our borrowing capacity in order to repurchase shares of our common stock and to support our seasonal working capital needs. was $62.4in 2019 increased $16.8 million in 2016 compared to net cash used in financing activities of $42.9 million in 2015. The increase was2018 primarily due to payments on outstanding debt balances earlier and at a higher levelthe increase in 2016 compared to 2015 due to higher sales and reduced manufacturing costs.Cash usedstock repurchase activity in financing activities was $42.9 million during 2015 compared to $40.0 million in 2014, a 7.2% increase. The net use2019 of cash in 2015 was primarily used to repurchase common stock in the amount of $45.2 million under our October 2014 $16.5 million.Program, and to fund working capital needs and support general business operations.Stock Repurchase Programs.19, 2014, our16, 2018, the Board of Directors authorizedadopted a common stock repurchase program of up to $50.05.8 million shares of ourthe Company’s outstanding common stock (February 2014 Stock Repurchase Program). This authorization had no expiration date. During the three months ended June 30, 2014, we repurchased 1,657,919 shares for $50.0 million, which completed the authorization under the February 2014 Stock Repurchase Program.On October 23, 2014, our Board of Directors authorized a common stock repurchase program of up to 2.0 million shares of our outstanding common stock (October 2014 Stock Repurchase Program). This authorization had no expiration date. During the three months ended September 30, 2015, we repurchased 1,134,300 shares for $45.2 million under the October 2014 Stock Repurchase Program.On October 22, 2015, our Board of Directors terminated the October 2014 Stock Repurchase Program and adopted a new stock repurchase program of up to 3.15 million shares of our outstanding common stock (October 2015 Stock Repurchase Program). In 2016, we repurchased 1,578,952 shares for $53.3 million under the October 2015 Stock Repurchase Program. This authorization terminated on December 31, 2016.On February 16, 2017, the Board of Directors authorized a common stock repurchase program of up to 2.961 million shares of our outstanding common stock (February 2017 Stock(Stock Repurchase Program). As of the date of this report, we had notthe Company has repurchased any959,380 shares under the February 2017 Stock Repurchase Program.the end users. Consistent with industry practices, to ensure adequate availability of product to meet anticipated seasonal consumer demand and to enable production planning, we have historically provided our distributors and dealers incentives to buildSignificant increases in inventory levels before the start of the prime deck-building season. These incentives include prompt payment discounts and favorable payment terms. In addition, we offer price discounts or volume rebates on specified products and other incentives based on increases in purchases as part of specific promotional programs. We warrant that we will replace defective items for a period of one year from the date of shipment to the distributor. While we do not typically receive any information regarding inventory in the distribution channel from any dealers, we occasionally receive limited information from some but not all of our distributors regarding their inventory. Because few distributors provide us with any information regarding their inventory, wewithout a corresponding change inchangesincreases in the levels of inventory in the distribution channels at December 31, 20162019 compared to inventory levels at December 31, 2015. Significant increases2018.inventory levels incash. We used cash on hand and $30.0 million from our existing revolving credit facility to acquire the distribution channel without a corresponding change in end-user demand could have an adverse effect on future sales.On occasion, we may need to replace a distributor. Historically, we have had little difficulty replacing a distributor and have experienced little or no disruption to operations or liquidity. We believe that in the event we need to replace a distributor, it would not have an adverse effect on our profitability or liquidity.Product Warranty. We continue to receive and settle claims related to material produced at our Nevada facility prior to 2007 that exhibits surface flaking, which has had a material adverse effect on cash flow from operations, and regularly monitor the adequacy of the warranty reserve. During the year ended December 31, 2016, we paid approximately $5.7 million to settle surface flaking claims against the warranty reserve, a decrease of 21% from the $7.2 million paid in 2015. We estimate that the number of claims received will continue to decline over time and that the average cost per claim will increase slightly, primarily due to inflation. If the level of claims received or average settlement cost per claim differs materially from expectations it could result in additional increases or decreases to the warranty reserve and a decrease or increase in earnings and cash flows in future periods.Company’s operating results for Trex Residential have historically varied from quarter to quarter, often attributable to seasonal trends in the demand for Trex products. The Company has historically experienced lower net sales during the fourth quarter due to the holiday season. Also, seasonal,quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift net salesdemand for its products to a later period.January 12, 2016,November 5, 2019, 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; and certain other lenders including Wells Fargo Bank, N.A. (Wells Fargo), who is also Syndication Agent; SunTrust Bank (SunTrust); and Branch Banking and Trust Company (BB&T) (each, a Lender and collectively, the Lenders), arranged by Bank of America Securities, Inc., as Sole Lead Arranger and Sole Bookrunner, entered into a ThirdFourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) to amend and also the First Amendment torestate the Third Amended and Restated Credit Agreement (together, the Thirddated as of January 12, 2016, as amended (Third Amended Credit Agreement) with Bank of America, N.A. (BOA), by and among the Company, as Lender,borrower; BOA, as a lender, Administrative Agent, Swing Line Lender and Letter of CreditL/C Issuer; and certain other lenders including Citibank,CitiBank, N.A., (Citi); Capital One, N.A., (Capital One); and SunTrust, Bank (collectively, Lenders) arranged byeach as a lender; and Bank of America Merrill Lynch, as Sole Lead Arranger and Sole Bookrunner. The Third Amended Credit Agreement amended and restated the Second Amended Credit Agreement.ThirdFourth Amended Credit Agreement, the Lenders agreeagreed to provide the Company with one or more 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 (Loan Limit) throughout the term, which ends November 5, 2024 (Term). Previously, under the Third Amended Credit Agreement, BOA, Citi, Capital One and SunTrust agreed to provide the Company with one orendswould have ended on January 12, 2021. 2021 if not replaced by the Fourth Amended Credit Agreement.revolving loan limitLoan Limit are sublimits for a letterLetter of creditCredit facility in an amount not to exceed $15 million and swing line loansSwing Line Loans in an aggregate principal amount at any time outstanding not to exceed $5 million. The revolving loans,Revolving Loans, the letterLetter of creditCredit facility and the swing line loansSwing Line Loans are for the purpose of fundingraising working capital needs and supporting general business operations.hasis not obligated to borrow any amount under the optionLoan Limit. Within the Loan Limit, the Company may borrow, repay and reborrow at any time or from time to select interest rates for each loan request attime while the Notes are in effect. Base Rate or Eurodollar Rate. Base rate loansLoans (as defined in the Fourth Amended Credit Agreement) under the revolving loansRevolving Loans and the swing line loansSwing Line Loans accrue interest at the Base Rate plus the Applicable Rate.Rate (as defined in the Fourth Amended Credit Agreement) and Eurodollar Rate Loans for the revolving loansRevolving Loans and swing line loansSwing Line Loans accrue interest at the Adjusted London InterBank Offered Rate plus the Applicable Rate.Rate (as defined in the Fourth Amended 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 Eurodollar Rate plus 1.0%.2021.The2016, the Company will reimburseentered into a Third Amended Credit Agreement with BOA for all amounts payable,as Lender, Administrative Agent, Swing Line Lender and Letter of Credit Issuer; and certain other lenders including interest, under a letterCiti, Capital One, and SunTrust (collectively, Lenders) arranged by Bank of credit at the earlier of (i) the date set forth in the application, or (ii) one business day after the payment under such letter of credit by BOA.isamended and restated the Second Amended Credit Agreement.arewere purported to be granted pursuant to and in accordance with the terms of the collateral documents as referenced in the Third Amended Credit Agreement.At December 31, 2016, the Company had no outstanding borrowings under the Third Amended Credit Agreement and $200 million of available borrowing capacity.Our abilitymake scheduled principal and interest payments, borrow and repay amounts under any outstanding revolving credit facility and continue to comply with any loan covenants depends primarily on our ability to generate sufficient cash flow from operations. To remain in compliance with financial covenants, we are required to maintain specified financial ratios based on levelsthe terms of debt, fixed charges, and earnings (excluding extraordinary gains and extraordinary non-cash losses) before interest, taxes, depreciation and amortization, all of which arethe Fourth Amended Credit Agreement, the Company, is subject to the risks of the business, some of which are discussed in this report under “Risk Factors.” We werecertain loan compliance covenants. The Company was in compliance with all covenants contained in the Third Amended Credit Agreement atas of December 31, 2016.2019. Failure to comply with the financial covenants could be considered a default of our repayment obligations and, among other remedies, could accelerate payment of any amounts outstanding.tables show, as of December 31, 2016,table summarizes our contractual obligations, and commercial commitments, which consist primarily of purchase commitments and operating leases, as of December 31, 2019 (in thousands): Total Less than
1 year 1-3 years 4-5 years After
5 years $ 23,802 $ 20,208 $ 3,594 $ — $ — 58,388 9,606 23,953 10,783 14,046 $ 82,190 $ 29,814 $ 27,547 $ 10,783 $ 14,046
5 years $ $ $ $ $ $ $ $ $ $ (1) Purchase commitmentsobligations represent supply contracts with raw material vendors.vendors and service contracts for hauling raw materials. Open purchase orders written in the normal course of business for goods or services that are provided on demand have been excluded as the timing of which is not certain.(2) Operating leases represent office space, storage warehouses, manufacturing facilities and certain office and plant equipment under various operating leases, and include operating leases accounted for under Financial Accounting Standards Board Accounting Standards Codification Topic 842 and short-term leases. arrangements other than operating leases.Capital expenditures2016 were $14.6June 2019 we announced a new multi-year capital expenditure program projected at approximately $200 million consisting of $5.6 million for the purchase of land adjacentbetween 2019 and 2021. The program will increase production capacity by at least 70% at our Trex Residential facilities in Virginia and Nevada and will bring further manufacturing efficiencies to our Winchester,production operations. In the third quarter of 2019, we installed two additional lines in our Nevada facility and three new lines will begin ramping up there in the second quarter of 2020. One new production line was operational in Virginia manufacturing facility,in the fourth quarter of 2019, and a new building being constructed in Virginia is scheduled to start ramping up production by early 2021 at the latest. The investment will allow us to increase production output for future projected growth related to our strategy of converting wood demand to Trex University (our state-of-the-art training facility), $5.6 million for general plant cost reduction initiatives, and $2.7 million for process and productivity improvement.Residential composite decking. We currently estimate that capital expenditures in 20172020 will be approximately $15$140 million to $20$160 million. Capital expenditures in 2017 are expected to be used primarily to support new product launches in current and adjacent categories, cost reduction initiatives, and general business support.May 2014,August 2018, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” issued subsequent amendments to the initial guidanceAugust 2015 within ASU 2015-14, in March 2016 within ASU 2016-08, in April 2016 within ASU 2016-10, and in May 2016 within ASU 2016-12 (collectively, the new standard)a Cloud Computing Arrangement That Is a Service Contract (a consensus of FASB Emerging Issues Task Force)”. The new standard providesguidance aligns the requirements for capitalizing implementation costs in a single, comprehensivecloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for anrevenue arising from contracts with customers and supersedes most current revenue recognition guidance.impairment in a manner similar to long-lived assets. The new standard requires an entity to recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring 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 does not believe adoption of the new standard will have a material impact on its Consolidated Statements of Comprehensive Income, but expects expanded financial statement footnote disclosure. The Company is continuing to evaluate the impacts of the pending adoption. As such, the Company’s preliminary assessments are subject to change.In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard requires lessees to recognize leases on the balance sheet as a right-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. 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 new 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 is currently assessing the impact of adoption of the new standard on its consolidated financial statements and related note disclosures and has not made any decision on the option to elect adoption of the practical expedients.In August 2016, the FASB issued ASU No. 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 standard is effective for financial statements issued for fiscal years beginning after December 15, 2017,2019, and interim periods within those fiscal years. Early adoption is permitted. Entities can choose to adopt the new guidance either prospectively to eligible costs incurred on or after the date the guidance is first applied or retrospectively. The Company will adopt the guidance on January 1, 2020, and has determined that adoption will not have a material impact on its financial condition or results of operations.requires application usingremoves 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 retrospective translation method.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 will 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 will adopt the guidance on January 1, 2020. The Company does not believe adoption will have a material impact on its financial condition or results of operations.assessingdesigned to capture expected credit losses through the impactestablishment of adoptionan allowance account, which will be presented as an offset to the amortized cost basis of the related financial asset. The new standardguidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is applied using the modified-retrospective approach. The Company will adopt the guidance on January 1, 2020. The Company has determined that adoption will not have a material impact on its consolidated financial statements and related note disclosures.condition or results of operations.Item 7A. 2016,2019, we had no debt outstanding under our revolving line of credit. While variable rate debt obligations expose us to the risk of rising interest rates, an increase of 1% in interest rates would not have a material adverse effect on our overall financial position, results of operations or liquidity.2016.2019.Item 8. F-23Item 9. Withwith Accountants on Accounting and Financial DisclosureItem 9A. Ourourits President and Chief Executive Officer, who is ourthe Company’s principal executive officer, and ourits Executive Vice President and Chief Financial Officer, who is ourthe Company’s principal financial officer, has evaluated the effectiveness of ourthe Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2016.2019. Based uponon this evaluation, ourthe President and Chief Executive Officer and ourthe Executive Vice President and Chief Financial Officer have concluded that ourthe Company’s disclosure controls and procedures were effective asare effective.(the “Company”)(Company), are responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.2016,2019, based on criteria for effective internal control over financial reporting established in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”)(COSO Framework). Based on this assessment, we concluded that, as of December 31, 2016,2019, our internal control over financial reporting was effective, based on the COSO Framework.2016,2019, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which follows hereafter. February 21, 2017 By: S/ JAMESs/ James E. CLINECline
President and Chief Executive Officer (Principal
(Principal Executive Officer)February 21, 2017 By: S/ BRYANs/ Bryan H. FAIRBANKSFairbanks
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)Ernst & Young LLP,Regarding Internal Control Over Financial ReportingTheand Stockholders2016,2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Trex Company, Inc.’s, (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.Overover Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit.Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.In our opinion, Trex Company, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Trex Company, Inc., as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016 of Trex Company, Inc. and our report dated February 21, 2017 expressed an unqualified opinion thereon.McLean,21, 2017Item 10. Directors, Executive Officers and Corporate Governance 20172020 annual meeting of stockholders, which we will file with the SEC on or before 120 days after our 20162019 fiscalcodeCode of conductConduct and ethics,Ethics, which is applicable to all of our directors, officers and employees, including our Chief Executive Officer and Chief Financial Officer. The code is available on our corporate web site and in print to any stockholder who requests a copy. We also make available on our web site, atwww.trex.comItem 11. Executive Compensation 20172020 annual meeting of stockholders, which we will file with the SEC on or before 120 days after our 20162019 fiscalItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 20172020 annual meeting of stockholders, which we will file with the SEC on or before 120 days after our 20162019 fiscalItem 13. Certain Relationships and Related Transactions, and Director Independence 20172020 annual meeting of stockholders, which we will file with the SEC on or before 120 days after our 20162019 fiscalItem 14. Principal Accounting Fees and Services 20172020 annual meeting of stockholders, which we will file with the SEC on or before 120 days after our 20162019 fiscalItem 15. Exhibits and Financial Statement Schedules F-27 F-2 F-3 F-4 F-5 F-6 F-7 F-28 The following exhibits are either filed withSee Exhibit Index at the end of the Annual Report on FormForm 10-K or are incorporated herein by reference. The Company’s Securities Exchange Act file number is 001-14649.ExhibitNumberExhibit Description 3.1Restated Certificate of Incorporation of Trex Company, Inc. (the “Company”). Filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (No. 333-63287) and incorporated herein by reference. 3.2Certificate 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 Form 10-Q for the quarterly period ended March 31, 2014 and incorporated herein by reference. 3.3Amended and Restated By-Laws of the Company. Filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed May 7, 2008 and incorporated herein by reference. 4.1Specimen certificate representing the Company’s common stock. Filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (No. 333-63287) and incorporated herein by reference. 4.2Second Amended and Restated Credit Agreement dated as of November 20, 2014 between the Company and Branch Banking and Trust Company, as a Lender, Administrative Agent, Swing Line Lender and Letter of Credit Issuer; Citibank, N.A. as a Lender; Bank of America, N.A. as a Lender; and BB&T Capital Markets, as Lead Arranger. Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference. 4.3Revolver Note dated November 20, 2014 payable by the Company to Branch Banking and Trust Company in the amount of the lesser of $80,000,000 or the outstanding revolver advances made by Branch Banking and Trust Company. Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference.ExhibitNumberExhibit Description 4.4Revolver Note dated November 20, 2014 payable by the Company to Citibank, N.A. in the amount of the lesser of $45,000,000 or the outstanding revolver advances made by Citibank, N.A. Filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference. 4.5Revolver Note dated November 20, 2014 payable by the Company to Bank of America, N.A. in the amount of the lesser of $25,000,000 or the outstanding revolver advances made by Bank of America, N.A. Filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference. 4.6Swing Advance Note dated November 20, 2014 payable by the Company to Branch Banking and Trust Company in the amount of the lesser of $5,000,000 or the outstanding swing advances made by Branch Banking and Trust Company. Filed as Exhibit 4.5 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference. 4.7Second Amended and Restated Security Agreement dated as of November 20, 2014 between the Company, as debtor, and Branch Banking and Trust Company as Administrative Agent for Branch Banking and Trust Company, Citibank, N.A. and Bank of America, N.A. Filed as Exhibit 4.6 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference. 4.8Second Modification to Amended and Restated Credit Line Deed of Trust, dated as of November 20, 2014, by and among the Company as grantor, BB&T-VA Collateral Service Corporation, as trustee, and Branch Banking and Trust Company, as Administrative Agent for Branch Banking and Trust Company, Citibank, N.A. and Bank of America, N.A., as Beneficiaries relating to real property partially located in the County of Frederick, Virginia and partially located in the City of Winchester, Virginia. Filed as Exhibit 4.7 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference. 4.9Modification to Deed of Trust, dated as of November 20, 2014, by and among the Company as grantor, First American Title Insurance Company, as trustee, and Branch Banking and Trust Company, as Administrative Agent for Branch Banking and Trust Company, Citibank, N.A. and Bank of America, N.A., as Beneficiaries relating to real property located in the County of Fernley, Nevada. Filed as Exhibit 4.8 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference. 4.10Intellectual Property Security Agreement, dated November 20, 2014, by and between Trex Company, Inc. as debtor; and Branch Banking and Trust Company, in its capacity as Administrative Agent under the Second Amended and Restated Credit Agreement and acting as agent for itself and the other secured parties. Filed as Exhibit 4.9 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference. 4.11Third Amended and Restated Credit Agreement dated as of January 12, 2016 between the Company, as borrower; the subsidiaries of the Company as guarantors; Bank of America, N.A., as a Lender, Administrative Agent, Swing Line Lender and Letter of Credit Issuer; and certain other lenders arranged by Bank of America Merrill Lynch as Sole Lead Arranger and Sole Bookrunner. Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference. 4.12Revolver Note dated January 12, 2016 payable by the Company to Bank of America, N.A. in the amount of the lesser of $110,000,000 or the outstanding revolver advances made by Bank of America, N.A. Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference.ExhibitNumberExhibit Description 4.13Revolver Note dated January 12, 2016 payable by the Company to Citibank, N.A. in the amount of the lesser of $75,000,000 or the outstanding revolver advances made by Citibank, N.A. Filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference. 4.14Revolver Note dated January 12, 2016 payable by the Company to Capital One, N.A. in the amount of the lesser of $35,000,000 or the outstanding revolver advances made by Capital One, N.A. Filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference. 4.15Revolver Note dated January 12, 2016 payable by the Company to SunTrust Bank in the amount of the lesser of $30,000,000 or the outstanding revolver advances made by SunTrust Bank. Filed as Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference. 4.16Third Amended and Restated Security and Pledge Agreement dated as of January 12, 2016 between the Company, as debtor, and Bank of America, N.A. as Administrative Agent (including Notices of Grant of Security Interest in Copyrights and Trademarks). Filed as Exhibit 4.6 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference. 4.17Assignment of Amended and Restated Credit Line Deed of Trust, Substitution of Trustee and Amendment, dated as of January 12, 2016, by and among the Company as grantor, PRLAP, INC, as trustee, and Bank of America, N.A., as Administrative Agent for Bank of America, N.A., Citibank, N.A., Capital One, N.A., and SunTrust Bank, as Beneficiaries relating to real property partially located in the County of Frederick, Virginia and partially located in the City of Winchester, Virginia. Filed as Exhibit 4.7 to the Company‘s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference. 4.18Amended and Restated Deed of Trust, dated as of January 12, 2016, by and among the Company as grantor, First American Title Insurance Company, as trustee, and Bank of America, N.A., Citibank, N.A., Capital One, N.A., and SunTrust Bank, as Beneficiaries relating to real property located in the County of Fernley, Nevada. Filed as Exhibit 4.8 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference. 10.1Description of Management Compensatory Plans and Arrangements. Filed herewith. ** 10.2Trex Company, Inc. 2014 Stock Incentive Plan. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 and incorporated herein by reference. ** 10.3Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors. Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 and incorporated herein by reference. ** 10.4Form of Trex Company, Inc. 2014 Stock Incentive Plan Time-Based Restricted Stock Agreement. Filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and incorporated herein by reference. ** 10.5Form of Trex Company, Inc. 2014 Stock Incentive Plan Performance-Based Restricted Stock Agreement. Filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and incorporated herein by reference. ** 10.6Form of Trex Company, Inc. 2014 Stock Incentive Plan Stock Appreciation Rights Agreement. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 and incorporated herein by reference. **ExhibitNumberExhibit Description 10.7Form of Trex Company, Inc. 2014 Stock Incentive Plan Time-Based Restricted Stock Unit Agreement. Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 and incorporated herein by reference. ** 10.8Form of Trex Company, Inc. 2014 Stock Incentive Plan Performance-Based Restricted Stock Unit Agreement. Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 and incorporated herein by reference. ** 10.9Form of Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors Stock Appreciation Rights Agreement. Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 and incorporated herein by reference. ** 10.10Form of Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors Restricted Stock Agreement. Filed as Exhibit 10.10 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2011 and incorporated herein by reference. ** 10.11Form of Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors Restricted Stock Unit Agreement. Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 and incorporated herein by reference. ** 10.12Change in Control Severance Agreement dated May 6, 2015 by and between Trex Company, Inc. and James E. Cline. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 8, 2015 and incorporated herein by reference. ** 10.13Severance Agreement dated May 6, 2015 by and between Trex Company, Inc. and James E. Cline. Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 8, 2015 and incorporated herein by reference. ** 10.14Amendment and Restatement of Employment Agreement, dated as of July 24, 2012, between Trex Company, Inc. and Ronald W. Kaplan. Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and incorporated herein by reference. ** 10.15Amendment and Restatement of Change in Control Severance Agreement, dated as of August 3, 2011, between Trex Company, Inc. and Ronald W. Kaplan. Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 9, 2011 and incorporated herein by reference. ** 10.16Form of Change in Control Severance Agreement between Trex Company, Inc. and Officers other than the Chief Executive Officer. Filed herewith. ** 10.17Form of Severance Agreement between Trex Company, Inc. and Officers other than the Chief Executive Officer. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 and incorporated herein by reference. ** 10.18Retention Agreement, dated as of July 24, 2012, between Trex Company, Inc. and Ronald W. Kaplan. Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and incorporated herein by reference. ** 10.19Retention Agreement, dated as of July 24, 2012, between Trex Company, Inc. and James E. Cline. Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and incorporated herein by reference. ** 10.20Retention Agreement, dated as of July 24, 2012, between Trex Company, Inc. and William R. Gupp. Filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and incorporated herein by reference. *, **ExhibitNumberExhibit Description 10.21Retention Agreement, dated as of July 24, 2012, between Trex Company, Inc. and F. Timothy Reese. Filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and incorporated herein by reference. ** 10.22Form of Indemnity Agreement for Directors. Filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference. 10.23Form of Indemnity Agreement for Officers. Filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference. 10.24Form of Indemnity Agreement for Director/Officers. Filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference. 10.25Form of Distributor Agreement of Trex Company, Inc. Filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference. 10.26Form of Trex Company, Inc. Fencing Agreement for Installers/Retailers. Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 and incorporated herein by reference. 10.27Deed of Lease, dated June 15, 2000, between Trex Company, LLC and Space, LLC. Filed as Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference. 10.28Amendment, dated February 22, 2010, of Deed of Lease dated as of June 15, 2000, between Trex Company, Inc., as successor by merger to Trex Company, LLC, and TC.V.LLC, as successor to Space, LLC. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010 and incorporated herein by reference. 10.29Amendment, dated November 2, 2016, of Deed of Lease dated as of June 15, 2000, between Trex Company, Inc., as successor by merger to Trex Company, LLC, and TC.V.LLC as successor to Space, LLC. Filed herewith. 10.30Deed of Lease, dated as of July 27, 2005, between the Company and 1 Dulles Town Center, L.L.C. Filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and incorporated herein by reference. * 21Subsidiaries of the Company. Filed herewith. 23Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. Filed herewith. 31.1Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. Filed herewith. 31.2Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. Filed herewith. 32Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350). Furnished herewith.101.INSXBRL Instance Document. Filed.101.SCHXBRL Taxonomy Extension Schema Document. Filed.ExhibitNumberExhibit Description101.CALXBRL Taxonomy Extension Calculation Linkbase Document. Filed.101.DEFXBRL Taxonomy Extension Definition Linkbase Document. Filed.101.LABXBRL Taxonomy Extension Label Linkbase Document. Filed.101.PREXBRL Taxonomy Extension Presentation Linkbase Document. Filed.*Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.**Management contract or compensatory plan or agreement. Page F-2 F-3 F-4 F-5 F-6 F-7 Page F-28 Ernst & Young LLP,onAudited Consolidated Financial StatementsTheStockholders and the Board of Directors and Stockholders20162019 and 2015, and2018, the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included2019, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. referred to above present fairly, in all material respects, the consolidated financial position of Trexthe Company Inc. at December 31, 20162019 and 2015,2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016,2019, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.Trex Company, Inc.’sthe Company’s internal control over financial reporting as of December 31, 2016,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 21, 201724, 2020 expressed an unqualified opinion thereon.McLean,21, 2017 Year Ended December 31, 2016 2015 2014 (In thousands, except share and per share data) $ 479,616 $ 440,804 $ 391,660 292,521 285,935 251,464 187,095 154,869 140,196 83,140 77,463 72,370 103,955 77,406 67,826 1,125 619 878 102,830 76,787 66,948 34,983 28,689 25,427 $ 67,847 $ 48,098 $ 41,521 $ 2.31 $ 1.53 $ 1.28 29,394,559 31,350,542 32,319,649 $ 2.29 $ 1.52 $ 1.27 29,612,669 31,682,509 32,751,074 $ 67,847 $ 48,098 $ 41,521 $ $ $ ) ) $ $ $ $ $ $ $ $ $ $ $ $ December 31, 2016 2015 (In thousands) $ 18,664 $ 5,995 48,039 47,386 28,546 23,104 10,400 13,409 — 9,136 105,649 99,030 103,286 100,924 10,523 10,526 1,972 1,518 $ 221,430 $ 211,998 $ 10,767 $ 17,733 34,693 28,891 5,925 6,825 — 7,000 51,385 60,449 894 4,597 31,767 26,698 3,223 3,791 87,269 95,535 — — — — 349 348 120,082 116,947 187,242 119,395 (173,512 ) (120,227 ) 134,161 116,463 $ 221,430 $ 211,998 $ $ $ $ $ $ ) ) $ $ Common Stock Additional
Paid-In
Capital Retained
Earnings
(Deficit) Treasury Stock Total Shares Amount Shares Amount 33,475,614 $ 346 101,494 $ 29,776 1,122,510 $ (25,000 ) $ 106,616 — — — 41,521 — — 41,521 133,133 1 746 — — — 747 (36,610 ) — (3,189 ) — — — (3,189 ) 105,905 1 4,806 — — — 4,807 — — 12,883 — — — 12,883 (1,657,919 ) — — — 1,657,919 (50,000 ) (50,000 ) 32,020,123 348 116,740 71,297 2,780,429 (75,000 ) 113,385 — — — 48,098 — — 48,098 113,996 1 314 — — — 315 (115,453 ) (1 ) (8,085 ) — — — (8,086 ) 20,164 — 4,861 — — — 4,861 — — 3,117 — — — 3,117 (1,134,300 ) — — — 1,134,300 (45,227 ) (45,227 ) 30,904,530 348 $ 116,947 119,395 3,914,729 (120,227 ) 116,463 — — — 67,847 — — 67,847 79,175 1 279 — — — 280 (13,193 ) (1 ) (1,932 ) — — — (1,933 ) 8,992 1 4,788 — — — 4,789 (1,578,952 ) — — — 1,578,952 (53,285 ) (53,285 ) 29,400,552 $ 349 $ 120,082 $ 187,242 5,493,681 $ (173,512 ) $ 134,161
Capital
Earnings $ $ $ $ ) $ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) $ $ $ $ ) $ Year Ended December 31, 2016 2015 2014 (In thousands) $ 67,847 $ 48,098 $ 41,521 14,498 14,384 15,204 5,433 1,024 3,574 4,788 4,861 4,807 (185 ) 649 158 — (3,147 ) (12,898 ) (284 ) (271 ) (245 ) (653 ) (10,995 ) 867 (5,442 ) 643 (1,319 ) (4,256 ) 905 (624 ) (6,966 ) (2,317 ) 5,159 9,403 7,554 (7,535 ) 1,110 1,246 9,973 85,293 62,634 58,642 (14,551 ) (23,333 ) (12,974 ) 4,349 35 66 — (31 ) (44 ) — — 79 (10,202 ) (23,329 ) (12,873 ) (485 ) (3 ) (453 ) 242,700 225,500 143,000 (249,700 ) (218,500 ) (143,000 ) (55,216 ) (53,313 ) (53,189 ) 279 315 747 — 3,147 12,898 (62,422 ) (42,854 ) (39,997 ) 12,669 (3,549 ) 5,772 5,995 9,544 3,772 $ 18,664 $ 5,995 $ 9,544 $ 852 $ 625 $ 520 $ 28,626 $ 26,327 $ 11,919 $ $ $ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 172,250 201,000 ) ) ) ) ) ) ) ) ) ) $ $ $ $ $ $ $ $ $ 1. BUSINESS AND ORGANIZATION subsidiary,subsidiaries, the Company), a Delaware corporation, was incorporated on September 4, 1998. The Company manufacturesCompany’s principal business based on net sales is the manufacture and distributes wood/distribution of wood and plastic composite products, as well as related accessories, primarily for residential and commercial decking and railing applications. 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., the Company acquired certain assets and assumed certain liabilities of Staging Concepts Acquisition, LLC (SC Company) and thus expanded its markets to include the design, engineering and marketing of modular and architectural railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues. Additional information on the acquisition of SC Company is presented in Note 3. The principal executive offices are located at 160 Exeter Drive, Winchester, Virginia 22603, and the telephone number at that address is (540)a single2 reportable segment.segments, Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial).States andStates. The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, Trex Wood-Polymer Espana, S.L. (TWPE).Commercial Products, Inc. (Trex Commercial Products), from date of acquisition of July 31, 2017. Intercompany accounts and transactions have been eliminated in consolidation.TWPE was formed to hold the Company’s 35% equity interest in Denplax, S.A. (Denplax), a venture with a Spanish company responsible for public environmental programs in southern Spain and with an Italian equipment manufacturer. The venture was formed to recycle polyethylene at a facility in El Ejido, Spain. The Company’s investment in Denplax is accounted for using the equity method. During 2010, the Company determined that its investment in Denplax and a related note receivable were no longer recoverable and recorded a $2.4 million charge to earnings to fully reserve the equity investment and note. Both the equity investment and note remain fully reserved as of December 31, 2016.2016,2019, substantially all deposits are maintained in one1 financial institution. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to its cash and cash equivalents.carriedrecognized at the original invoice amount lessof revenue recognized on each shipment for Trex Residential products and for satisfied performance obligations for Trex Commercialestimate made forunconditional right to consideration from the customer and payment discounts and doubtful accounts. is due based solely on the passage of time.no0 material valuation allowance recorded as of December 31, 20162019 and 2015.2016, 20152019, 2018 and 2014,2017, sales to certain customers of Trex Residential accounted for 10% or more of the Company’s total net sales. For the year ended December 31, 2016, two 2019,the CompanyTrex Residential represented approximately 39%57% of the Company’s total net sales. For the year ended December 31, 2015, one customer2018,Company represented approximately 27% of the Company’s total net sales. For the year ended December 31, 2014, one customer2017,Company represented approximately 24% of the Company’s total net sales. At December 31, 2016, four2019, 3 customers of Trex Residential represented 30%, 16%, 14%,24% and 13%10%, respectively, of the Company’s total accounts receivable balance.Approximately35%, and 38%respectively, of the Company’s materials purchases for the years ended December 31, 2016, 2015 and 2014, respectively,at Trex Residential were purchased from its four4 largest suppliers. (last-in, or market value.and market. The Company periodically reviews its inventory for slow moving or obsolete items and writes down the related products to estimated realizable value. The Company’s reserves for estimated slow moving products or obsolescence are not material. At December 31, 2016,2019, the excess of the replacement cost of inventory over the LIFO value of inventory was approximately $21.4$19.1 million. Due to the nature of the LIFO valuation methodology, liquidations of inventories will result in a portion of the Company’s cost of sales being based on historical rather than current year costs. Contract Termination CostsThe Company leases 55,047 square feet of office and storage space in Dulles, Virginia, 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 future sublease receipts are less than the remaining minimum lease payment obligations under the Company’s lease. Accordingly, the Company has recorded a liability for the present value of the shortfall.and the 2011 purchase of the assets of the Iron Deck Corporation.Corporation, and the 2017 purchase of certain assets and the assumption of certain liabilities of SC Company. The Company evaluates the recoverability of goodwill in accordance with Accounting Standard Codification Topic 350, “unitunits is less than itsthe carrying amount to determine if it should proceed with the evaluation of goodwill for impairment. The Company identified its reporting units based on the way it manages its operating segments. Each reporting unit constitutes a business with discrete financial information and operating segment management, at a level below the Company’s chief operating decision maker, regularly reviews the operating results of the reporting unit. The Company assigned goodwill to the reporting units based on the excess of the fair values acquired over the fair value of the sum of the individual assets acquired and liabilities assumed that were assigned to the reporting units. If the Company proceeds with theunitunits based on a present value of future discounted cash flows and a market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the reporting unit is expected to generate in the future. Significant estimates in the discounted cash flows model include: the weighted average cost of capital; long-term rate of growth and profitability of the business; and working capital effects. The market valuation approach2016, 20152019, 2018 and 2014,2017, the Company completed its annual impairment test of goodwill utilizing the qualitative assessment and noted no impairment.concluded it was not more likely than 0t that the fair value of the reporting units was less than the carrying amounts. The Company performs the annual impairment testing of its goodwill as of2016,2019, the Company had goodwill of $10.5$68.5 million that is reviewed annually for impairment.on a quarterly basis based on the differences between actual experience and historical estimates.recognizesdetermined the appropriate revenue recognition for its contracts with customers by analyzing the type, terms and conditions of the contracts with customers. Topic 606 provides a single, comprehensive model for revenue recognition arising from contracts with customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when titleor as the Company satisfies the performance obligation. Revenue is transferredrecognized at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring control of the goods or services to a customer. Adoption of Topic 606 did not have an impact on the Company’s financial condition or results of operations. The following provides additional information about the Company’s contracts with customers.generally upona 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 and recognized when the product ships and the performance obligation is satisfied.does not grant contractual product return rights to customers other than pursuant toreviews and updates its product warranty. The Company does not expect future product returns to be materialestimates regularly and consequently, does not maintain an allowance for product returns.The Company records all shipping and handling feesrecognizes adjustments in sales and records allestimated profit on contracts under the cumulativerelated costs in cost of sales. The Company offers sales incentive programsadjustment on revenue and estimated profit to dealers and distributors, including rebates, pricing discounts, favorable payment terms and cooperative advertising, many of which result in cash consideration made to dealers and distributors. The Company accounts for consideration made pursuant to these programs in accordance with accounting guidance that governs consideration given bydate on a vendor to a customer. With the exception of cooperative advertising, the Company classifies sales incentives as a reduction in revenue in “Net sales.” Sales incentives are recordedcontract is recognized in the period the adjustment is identified. Revenues and profits in which theyfuture periods are earned by customers. The Company’s cooperative advertising program meetsrecognized using the requirements for exclusion from net sales andadjusted estimate. If at any time the costs are recorded as expenses in “Selling, general and administrative expenses”estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the accompanyingperiod it is identified. During the year ended December 31, 2019, no adjustment to any one contract was material to the Company’s Consolidated Financial Statements of Comprehensive Income. Cooperative advertising costs are expensed as incurred.2016,2019, the Company has a valuation allowance of $4.1$2016, 20152019, 2018 and 2014,2017, research and development costs were $3.7$4.5 million, $1.5$4.2 million, and $2.3$3.8 million, respectively, and have been included in “Selling, general and administrative expenses” in the accompanying Consolidated Statements of Comprehensive Income.Significant productionProduction costs are deferred and recognized as expense in the period that the related advertisement is first used. At December 31, 2016 and December 31, 2015, $2.42019 $0.5 million and $0.8 million, respectively, werewas included in prepaid expenses for production costs.2016, 20152019, 2018 and 2014,2017, branding expenses, including advertising expenses as described above, were $24.8$35.7 million, $23.4$35.0 million, and $20.8$31.0 million, respectively.20162019 and 2015.November 2015,June 2018, the Financial Accounting Standards BoardFASB issued Accounting Standards Update (ASU)ASU No. 2015-17, Income TaxesCompensation—Stock Compensation (Topic 740): Balance Sheet Classification of Deferred Taxes718).” The standard requires that all deferred tax assetsASU expands the scope of Topic 718, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods or services. The ASU supersedes Subtopicliabilities for a particular tax-paying component of an entity and within a particular tax jurisdiction, along with any valuation allowance,employees will be offset and classified as a single noncurrent deferred tax asset or liability regardless of their nature or expected timing of reversal or recovery.substantially aligned. The standard may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively. The standard isASU was effective for fiscal years beginning after December 15, 2016,2018, including interim periods within thosethat fiscal years. Early adoption is permitted.year. The Company elected to early adoptadopted the standard in the quarterly period ended December 31, 2016. The Company applied the standard prospectively in the fourth quarter of fiscal 2016 and, accordingly, prior periods wereguidance on January 1, 2019. Adoption did not adjusted. Adoption of the standard will nothave an impact on the Company’s financial debt covenantscondition or restrictions, and deferred tax assets and deferred tax liabilities are no longer reported in current assets or current liabilities.MarchFebruary 2016, the FASB issued ASU No. 2016-09, Compensation – Stock CompensationLeases (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 is 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 Company recorded a tax benefit of $1.7 million within income tax expense related to the 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. The Company applied this guidance prospectively as of January 1, 2016 and, accordingly, data for the prior years ended December 31, 2015 and 2014 were not adjusted. Prior to adoption this amount would have been recorded as an increase in additional paid-in capital. Going forward, this change could create volatility in the Company’s effective tax rate.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 StatementsExcess 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. As the Company applied this guidance prospectively as of January 1, 2016, excess tax benefits for the years ended December 31, 2015 and December 31, 2014 were not adjusted and continue to be reported in financing activities in the Consolidated Statements of Cash Flows.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 currently presents 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. Data reported in Note 14, “Interim Financial Data (Unaudited)842),“for net income, diluted net income per share and diluted weighted average common shares outstanding for the each quarterly period in the fiscal year ended December 31, 2016, reflect adoption of the new standard.New Accounting Standards Not Yet AdoptedIn May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” and issued subsequent amendments to the initial guidance in August 2015January 2018 within ASU 2015-14,No.20162019 within ASU 2016-08, in April 2016 within ASU 2016-10, and in May 2016 within ASU 2016-12 (collectively,No.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 at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. The Company intends to adopt the new standard in the first quarterly period 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 does not believe adoption of the new standard will have a material impact on its Consolidated Statements of Comprehensive Income, but expects expanded financial statement footnote disclosure. TheCompany is continuing to evaluate the impacts of the pending adoption. As such, the Company’s preliminary assessments are subject to change.In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires lessees to recognize operating leases on the balance sheet as aliability, other than leases that meet the definition of a short-term lease.liability. The liability will beis equal to the present value of the lease payments.payments over the remaining lease term. The asset will beis based on the liability, subject to adjustment. For income statement purposes, the leases will continue to be classified as either operating or finance.certain adjustments. Operating leases will result in straight-line expense (similar to current operating leases)expense. The Company adopted the standard on January 1, 2019, 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 usingelected the modified retrospective transition method and provides forof adoption that allowed the optionCompany to apply the standard as of the beginning of the period of adoption. The Company opted to elect athe package of practical expedients upon adoption. Theto not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs, and certain otherintends to adoptdid not elect the standardpractical expedient under which the lease components would not be separated from the nonlease components. Nonlease components include certain maintenance services provided by the lessor and the related consideration is specified on a stand-alone basis in the first quarterly period of fiscal 2019, and is currently assessing the impact of adoptionapplicable lease agreements. Adoption of the standard on its consolidated financial statements and related note disclosures. The Company has not made any decisionhad a significant impact on the optionCompany’s condensed consolidated balance sheet due to elect adoptionthe recognition of apractical expedients.2016,2018, the FASB issued ASU No. 2016-15, StatementIntangibles—Goodwill andCash flows (Topic 230): ClassificationFASB Emerging Issues Task Force)”. The new guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for anCertain Cash Receiptsthe costs and Cash Payments.”the project stage during which they are incurred. Capitalized implementation costs are amortized over the term of the associated hosted cloud computing arrangement service contract on a straight-line basis, unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from its right to access the hosted software. Capitalized implementation costs would then be assessed for impairment in a manner similar to long-lived assets. The new guidance is intended to reduce diversity in practice across all industries in how certain transactions are classified in the statement of cash flows. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017,2019, and interim periods within those fiscal years. Early adoption is permitted. Entities can choose to adopt the new guidance either prospectively to eligible costs incurred on or after the date the guidance is first applied or retrospectively. The Company will adopt the guidance on January 1, 2020, and has determined that adoption will not have a material impact on its financial condition or results of operations.applicationan entity to recognize its current estimate of all expected credit losses, rather than incurred losses, and applies to trade receivables and other receivables. The CECL model is designed to capture expected credit losses through the establishment of an allowance account, which will be presented as an offset to the amortized cost basis of the related financial asset. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is applied using the modified-retrospective approach. The Company will adopt the guidance on January 1, 2020. The Company has determined that adoption will not have a material impact on its financial condition or results of operations.retrospective translation method.combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, “is assessingbelieves that the impactfair values assigned to the assets acquired and liabilities assumedadoptionoperations include the operating results of the new standard on its consolidated financial statements and related note disclosures.ReclassificationsCertain prior year amounts have been reclassified to conformacquired business from the date of acquisition.current year presentation.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 was amortized and deductible for tax purposes in 2019, 2018 and 2017 was $3.9 million, $3.9 million and $1.6 million, respectively. Primarily all of the goodwill was recorded to Trex Commercial.3.(atat LIFO value)value consist of the following as of December 31 (in thousands): 2016 2015 $ 29,686 $ 24,961 20,231 21,384 49,917 46,345 (21,371 ) (23,241 ) $ 28,546 $ 23,104 $ $ Total FIFO inventories ) ) $ $ net realizable value.market. The Company periodically reviews its inventory for slow moving or obsolete items and writes down the related products to estimated net realizable value.no0 material inventory reduction during 2016. There was an inventory reduction in 2015. However,2019 or 2018.impact on the Company’s costFIFO method of sales was not material due the fact that the historical costs expensed during 2015 closely approximated the current year costs.4. 2016 2015 $ 6,209 $ 1,897 4,024 5,134 — 6,154 167 224 $ 10,400 $ 13,409 $ $ $ $ 2015,2019 and 2018, intangible assets held for sale consistedwere $6.3 million, net of assets at the idle Olive Branch, Mississippi facility (Olive Branch assets) consistingaccumulated amortization of land$0.7 million and buildings and measured at the lower of their carrying amount or fair value less cost to sell. Fair value was$0.3 million, respectively. Intangible asset amounts were determined using the Level 3 fair value hierarchy classification and was based on management’s best estimate of market participants’ pricingthe estimated economics of the asset and are amortized over the estimated useful lives on a straight-line basis over 15 years, which approximates the pattern in which the economic benefits are expected to be received. The Company evaluates the recoverability of intangible assets including input from brokerperiodically and industry specialists,considers events or circumstances that may warrant revised estimates of useful lives or that may indicate an impairment. Intangible asset amortization expense for the years ended December 31, 2019 and consideredDecember 31, 2018, was $0.4 million and $3.1 million, respectively.conditionyear ended December 31, 2018 included amortization expense for customer backlog and trade names and trademarks, which were fully amortized as of the assets.December 31, 2018.5. 2016 2015 $ 47,859 $ 47,209 223,450 210,880 2,710 2,221 10,167 7,607 10,481 9,575 4,172 11,032 11,417 8,532 310,256 297,056 (206,970 ) (196,132 ) $ 103,286 $ 100,924 $ $ ) ) $ $ 20162019 of approximately $4.2$59.3 million. The Company expects that the construction in process will be completed and put into service in the year ending December 31, 2017.2016, 2015,2019, 2018, and 20142017 totaled $14.2$13.6 million, $14.3$13.4 million, and $14.8$14.7 million, respectively.During December 2015, the Company reclassified the Olive Branch assets from “Property, plant and equipment, net,” to assets held for sale in “Prepaidassets” in the Consolidated Balance Sheet. The transfer to a held for sale category was due to the signing of letters of intent to sell certain of the Olive Branch assets. Upon transfer during December 2015, the Company measured the Olive Branch assets at the lower of their carrying amount or fair value less cost to sell, and recognized a loss of $0.5 million, which is reported in “Selling, general and administrative expenses” in the Consolidated Statements of Comprehensive Income for the year ended December 31, 2015. In January 2016, the Company sold a portion of the Olive Branch facility that contained the buildings for $4.2 million and recognized a $0.1 million gain on sale, which is reported in “Selling, general and administrative expenses” in the Consolidated Statements of Comprehensive Income. As of December 31, 2016, the Company continues to own approximately 62 acres of undeveloped land that is reported in “Property, plant and equipment, net” in the Consolidated Balance Sheet.6.ACCRUED EXPENSESAccrued expensesliabilities consist of the following as of December 31 (in thousands): 2016 2015 $ 16,707 $ 11,928 13,298 11,217 1,799 1,732 632 664 2,257 3,350 $ 34,693 $ 28,891 $ $ $ $ 7.2016,2019 and 2018, the Company had no0 outstanding indebtedness. Available borrowing capacity at December 31, 2016,2019, was $200 million. At December 31, 2015,had $7.0 millionas borrower, Trex Commercial Products, Inc. (TCP), as guarantor; Bank of outstanding indebtedness,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; SunTrust Bank (SunTrust); and Branch Banking and Trust Company (BB&T) (each, a Lender and collectively, the interest rate on the revolving credit facility was 1.39%.Revolving Credit FacilityIndebtedness after December 31, 2015. On January 12, 2016, the CompanyLenders), arranged by BOA Securities, Inc., as Sole Lead Arranger and Sole Bookrunner, entered into a ThirdFourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) to amend and also the First Amendment torestate the Third Amended and Restated Credit Agreement (together, the Thirddated as of January 12, 2016, as amended (Third Amended Credit Agreement) with Bank of America, N.A. (BOA), by and among the Company, as Lender,borrower; BOA, as a lender, Administrative Agent, Swing Line Lender and Letter of CreditL/C Issuer; and certain other lenders including Citibank,CitiBank, N.A., (Citi); Capital One, N.A., (Capital One); and SunTrust, Bank (collectively, Lenders) arranged byeach as a lender; and Bank of America Merrill Lynch, as Sole Lead Arranger and Sole Bookrunner. The Thirdamendedthe Lenders agreed to provide the Company with one or more Revolving Loans in a collective maximum principal amount of $restateda maximum principal amount of $Second Amended Credit Agreement.Underterm, which ends November 5, 2024 (Term). Previously, under the Third Amended Credit Agreement, the Lenders agreeBOA, Citi, Capital One and SunTrust agreed to provide the Company with one or more 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 endswould have ended on January 12, 2021 if not replaced by the Fourth Amended Credit Agreement.arewere sublimits for a letter of credit facility in an amount not to exceed $15 million and swing line loans in an aggregate principal amount at any time outstanding not to exceed $5 million. The revolving loans, the letter of credit facility and the swing line loans arewere for the purpose of funding working capital needs and supporting general business operations. Additionally, within the Revolving Loan Limit, the Company could borrow, repay, and reborrow, at any time or from time to time while the Third Amended Credit Agreement iswas in effect.hashad the option to select interest rates for each loan request at the Base Rate or Eurodollar Rate. Base rate loans under the revolving loans and the swing line loans accrueaccrued interest at the Base Rate plus the Applicable Rate. Eurodollar Rate Loans for the revolving loans and swing line loans accrueaccrued interest at the Adjusted London InterBank Offered Rate plus the Applicable Rate. The Base Rate for any day iswas 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 Eurodollar Rate plus 1.0%. Repayment of all then outstanding principal, interest, fees and costs iswould have been due onJanuary 12, 2021.The Company shall reimburse BOA for all amounts payable, including interest, under a letter of credit at the earlier of (i) the date set forth in the application, or (ii) one business day after the payment under such letter of credit by BOA.iswas secured by property with respect to which liens in favor of the Administrative Agent, for the benefit of itself and the other holders of the obligations, arewere purported to be grantedIndebtedness through December 31, 2015. On November 20, 2014, the Company entered into a Second Amended and Restated Credit Agreement (Second Amended Credit Agreement) with Branch Banking and Trust Company (BB&T), as a Lender, Administrative Agent, Swing Line Lender and Letter of Credit Issuer; Citibank, N.A. and Bank of America, N.A., each as a Lender, and BB&T Capital Markets, as Lead Arranger. The Second Amended Credit Agreement amended and restated the Amended and Restated Credit Agreement (Prior Credit Agreement) dated as of January 6, 2012 by and among the Company, as borrower; BB&T as Lender, Administrative Agent, Swing Line Lender, Letter of Credit Issuer and a Collateral Agent; Wells Fargo Capital Finance, LLC, as a Lender and a Collateral Agent; and BB&T Capital Markets, as Lead Arranger, and as further amended. Under the Prior Credit Agreement, BB&T and Wells Fargo provided the Company with one or more revolving loans in a collective maximum principal amount of $100 million. The Second Amended Credit Agreement terminated the Revolver Notes and Swing Advance Notes under the Prior Credit Agreement. No additional fees were due or owing as a result of the termination of the aforementioned agreements.The Second Amended Credit Agreement provided the Company with one or more revolving loans in a collective maximum principal amount of $150 million from January 1 through June 30 of each year and a maximum principal amount of $100 million from July 1 through December 31 of each year (Revolving Loan Limit) throughout the term of November 20, 2019.Included within the Revolving Loan Limit were sublimits for a letter of credit facility in an amount not to exceed $15 million and swing advances in an aggregate principal amount at any time outstanding not to exceed $5 million. The Revolver Loans, the Letter of Credit Facility and the Swing Advance loans were for the purpose of raising working capital and supporting general business operations. The Company was not obligated to borrow any amount under the Revolving Loan Limit. Additionally, within the Revolving Loan Limit, the Company could borrow, repay, and reborrow, at any time or from time to time while the Second Amended Credit Agreement is in effect.Base Rate Advances (as defined in the Second Amended Credit Agreement) under the Revolver Loans and the Swing Advances accrued interest at the Base Rate plus the Applicable Margin (as defined in the Second Amended Credit Agreement) and Euro-dollar Advances for the Revolver Loans and Swing Advances accrued interest at the Adjusted London InterBank Offered Rate plus the Applicable Margin (as defined in the Second Amended Credit Agreement).The Company was required to reimburse BB&T for all amounts payable, including interest, under a Letter of Credit at the earlier of (i) the date set forth in the application, or (ii) one business day after the payment under such Letter of Credit by BB&T.The Second Amended Credit Agreement was secured by interest in real property owned by us and certain collateral (as described in the Second Amended and Restated Security Agreement and Intellectual Property Security Agreement)..The Company’s abilitymake scheduled principal and interest payments, borrow and repay amounts under any outstanding revolving credit facility and continue to comply with any loan covenants depends primarily on its ability to generate sufficient cash flows from operations. To remain in compliance with financial covenants,the terms of the Fourth Amended Credit Agreement, the Company is required to maintain specified financial ratios based on levels of debt, fixed charges, and earnings (excluding extraordinary gains and extraordinary non-cash losses) before interest, taxes, depreciation and amortization, all of which are subject to the risks of the business, some of which are discussed in this report under “Risk Factors.” The material financial covenants and restrictions do not permit the Company’s fixed charge coverage ratio to be less than 1.5 to 1.0 and do not permit the Company’s consolidated debt to consolidated EBITDA ratio to exceed 3.0 to 1.0, measured asof the end of each fiscal quarter (and in the case of Consolidated EBITDA, for the four-quarter period ending on such date).certain loan compliance covenants. The Company was in compliance with all covenants contained in the Third Amended Credit Agreement atas of December 31, 2016.2019. Failure to comply with the financial covenants could be considered a default of repayment obligations and, among other remedies, could accelerate payment of any amounts outstanding.8.10.LEASES $ $ $ $ $ $ ) $ $ $ 11. FINANCIAL INSTRUMENTS 12. STOCKHOLDERS’ EQUITY Year Ended December 31, 2016 2015 2014 $ 67,847 $ 48,098 $ 41,521 29,394,559 31,350,542 32,319,649 125,119 197,299 262,730 92,991 134,668 168,695 29,612,669 31,682,509 32,751,074 $ 2.31 $ 1.53 $ 1.28 $ 2.29 $ 1.52 $ 1.27 $ $ $ $ $ $ $ $ Year Ended December 31, 2016 2015 2014 12 501 2,633 4,631 5,828 1,969 Programs19, 2014,16, 2018, the Board of Directors authorized a commonadopted new stock repurchase program of up to $505.8 million shares of the Company’s outstanding common stock (February 2014 Stock Repurchase Program). This authorization had no expiration date. During 2014, the Company repurchased 1,657,919 shares for $50.0 million, which completed the authorization under the February 2014 Stock Repurchase Program.On October 23, 2014, the Board of Directors authorized a common stock repurchase program of up to 2.0 million shares of the Company’s outstanding common stock (October 2014 Stock Repurchase Program). This authorization had no expiration date. During 2015, the Company repurchased 1,134,300 shares for $45.2 million under the October 2014 Stock Repurchase Program. On October 22, 2015, the Board of Directors terminated the October 2014 Stock Repurchase Program and adopted a new stock repurchase program of up to 3.15 million shares of the Company’s outstanding common stock (October 2015 Stock Repurchase Program). This authorization terminated on December 31, 2016. During 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 2.961 million shares of the Company’s outstanding common stock (February 2017 Stock(Stock Repurchase Program). As of the date of this report, the Company has made no repurchasesrepurchased 959,380 shares under the February 2017 Stock Repurchase Program.9.13.REVENUE FROM CONTRACTS WITH CUSTOMERS
Residential
Commercial
contracts $ $ $ $ $ $
Residential
Commercial
contracts $ $ $ $ $ $
Residential
Commercial
contracts $ $ $ $ $ $ 6,420,000.In 2014, the Company began granting performance-based restricted stock in addition to the time-based restricted stock it previously granted. The performance-based restricted shares have a three-year vesting period, vesting one-third each year based on target earnings before interest, taxes, depreciation and amortization for 1 year, cumulative 2 years and cumulative 3 years, respectively. The number of shares that vest, with respect to each vesting, will be between 0% and 200% of the target number of shares.In 2015, the Company began issuing restricted stock units in lieu of restricted stock. Accordingly, time-based restricted stock units replaced time-based restricted stock and performance-based restricted stock units replaced performance-based restricted stock. The vesting terms of the restricted stock units are identical to the vesting provisions of the restricted stock.for the years ended December 31, 2016, 2015 and 2014 (in thousands): Year Ended December 31, 2016 2015 2014 $ 2,281 $ 2,704 $ 2,974 2,210 1,562 727 184 525 1,035 113 70 71 $ 4,788 $ 4,861 $ 4,807 $ $ $ $ $ $ 2016, 20152019, 2018 and 20142017 was $1.7$6.0 million, $9.8$5.1 million, and $3.9$5.5 million, respectively. At December 31, 2016,2019, there was $1.5$3.2 million of total compensation expense related to unvested1.62 years. Time-based
Restricted Stock Weighted-Average
Grant Price
Per Share 382,974 $ 13.78 66,511 $ 32.70 (116,641 ) $ 33.73 (3,282 ) $ 16.61 329,562 $ 18.89 57,598 $ 43.81 (230,704 ) $ 42.37 (48,549 ) $ 20.20 107,907 $ 29.43 57,874 $ 37.64 (43,848 ) $ 42.34 (133 ) $ 43.89 121,800 $ 31.59
Restricted Stock
and Restricted
Stock Unit
Grant Price
Per Share $ $ ) $ ) $ $ $ ) $ ) $ $ $ ) $ ) $ $ 20162019, 2018, and 2015,2017 there was $1.2$0.8 million, $1.6 million, and $0.6$1.8 million, respectively, of total compensation expense related to unvested performance-based restricted stock and unvested performance-based restricted stock units remaining to be recognized over a weighted-average period of approximately 2.01.7 years. Performance-based
Restricted Stock and
Performance-based
Restricted Stock
Units Weighted-Average
Grant Price
Per Share 42,676 $ 33.72 34,638 $ 43.89 (35,679 ) $ 41.91 (12,538 ) $ 38.12 29,097 $ 39.38 44,925 $ 35.83 (14,949 ) $ 35.71 (657 ) $ 33.72 58,416 $ 36.63
Restricted Stock and
Performance-based
Restricted Stock
Units
Grant Price
Per Share $ $ ) $ $ $ $ ) $ $ $ $ ) $ ) $ $ 2016,2019, there was no$0.4 million of unrecognized compensation cost related to SARs. The fair value of each SAR is estimated on the date of grant using amodel. There were no SARs issued in the year ended December 31, 2016.model20152019, December 31, 2018 and 2014,December 31, 2017, respectively, the assumptions shown in the following table were used: December 31, 2015 2014 0 % 0 % 1.6 % 1.7 % 5 5 42.9 % 52.6 % % % % % % % % % % yearyears ended December 31, 20152019, December 31, 2018 and December 31, 2017 had a maximum term of ten years. The Company used historical exercise behavior with further consideration given to the class of employees to whom the equity awards were granted to estimate the expected term of the SAR.The Company recognizes forfeitures as they occur.20152019, December 31, 2018 and 2014December 31, 2017 was $16.26,$29.56, $22.09 and $17.78,$13.99, respectively. SARs Weighted-Average
Grant Price
Per Share Weighted-
Average
Remaining
Contractual
Life (Years) Aggregate
Intrinsic
Value as of
December 31,
2016 739,194 $ 12.93 3,866 $ 37.88 (218,826 ) $ 10.96 (8,404 ) $ 4.74 515,830 $ 13.98 15,585 $ 41.19 (263,626 ) $ 13.86 (5,712 ) $ 21.94 262,077 $ 13.13 — $ — (124,352 ) $ 11.09 — $ — 137,725 $ 19.57 5.6 $ 6,174,886 127,469 $ 17.83 5.4 $ 5,936,639 127,469 $ 17.83 5.4 $ 5,936,639
Grant Price
Per Share
Average
Remaining
Contractual
Life (Years)
Intrinsic
Value as of
December 31,
2019 $ $ ) $ $ $ $ ) $ $ $ $ ) $ ) $ $ $ $ $ $ $ 600,000.1,200,000. Through December 31, 2016,2019, employees had purchased approximately 422,687891,065 shares under the plan.Stock OptionsStock options are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. These awards expire ten years after the date of grant and vest based on the terms of the individual awards. The options are generally forfeitable upon termination of a holder’s service as an employee or director, unless the individual’s service is terminated due to retirement, death or permanent disability. The fair value of each stock option award is estimated on the date of grant using a Black-Scholes option-pricing model. The Company recognizes compensation cost on a straight-line basis over the vesting period for the award. All outstanding options were exercised during fiscal 2015 and there were no stock options outstanding at December 31, 2015 and 2016.Stock option activity under the Plan and all predecessor stock incentive plans is as follows: Options Weighted-Average
Exercise Price
Per Share 42,288 $ 20.05 — $ — (27,942 ) $ 35.73 (1,188 ) $ 17.92 13,158 $ 23.36 — $ — (13,158 ) $ 50.37 — $ — — $ — 10.LEASESThe Company leases office space, storage warehouses and certain office and plant equipment under various operating leases. Minimum annual payments under these non-cancelable leases as of December 31, 2016 were as follows (in thousands): $ 9,606 9,271 8,205 6,477 6,170 18,659 $ 58,388 For the years ended December 31, 2016, 2015 and 2014, the Company recognized rental expenses of approximately $9.9 million, $7.7 million and $7.5 million, respectively.For information related to the Company’s reconsidered corporate headquarters lease agreement, see Note 13.11.15.EMPLOYEE BENEFIT PLANS atwo 401(k) Profit Sharing PlanPlans for the benefit of allits employees who meet certain eligibility requirements. The plan covers substantially all of the Company’s full-time employees. The plan documents provide for the Company to match contributions equal to 100% of an employee’s contribution to the plan up to 6% of base salary.requirements and it matches qualifying employee contributions. The Company’s contributions to the planplans totaled $2.5$4.6 million, $2.2$4.2 million, and $2.0$3.0 million for the years ended December 31, 2016, 20152019, 2018 and 2014.12. for the years ended December 31, 2016, 2015 and 2014 consists of the following (in thousands): Year Ended December 31, 2016 2015 2014 $ 26,752 $ 25,105 $ 18,722 2,798 2,560 3,131 29,550 27,665 21,853 5,217 987 3,118 216 37 456 5,433 1,024 3,574 $ 34,983 $ 28,689 $ 25,427 $ $ $ ) $ $ $ Year Ended December 31, 2016 2015 2014 $ 35,990 $ 26,876 $ 23,432 3,747 2,806 2,856 396 1,308 249 (1,749 ) — — (2,740 ) (2,262 ) (1,117 ) (488 ) (328 ) (214 ) (173 ) 289 221 $ 34,983 $ 28,689 $ 25,427 $ $ $ ) ) ) ) ) ) ) ) ) ) $ $ $ as of December 31, 2016 and 2015 consist of the following (in thousands): As of December 31, 2016 2015 $ 93 $ 138 14,510 12,904 2,186 1,554 2,261 6,195 5,785 4,406 4,020 4,350 28,855 29,547 (4,061 ) (4,582 ) 24,794 24,965 (25,688 ) (20,426 ) (25,688 ) (20,426 ) $ (894 ) $ 4,539 $ $ — ) ) ) ) Operating lease right-of-use asset ) — ) ) ) ) ) ) $ ) $ ) 2016,2019, the Company had a valuation allowance of $4.1$3.0 million against deferred tax assets it estimates will not be realized. The Company will analyze its position in subsequent reporting periods, considering all available positive and negative evidence, in determining the expected realization of its deferred tax assets.In 2016, the Company adopted ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” and, accordingly, recognizes excess tax benefits for stock-based awards within income tax expense when realized. The Company applied the guidance in the new standard prospectively as of January 1, 2016. Excess tax benefits for the years ended December 31, 2015 and 2014 are recorded in additional paid-in-capital. $1.7$2016.2016,2019, the Company has identified no not2016,2019 Federal tax years 20132016 through 20162019 remain subject to examination. The Company’s returns filed with the state of Oregon for the tax years 2015 through 2017 are currently under examination. No material adjustments are13.
(Loss)
and
Amortization
Expense
(Benefit)
Expenditures $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ ) ) ) $ $ $ $ $ $ $
(Loss)
(Income)
Expense, Net
Expense
(Benefit)
and
Amortization $ $ ) $ $ $ ) $ $ ) $ $ $ $ $ (192 ) $ $ $ $ $ (192 ) $ $ $ $ $ $ $ $ (2,284 ) (1,120 ) (1,272 ) $ $ $ $ $ 18. SEASONALITY 19. COMMITMENTS AND CONTINGENCIES 2016,2019, the Company purchased substantially all of its reclaimed wood fiber requirements under purchase orders which do not involve long-term supply commitments. All of the Company’s scrap polyethylene, aluminum and stainless steel purchases are under short-term supply contracts that may average approximately2016,2019, the Company has purchase commitments under material supply contracts of $20.2$26.8 million, $3.2 million, $0.35 million and $0.05$6.2 million for the years ending December 31, 2017, 2018, 20192020 and 2020, respectively.Contract Termination CostsThe Company leases 55,047 square feet2021, respectively, and a total of office and storage space in Dulles, Virginia, that it does not occupy, but has sublet all of the office space$0.1 million for the remainder of the term of its lease obligation, which ends June 30, 2019. The future sublease receipts are less than the remaining minimum lease payment obligations under the Company’s lease. Accordingly, the Company has recorded a liability for the present value of the shortfall.As of December 31, 2016, the minimum payments remaining under the Company’s lease over the years ending December 31, 2017, 2018,2022 and 2019 are $1.9 million, $2.0 million, and $1.0 million, respectively. The net minimum receipts remaining under the Company’s existing subleases over the years ending December 31, 2017, 2018, and 2019 are $1.3 million, $1.3 million, and $0.7 million, respectively.The following table provides information about the Company’s liability under the lease (in thousands): 2016 2015 $ 2,106 $ 3,033 (691 ) (1,352 ) 145 220 (85 ) 205 $ 1,475 $ 2,106 Signature™ SignatureAdditionally, 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.20162019, was slightly lower than the Company’s expectations for 2019 and the number of claims received in the year ended December 31, 2015,2018, continuing the historical year-over-year decline in incoming claims, butclaims. Average settlement cost per claim experienced in 2019 wasexpectations. Also,expectations for 2019 and the average settlement cost per claim experienced in the year ended December 31, 2016 was higher than the average settlement cost per claim experienced during the year ended December 31, 2015 and higher than the Company’s expectation for 2016. As a result and after actuarial review, the Company revised its estimate and recorded2018 due to an increase toin larger claims settled and changes in the warrantymix of settlement methods. The Company believes its reserve of $9.8 million during the third quarter of 2016. Based on the facts and circumstances at December 31, 2016, the Company believes its reserve2019 is sufficient to cover future surface flaking obligations. The Company notes that its annual cash outflows for surface flaking claims declined by $1.5 million, or 21%,obligations and no adjustments were required in 2016 compared to 2015, and declined by $1.7 million, or 19%, in 2015 compared to 2014.$3.4$1.9 million change in the surface flaking warranty reserve.that represents amounts accrued for surface flaking claims (in thousands): 2016 2015 $ 29,673 $ 31,419 9,835 5,426 (5,661 ) (7,172 ) $ 33,847 $ 29,673 The remainder of the Company’s warranty reserve represents amounts accrued for non-surface flaking claims.
Flaking
Residential $ $ $ ) ) ) $ $ $
Flaking
Residential $ $ $ ) ) ) $ $ $ 14.20.INTERIM FINANCIAL DATA (Unaudited) Three Months Ended December 31,
2016 September 30,
2016 June 30,
2016 March 31,
2016 December 31,
2015 September 30,
2015 June 30,
2015 March 31,
2015
2019
2019
2019
2019
2018
2018
2018
2018 (In thousands, except share and per share data) 95,322 106,168 146,450 131,676 89,202 94,023 136,779 120,800 $ $ $ $ $ $ $ $ 38,113 29,945 61,410 57,627 31,955 22,143 52,524 48,247 $ $ $ $ $ $ $ $ 12,629 7,787 23,725 23,706 8,086 3,744 18,715 17,553 $ $ $ $ $ $ $ $ $ 0.43 $ 0.27 $ 0.81 $ 0.80 $ 0.26 $ 0.12 $ 0.59 $ 0.55 $ $ $ $ $ $ $ $ 29,318,915 29,295,284 29,264,362 29,697,722 30,766,943 31,227,643 31,735,333 31,683,672 $ 0.43 $ 0.26 $ 0.80 $ 0.79 $ 0.26 $ 0.12 $ 0.58 $ 0.55 $ $ $ $ $ $ $ $ 29,543,842 29,516,718 29,477,870 29,910,292 30,966,682 31,537,010 32,142,939 32,094,828 Company’s net sales, gross profit and income from operationsoperating results for Trex Residential have historically varied from quarter to quarter. Such variations are often attributable to seasonal trends in the demand for Trex products. The Company has historically experienced lower net sales during the fourth quarter because holidays andSeasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity.elected to early adopt ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting” (ASU No. 2016-09)approved aquarterly period ended December 31, 2016, with adoptionform of a stock dividend distributed on June 18, 2018, to stockholders of record at the close of business on May 23, 2018. The stock split entitled each stockholder to receive one additional share of common stock, par value $0.01, for each share they held as of January 1, 2016. The effect on previously reportedthe record date. All common stock share and per share data for all periods presented have been retroactively adjusted to reflect the quarterly periods ended September 30, June 30, and March 31, 2016 is presented in the below table. Also, see the related discussion in Note 2, “Summarystock split.Thousands) Balance at
Beginning
of Period Additions
(Reductions)
Charged to
Cost and
Expenses Deductions Balance
at End
of Period $ 33,522 $ 10,852 $ (6,682 ) $ 37,692 $ 4,582 $ — $ (521 ) $ 4,061 $ 33,841 $ 8,515 $ (8,834 ) $ 33,522 $ 4,465 $ 117 $ — $ 4,582 $ 40,812 $ 3,774 $ (10,745 ) $ 33,841 $ 4,201 $ 388 $ (124 ) $ 4,465
Beginning
of Period
Charged to
Cost and
Expenses
at End
of Period $ $ $ ) $ $ $ $ ) $ $ $ $ ) $ $ $ $ ) $ $ $ $ ) $ $ $ $ ) $ Trex Company, Inc.Date: February 21, 2017 By: /S/ JAMES E. CLINE 21, 201724, 2020 by the following persons on behalf of the registrant and in the capacities indicated.Signature TitleS/ JAMES E. CLINE S/ BRYAN H. FAIRBANKS �� Incorporated by reference Description Form Exhibit Filing Date File No. 4.12 4.3 November 6, 2019 4.13 4.4 November 6, 2019 4.14 4.5 November 6, 2019 4.15 4.6 November 6, 2019 4.16* 10.1 10.1 February 14, 2019 10.2 10.1 May 7, 2018 10.3 10.1 October 29, 2018 10.4 10.1 July 29, 2019 10.5 10.2 July 29, 2019 10.6 10.3 July 29, 2019 10.7 10.2 August 3, 2015 �� /S/ RONALD W. KAPLANRonald W. Kaplan Chairman/S/ MICHAEL F. GOLDENMichael F. Golden Director/S/ JAY M. GRATZJay M. Gratz Director/S/ FRANK H. MERLOTTI, JR.Frank H. Merlotti, Jr. Director/S/ RICHARD E. POSEYRichard E. Posey Director/S/ PATRICIA B. ROBINSONPatricia B. Robinson Director/S/ GERALD VOLASGerald Volas DirectorEXHIBIT INDEXExhibitNumber Exhibit Description3.1 Restated Certificate of Incorporation of Trex Company, Inc. (the “Company”). Filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-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 Form 10-Q for the quarterly period ended March 31, 2014 and incorporated herein by reference.3.3 Amended and Restated By-Laws of the Company. Filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed May 7, 2008 and incorporated herein by reference.4.1 Specimen certificate representing the Company’s common stock. Filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (No. 333-63287) and incorporated herein by reference.4.2 Second Amended and Restated Credit Agreement dated as of November 20, 2014 between the Company and Branch Banking and Trust Company, as a Lender, Administrative Agent, Swing Line Lender and Letter of Credit Issuer; Citibank, N.A. as a Lender; Bank of America, N.A. as a Lender; and BB&T Capital Markets, as Lead Arranger. Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference.4.3 Revolver Note dated November 20, 2014 payable by the Company to Branch Banking and Trust Company in the amount of the lesser of $80,000,000 or the outstanding revolver advances made by Branch Banking and Trust Company. Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference.4.4Revolver Note dated November 20, 2014 payable by the Company to Citibank, N.A. in the amount of the lesser of $45,000,000 or the outstanding revolver advances made by Citibank, N.A. Filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference.4.5Revolver Note dated November 20, 2014 payable by the Company to Bank of America, N.A. in the amount of the lesser of $25,000,000 or the outstanding revolver advances made by Bank of America, N.A. Filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference.4.6Swing Advance Note dated November 20, 2014 payable by the Company to Branch Banking and Trust Company in the amount of the lesser of $5,000,000 or the outstanding swing advances made by Branch Banking and Trust Company. Filed as Exhibit 4.5 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference.4.7Second Amended and Restated Security Agreement dated as of November 20, 2014 between the Company, as debtor, and Branch Banking and Trust Company as Administrative Agent for Branch Banking and Trust Company, Citibank, N.A. and Bank of America, N.A. Filed as Exhibit 4.6 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference.4.8Second Modification to Amended and Restated Credit Line Deed of Trust, dated as of November 20, 2014, by and among the Company as grantor, BB&T-VA Collateral Service Corporation, as trustee, and Branch Banking and Trust Company, as Administrative Agent for Branch Banking and Trust Company, Citibank, N.A. and Bank of America, N.A., as Beneficiaries relating to real property partially located in the County of Frederick, Virginia and partially located in the City of Winchester, Virginia. Filed as Exhibit 4.7 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference.ExhibitNumberExhibit Description4.9Modification to Deed of Trust, dated as of November 20, 2014, by and among the Company as grantor, First American Title Insurance Company, as trustee, and Branch Banking and Trust Company, as Administrative Agent for Branch Banking and Trust Company, Citibank, N.A. and Bank of America, N.A., as Beneficiaries relating to real property located in the County of Fernley, Nevada. Filed as Exhibit 4.8 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference.4.10Intellectual Property Security Agreement, dated November 20, 2014, by and between Trex Company, Inc. as debtor; and Branch Banking and Trust Company, in its capacity as Administrative Agent under the Second Amended and Restated Credit Agreement and acting as agent for itself and the other secured parties. Filed as Exhibit 4.9 to the Company’s Current Report on Form 8-K filed November 25, 2014 and incorporated herein by reference.4.11Third Amended and Restated Credit Agreement dated as of January 12, 2016 between the Company, as borrower; the subsidiaries of the Company as guarantors; Bank of America, N.A., as a Lender, Administrative Agent, Swing Line Lender and Letter of Credit Issuer; and certain other lenders arranged by Bank of America Merrill Lynch as Sole Lead Arranger and Sole Bookrunner. Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference.4.12Revolver Note dated January 12, 2016 payable by the Company to Bank of America, N.A. in the amount of the lesser of $110,000,000 or the outstanding revolver advances made by Bank of America, N.A. Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference.4.13Revolver Note dated January 12, 2016 payable by the Company to Citibank, N.A. in the amount of the lesser of $75,000,000 or the outstanding revolver advances made by Citibank, N.A. Filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference.4.14Revolver Note dated January 12, 2016 payable by the Company to Capital One, N.A. in the amount of the lesser of $35,000,000 or the outstanding revolver advances made by Capital One, N.A. Filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference.4.15Revolver Note dated January 12, 2016 payable by the Company to SunTrust Bank in the amount of the lesser of $30,000,000 or the outstanding revolver advances made by SunTrust Bank. Filed as Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference.4.16Third Amended and Restated Security and Pledge Agreement dated as of January 12, 2016 between the Company, as debtor, and Bank of America, N.A. as Administrative Agent (including Notices of Grant of Security Interest in Copyrights and Trademarks). Filed as Exhibit 4.6 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference.4.17Assignment of Amended and Restated Credit Line Deed of Trust, Substitution of Trustee and Amendment, dated as of January 12, 2016, by and among the Company as grantor, PRLAP, INC, as trustee, and Bank of America, N.A., as Administrative Agent for Bank of America, N.A., Citibank, N.A., Capital One, N.A., and SunTrust Bank, as Beneficiaries relating to real property partially located in the County of Frederick, Virginia and partially located in the City of Winchester, Virginia. Filed as Exhibit 4.7 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference.4.18Amended and Restated Deed of Trust, dated as of January 12, 2016, by and among the Company as grantor, First American Title Insurance Company, as trustee, and Bank of America, N.A., Citibank, N.A., Capital One, N.A., and SunTrust Bank, as Beneficiaries relating to real property located in the County of Fernley, Nevada. Filed as Exhibit 4.8 to the Company’s Current Report on Form 8-K filed on January 14, 2016 and incorporated herein by reference.ExhibitNumberExhibit Description10.1Description of Management Compensatory Plans and Arrangements. Filed herewith. **10.2Trex Company, Inc. 2014 Stock Incentive Plan. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 and incorporated herein by reference. **10.3Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors. Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 and incorporated herein by reference. **10.4Form of Trex Company, Inc. 2014 Stock Incentive Plan Time-Based Restricted Stock Agreement. Filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and incorporated herein by reference. **10.5Form of Trex Company, Inc. 2014 Stock Incentive Plan Performance-Based Restricted Stock Agreement. Filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and incorporated herein by reference. **10.6Form of Trex Company, Inc. 2014 Stock Incentive Plan Stock Appreciation Rights Agreement. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 and incorporated herein by reference. **10.7Form of Trex Company, Inc. 2014 Stock Incentive Plan Time-Based Restricted Stock Unit Agreement. Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 and incorporated herein by reference. **10.8Form of Trex Company, Inc. 2014 Stock Incentive Plan Performance-Based Restricted Stock Unit Agreement. Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 and incorporated herein by reference. **10.9Form of Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors Stock Appreciation Rights Agreement. Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 and incorporated herein by reference. **10.10Form of Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors Restricted Stock Agreement. Filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and incorporated herein by reference. **10.11Form of Trex Company, Inc. Amended and Restated 1999 Incentive Plan for Outside Directors Restricted Stock Unit Agreement. Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 and incorporated herein by reference. **10.12Change in Control Severance Agreement dated May 6, 2015 by and between Trex Company, Inc. and James E. Cline. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 8, 2015 and incorporated herein by reference. **10.13Severance Agreement dated May 6, 2015 by and between Trex Company, Inc. and James E. Cline. Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 8, 2015 and incorporated herein by reference. **10.14Amendment and Restatement of Employment Agreement, dated as of July 24, 2012, between Trex Company, Inc. and Ronald W. Kaplan. Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and incorporated herein by reference. **10.15Amendment and Restatement of Change in Control Severance Agreement, dated as of August 3, 2011, between Trex Company, Inc. and Ronald W. Kaplan. Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 9, 2011 and incorporated herein by reference. **10.16Form of Change in Control Severance Agreement between Trex Company, Inc. and Officers other than the Chief Executive Officer. Filed herewith. **ExhibitNumberExhibit Description10.17Form of Severance Agreement between Trex Company, Inc. and Officers other than the Chief Executive Officer. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 and incorporated herein by reference. **10.18Retention Agreement, dated as of July 24, 2012, between Trex Company, Inc. and Ronald W. Kaplan. Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and incorporated herein by reference. **10.19Retention Agreement, dated as of July 24, 2012, between Trex Company, Inc. and James E. Cline. Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and incorporated herein by reference. **10.20Retention Agreement, dated as of July 24, 2012, between Trex Company, Inc. and William R. Gupp. Filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and incorporated herein by reference. *, **10.21Retention Agreement, dated as of July 24, 2012, between Trex Company, Inc. and F. Timothy Reese. Filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 and incorporated herein by reference. **10.22Form of Indemnity Agreement for Directors. Filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference.10.23Form of Indemnity Agreement for Officers. Filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference.10.24Form of Indemnity Agreement for Director/Officers. Filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference.10.25Form of Distributor Agreement of Trex Company, Inc. Filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference.10.26Form of Trex Company, Inc. Fencing Agreement for Installers/Retailers. Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 and incorporated herein by reference.10.27Deed of Lease, dated June 15, 2000, between Trex Company, LLC and Space, LLC. Filed as Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference.10.28Amendment, dated February 22, 2010, of Deed of Lease dated as of June 15, 2000, between Trex Company, Inc., as successor by merger to Trex Company, LLC, and TC.V.LLC, as successor to Space, LLC. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010 and incorporated herein by reference.10.29Amendment, dated November 2, 2016, of Deed of Lease dated as of June 15, 2000, between Trex Company, Inc., as successor by merger to Trex Company, LLC, and TC.V.LLC, as successor to Space, LLC. Filed herewith.10.30Deed of Lease, dated as of July 27, 2005, between the Company and 1 Dulles Town Center, L.L.C. Filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and incorporated herein by reference. *21Subsidiaries of the Company. Filed herewith.23Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. Filed herewith.ExhibitNumberExhibit Description 31.1Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. Filed herewith. 31.2Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. Filed herewith. 32Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350). Furnished herewith.101.INSXBRL Instance Document. Filed.101.SCH Filed.101.CAL Filed.101.DEF Filed.101.LAB Filed.101.PRE Filed.* Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.Filed herewith.** Management contract or compensatory plan or agreement. *** Furnished herewith.