Trex(TREX) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the period Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including statements of comprehensive income, balance sheets, changes in stockholders' equity, and cash flows, along with detailed notes explaining business operations, accounting policies, segment information, and commitments Condensed Consolidated Statements of Comprehensive Income This statement details the company's financial performance, including net sales, gross profit, income from operations, net income, and earnings per share for the specified periods | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $356,538 | $386,249 | $595,256 | $725,477 | | Gross profit | $156,448 | $157,377 | $250,876 | $292,289 | | Income from operations| $104,767 | $117,809 | $161,714 | $212,760 | | Net income | $77,036 | $88,916 | $118,167 | $160,127 | | Basic EPS | $0.71 | $0.79 | $1.09 | $1.41 | | Diluted EPS | $0.71 | $0.79 | $1.09 | $1.40 | Condensed Consolidated Balance Sheets This statement presents the company's financial position, including total assets, liabilities, and stockholders' equity at specific reporting dates | Metric (in thousands) | June 30, 2023 (Unaudited) | December 31, 2022 | | :-------------------- | :------------------------ | :---------------- | | Total current assets | $369,444 | $286,842 | | Total assets | $1,069,815 | $933,705 | | Total current liabilities | $322,797 | $290,599 | | Total liabilities | $446,290 | $415,356 | | Total stockholders' equity | $623,525 | $518,349 | Condensed Consolidated Statements of Changes in Stockholders' Equity This statement outlines changes in total stockholders' equity, including net income and stock repurchases, between reporting periods | Metric (in thousands) | Balance, December 31, 2022 | Balance, June 30, 2023 | | :-------------------- | :------------------------- | :--------------------- | | Total Stockholders' Equity | $518,349 | $623,525 | | Net income (6 months) | $41,131 (Q1) + $77,036 (Q2) | $118,167 | | Repurchases of common stock | N/A | $(15,746) | Condensed Consolidated Statements of Cash Flows This statement reports cash inflows and outflows from operating, investing, and financing activities for the specified periods | Metric (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $107,781 | $189,992 | | Net cash used in investing activities | $(82,357) | $(66,561) | | Net cash used in financing activities | $(33,523) | $(247,836) | | Net decrease in cash and cash equivalents | $(8,099) | $(124,405) | | Cash and cash equivalents, end of period | $4,226 | $16,648 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering business operations, accounting policies, segment information, debt, leases, equity, revenue recognition, stock-based compensation, income taxes, seasonality, and commitments and contingencies 1. BUSINESS AND ORGANIZATION Trex Company, Inc. operates primarily in one reportable segment, Trex Residential Products, which is the world's largest manufacturer of high-performance, low-maintenance wood-alternative decking and residential railing products. The company divested its Trex Commercial Products segment on December 30, 2022, to focus on its outdoor living strategy - Trex Company, Inc. operates in one reportable segment, Trex Residential Products, after divesting Trex Commercial Products on December 30, 2022[22][27] - Trex Residential is the world's largest manufacturer of high-performance, low-maintenance wood-alternative decking and residential railing and outdoor living products[23] 2. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information, including normal and recurring adjustments. Results for the three and six months ended June 30, 2023, are not necessarily indicative of the full fiscal year due to factors like manufacturing costs, raw material costs, inflation, consumer spending, interest rates, supply chain disruptions, and economic conditions - Interim financial statements are unaudited and include normal and recurring adjustments[24] - Results are affected by manufacturing costs, raw materials, inflation, consumer spending, interest rates, supply chain, and economic conditions, with a noted reduction in demand in Q3 2022 leading to inventory recalibration by year-end[25] 3. SALE OF TREX COMMERCIAL PRODUCTS, INC. On December 30, 2022, Trex completed the sale of its Trex Commercial segment to focus on its outdoor living strategy and accelerate conversion to composites from wood. This divestiture did not represent a major strategic shift - Trex completed the sale of Trex Commercial Products on December 30, 2022[27] - The divestiture aims to focus on profitable growth through the outdoor living strategy and accelerate conversion to composites from wood[27] 4. RECENTLY ADOPTED ACCOUNTING STANDARDS The company adopted ASU No. 2022-06, deferring the sunset date of Topic 848 (Reference Rate Reform) to December 31, 2024. This amendment did not have a material effect on the consolidated financial statements - Adopted ASU No. 2022-06, deferring the sunset date of Topic 848 (Reference Rate Reform) to December 31, 2024[29] - The amendments did not have a material effect on the Company's consolidated financial statements[29] 5. INVENTORIES Inventories are valued using the LIFO method. Total LIFO inventories decreased from $141.4 million at December 31, 2022, to $74.0 million at June 30, 2023. A reduction in inventory in the first six months of 2023 is not expected to materially impact cost of sales for the full year | Inventory Type (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------- | :------------ | :---------------- | | Finished goods | $52,660 | $107,114 | | Raw materials | $56,398 | $69,292 | | Total FIFO inventories | $109,058 | $176,406 | | Reserve to adjust to LIFO | $(35,051) | $(35,051) | | Total LIFO inventories | $74,007 | $141,355 | - A reduction in inventory during the six months ended June 30, 2023, is not expected to have a material impact on cost of sales for the year[31] 6. PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other assets decreased from $35.1 million at December 31, 2022, to $24.4 million at June 30, 2023, primarily due to a reduction in income tax receivable | Asset Type (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------ | :------------ | :---------------- | | Prepaid expenses | $9,314 | $10,787 | | Income tax receivable | $14,810 | $23,979 | | Other | $279 | $339 | | Total | $24,403 | $35,105 | 7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET Goodwill remained at $14.2 million for Trex Residential. Intangible assets, primarily domain names, had a carrying amount of $6.3 million with accumulated amortization of $2.1 million at June 30, 2023. Amortization expense for the six months ended June 30, 2023, was $0.2 million - Goodwill for Trex Residential was $14.2 million at June 30, 2023, and December 31, 2022[33] | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------- | :------------ | :---------------- | | Intangible assets | $6,300 | $6,300 | | Accumulated amortization | $2,100 | $1,900 | - Intangible asset amortization expense was $0.2 million for both six-month periods ended June 30, 2023, and June 30, 2022[33] 8. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities increased significantly from $44.1 million at December 31, 2022, to $79.8 million at June 30, 2023, driven primarily by increases in sales and marketing accruals and compensation and benefits | Liability Type (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------- | :------------ | :---------------- | | Sales and marketing | $31,230 | $19,194 | | Compensation and benefits | $15,576 | $8,646 | | Income taxes | $15,848 | $0 | | Other | $5,849 | $5,311 | | Total | $79,803 | $44,064 | 9. DEBT The company has a revolving credit facility with a maximum principal amount of $400 million (Revolving A Loan) and an additional Revolving B Loan of $150 million, with terms ending May 18, 2027, and December 22, 2024, respectively. As of June 30, 2023, $206 million was outstanding with a weighted average interest rate of 6.15%, and the company was in compliance with all debt covenants - Revolving A Loan has a maximum principal amount of $400 million, with its term ending May 18, 2027[39] - Revolving B Loan has a maximum principal amount of $150 million, with its term ending December 22, 2024[45] | Metric (in millions) | June 30, 2023 | | :---------------------------- | :------------ | | Borrowings outstanding | $206 | | Available borrowing capacity | $344 | | Weighted average interest rate| 6.15% | - The Company was in compliance with all loan covenants as of June 30, 2023[50] 10. LEASES The company leases various facilities and equipment under operating leases with terms ranging from 1 to 6 years. Total operating lease expense for the six months ended June 30, 2023, was $4.2 million, with a weighted average remaining lease term of 4.8 years and a discount rate of 2.27% - Total operating lease expense for the six months ended June 30, 2023, was $4.2 million[52] | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------- | :------------ | :---------------- | | Weighted average remaining lease term | 4.8 years | 5.2 years | | Weighted average discount rate| 2.27% | 2.10% | | Operating lease ROU assets | $29,099 | $30,991 | | Total operating lease liabilities | $29,414 | $31,462 | 11. FINANCIAL INSTRUMENTS The recorded value of financial assets and liabilities, including cash, accounts receivable, accounts payable, accrued expenses, and debt, approximates their fair value as of June 30, 2023, and December 31, 2022 - Recorded value of financial assets and liabilities approximates fair value[54] 12. STOCKHOLDERS' EQUITY This section details the computation of basic and diluted earnings per share and outlines the company's stock repurchase program. A new 2023 Stock Repurchase Program was adopted on May 4, 2023, authorizing the repurchase of up to 10.8 million shares, replacing the previous program | Metric (in shares, except per share data) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic weighted average shares outstanding | 108,770,204 | 113,099,561 | 108,771,077 | 113,864,741 | | Diluted weighted average shares outstanding | 108,871,440 | 113,259,514 | 108,893,848 | 114,052,447 | | Basic earnings per share | $0.71 | $0.79 | $1.09 | $1.41 | | Diluted earnings per share | $0.71 | $0.79 | $1.09 | $1.40 | - A new 2023 Stock Repurchase Program was adopted on May 4, 2023, authorizing the repurchase of up to 10.8 million shares, replacing the previous program[56] - From May 4, 2023, through June 30, 2023, Trex repurchased 264,896 shares under the 2023 Stock Repurchase Program[56] 13. REVENUE FROM CONTRACTS WITH CUSTOMERS Trex Residential generates revenue from the manufacture and sale of wood-alternative composite decking and railing products, with performance obligations satisfied at the point of shipment. Following the sale of Trex Commercial, all revenues are from products transferred at a point in time with variable consideration contracts - Trex Residential's revenue is primarily from high-performance, low-maintenance, eco-friendly wood-alternative composite decking and residential railing products and accessories[57] - All revenues for the three and six months ended June 30, 2023, are from products transferred at a point in time and variable consideration contracts, following the divestiture of Trex Commercial[60][61] | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Trex Residential Net Sales | $356,538 | $373,922 | $595,256 | $701,117 | | Trex Commercial Net Sales | N/A | $12,327 | N/A | $24,360 | | Consolidated Net Sales | $356,538 | $386,249 | $595,256 | $725,477 | 14. STOCK-BASED COMPENSATION The 2023 Stock Incentive Plan was approved, providing for various awards to officers, directors, and employees, with 3,999,023 shares available for future grants as of June 30, 2023. Total stock-based compensation expense for the six months ended June 30, 2023, was $4.6 million, up from $3.3 million in the prior year - The 2023 Stock Incentive Plan was approved, replacing the 2014 Plan, with 4,000,000 shares permitted for grant at adoption and 3,999,023 shares available for future grants as of June 30, 2023[63] | Stock-Based Compensation (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock appreciation rights | $198 | $196 | $412 | $350 | | Time-based restricted stock and restricted stock units | $871 | $959 | $1,806 | $1,806 | | Performance-based restricted stock and restricted stock units| $1,320 | $(151) | $2,044 | $1,007 | | Employee stock purchase plan | $201 | $53 | $300 | $119 | | Total stock-based compensation | $2,590 | $1,057 | $4,562 | $3,282 | - Total unrecognized compensation cost related to unvested awards as of June 30, 2023, was $14.4 million[67] 15. INCOME TAXES The effective tax rate for the six months ended June 30, 2023, was 25.4%, comparable to 24.8% in the prior year. The company maintains a $3.0 million valuation allowance against deferred tax assets, primarily for state tax credits | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Effective tax rate | 25.4% | 24.8% | | Income tax expense (in millions) | $40.3 | $52.7 | - The Company maintains a valuation allowance of $3.0 million against deferred tax assets, primarily related to state tax credits[70] 16. SEGMENT INFORMATION Following the sale of Trex Commercial on December 30, 2022, the company now operates in one reportable segment: Trex Residential, which manufactures wood-alternative decking and residential railing products. Segment performance is evaluated based on net sales and EBITDA - As of December 30, 2022, the Company operates in one reportable segment, Trex Residential, after selling Trex Commercial[72] - Trex Residential manufactures wood-alternative decking and residential railing and related products, sold to distributors and home centers for the residential market[72] | Metric (in thousands) | Three Months Ended June 30, 2023 (Trex Residential & Consolidated) | Three Months Ended June 30, 2022 (Trex Residential) | Three Months Ended June 30, 2022 (Trex Commercial) | Three Months Ended June 30, 2022 (Consolidated) | | :-------------------- | :--------------------------------------------------------------- | :-------------------------------------------------- | :------------------------------------------------- | :---------------------------------------------- | | Net sales | $356,538 | $373,922 | $12,327 | $386,249 | | Net Income (loss) | $77,036 | $89,437 | $(521) | $88,916 | | EBITDA | $117,050 | $129,550 | $(410) | $129,140 | | Capital expenditures | $43,165 | $44,251 | $67 | $44,318 | | Total assets | $1,069,815 | $846,112 | $41,182 | $887,294 | | Metric (in thousands) | Six Months Ended June 30, 2023 (Trex Residential & Consolidated) | Six Months Ended June 30, 2022 (Trex Residential) | Six Months Ended June 30, 2022 (Trex Commercial) | Six Months Ended June 30, 2022 (Consolidated) | | :-------------------- | :--------------------------------------------------------------- | :-------------------------------------------------- | :------------------------------------------------- | :---------------------------------------------- | | Net sales | $595,256 | $701,117 | $24,360 | $725,477 | | Net Income (loss) | $118,167 | $161,652 | $(1,525) | $160,127 | | EBITDA | $185,912 | $236,031 | $(1,466) | $234,565 | | Depreciation and amortization | $24,198 | $21,240 | $565 | $21,805 | | Income tax expense (benefit) | $40,258 | $53,243 | $(506) | $52,737 | | Capital expenditures | $82,357 | $66,534 | $72 | $66,606 | | Total assets | $1,069,815 | $846,112 | $41,182 | $887,294 | 17. SEASONALITY Trex Residential's operating results have historically varied from quarter to quarter. Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift demand for its products to a later period. As part of its normal business practice and consistent with industry practice, Trex Residential has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of its product to meet anticipated seasonal consumer demand. The seasonal effects are often offset by the positive effect of the incentive programs - Operating results for Trex Residential vary quarter to quarter due to seasonal weather conditions impacting home improvement and construction[79] - Incentive programs are offered to distributors and dealers to build inventory before the prime deck-building season, which often offsets seasonal effects[79] 18. COMMITMENTS AND CONTINGENCIES The company provides product warranties for its Trex Residential products, with varying periods (25-50 years for residential, 10-25 years for commercial) depending on the product. A warranty reserve is maintained for surface flaking claims from pre-2007 products, with incoming claims and average costs per claim being lower in the first six months of 2023 compared to 2022 - Trex Residential products sold on or after January 1, 2023, have warranty periods of 25-50 years for residential use and 10-25 years for commercial use, depending on the product[81] - The number of incoming surface flaking claims and the average cost per claim were lower in the six months ended June 30, 2023, compared to the same period in 2022 and company expectations[87] | Warranty Reserve (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------ | :----------------------------- | :----------------------------- | | Beginning balance, January 1 | $25,599 | $28,595 | | Provisions and changes in estimates | $3,008 | $2,369 | | Settlements made during the period | $(2,048) | $(2,434) | | Ending balance, June 30 | $26,559 | $28,530 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, highlighting key performance indicators, discussing factors affecting operations, and analyzing consolidated results for the three and six months ended June 30, 2023, compared to the prior year. It also covers liquidity, capital resources, and future outlook NOTE ON FORWARD-LOOKING STATEMENTS This section cautions readers that the report contains forward-looking statements subject to various risks and uncertainties, including market acceptance of products, raw material costs, inflation, economic conditions, and supply chain disruptions, which could cause actual results to differ materially from expectations - Forward-looking statements are subject to risks and uncertainties, including market acceptance, product costs, raw material availability and cost, inflation, economic conditions, and supply chain disruptions[95] OVERVIEW (MD&A Section) This overview section within the MD&A describes Trex's business operations, product offerings, and summarizes key financial and operational highlights for the period, including new product introductions, industry recognition, and ESG efforts - Trex Residential is the world's largest manufacturer of high-performance composite decking and residential railing products, utilizing recycled and reclaimed materials[98] - Key product offerings include Trex Transcend® Lineage™, Trex Transcend®, Trex Signature®, Trex Select®, and Trex Enhance® decking, along with various railing systems and licensed outdoor living accessories[99][100] - Trex introduced the new Trex Select T-Rail composite railing system and updated its online deck design tool[103] - Trex was ranked the brand of choice for composite decking and deck railing by Builder Magazine for the 16th consecutive year[103] - The company published its 2022 ESG report, highlighting focus on circularity, energy efficiency, employee safety, diversity in leadership, governance, and community support[103] | Metric (in thousands, except per share data) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | $ Change | % Change | | :----------------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | Net sales | $356,538 | $386,249 | $(29,711) | (7.7)% | | Gross profit | $156,448 | $157,377 | $(929) | (0.6)% | | Net income | $77,036 | $88,916 | $(11,880) | (13.4)% | | EBITDA | $117,050 | $129,140 | $(12,090) | (9.4)% | | Diluted earnings per share | $0.71 | $0.79 | $(0.08) | (10.1)% | | Metric (in thousands, except per share data) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | $ Change | % Change | | :----------------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Net sales | $595,256 | $725,477 | $(130,221) | (17.9)% | | Gross profit | $250,876 | $292,289 | $(41,413) | (14.2)% | | Net income | $118,167 | $160,127 | $(41,960) | (26.2)% | | EBITDA | $185,912 | $234,565 | $(48,653) | (20.7)% | | Diluted earnings per share | $1.09 | $1.40 | $(0.31) | (22.1)% | - Capital expenditures for the six months ended June 30, 2023, were $82.4 million, primarily for the Arkansas manufacturing facility ($45.5 million), cost reduction initiatives ($10.6 million), and new corporate headquarters ($9.6 million)[104] - Repurchased 264,896 shares of common stock under the new 2023 Stock Repurchase Program during the six months ended June 30, 2023[105] RESULTS OF OPERATIONS This section analyzes the company's operating results, noting a decrease in net sales for both the three and six months ended June 30, 2023, primarily due to the non-recurrence of prior year channel inventory build and cautious purchase patterns. Gross margin improved due to production optimization and cost savings, while SG&A expenses increased due to personnel costs and expenses related to exiting the prior corporate headquarters - Total net sales decreased by 7.7% for the three months and 17.9% for the six months ended June 30, 2023, primarily due to the non-recurrence of the 2022 channel inventory build and cautious consumer purchasing[113][119] - Gross margin increased to 43.9% (from 40.7%) for the three months and 42.1% (from 40.3%) for the six months ended June 30, 2023, driven by production optimization and cost savings, despite lower absorption from decreased production[114][120] - Selling, general and administrative expenses increased by $12.1 million (30.6%) for the three months and $9.6 million (12.1%) for the six months ended June 30, 2023, mainly due to higher personnel-related expenses, R&D, and costs associated with exiting the prior corporate headquarters[115][121] - Effective tax rates remained comparable at 25.5% for the three months and 25.4% for the six months ended June 30, 2023[117][122] - Total EBITDA decreased by 9.4% for the three months and 20.7% for the six months ended June 30, 2023, primarily due to decreased net sales and gross profit[118][125] LIQUIDITY AND CAPITAL RESOURCES The company finances operations through cash flows, revolving credit facilities, and trade credit. Cash and cash equivalents were $4.2 million at June 30, 2023. Net cash provided by operating activities decreased due to increased accounts receivable and reduced profitability, partially offset by decreased inventories. Capital expenditures were primarily for the new Arkansas facility. The company maintains a revolving credit facility with $206 million outstanding and $344 million available capacity, and is in compliance with all debt covenants - Cash and cash equivalents were $4.2 million at June 30, 2023[126] | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $107,781 | $189,992 | | Net cash used in investing activities | $(82,357) | $(66,561) | | Net cash used in financing activities | $(33,523) | $(247,836) | | Net decrease in cash and cash equivalents | $(8,099) | $(124,405) | - Decrease in operating cash flow primarily due to increased accounts receivable and reduced profitability, partially offset by decreased inventories[128] - Capital expenditures of $82.4 million were mainly for the Arkansas manufacturing facility ($45.5 million), cost reduction initiatives ($10.6 million), and new corporate headquarters ($9.6 million)[129] - At June 30, 2023, the company had $206 million in outstanding borrowings and $344 million in available borrowing capacity under its revolving credit facility, and was in compliance with all debt covenants[146][147] Capital Requirements The company plans to spend approximately $400 million on a new Arkansas manufacturing facility, with 2023 capital expenditure guidance set at $145 million to $155 million. Funding will come from cash generation and the line of credit, prioritizing internal growth, cost reductions, equipment upgrades, and strategic acquisitions - The company anticipates spending approximately $400 million on the new Arkansas manufacturing facility, to be funded primarily through ongoing cash generation or its line of credit[150] - Capital expenditure guidance for 2023 is $145 million to $155 million, prioritizing internal growth, cost reductions, equipment upgrades, and acquisitions[151] Inventory in Distribution Channels Trex sells its residential decking and railing products through a tiered distribution system. Significant increases in channel inventory without corresponding end-use demand could negatively impact future sales - Trex sells residential decking and railing products through a tiered distribution system with over 50 distributors and two national retail merchandisers[152] - Significant increases in distribution channel inventory without corresponding end-use demand could adversely affect future sales[152] Product Warranty Trex provides warranties for its residential products, with periods ranging from 10 to 50 years. The company maintains a warranty reserve for surface flaking claims from pre-2007 products, noting lower incoming claims and average costs per claim in the first six months of 2023 compared to 2022 - Trex Residential products have warranty periods of 25-50 years for residential use and 10-25 years for commercial use, depending on the product[154][155] - The number of incoming surface flaking claims and the average cost per claim were lower in the six months ended June 30, 2023, compared to the same period in 2022 and company expectations[158] | Surface Flaking Claims Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------ | :----------------------------- | :----------------------------- | | Claims open, beginning of period (number) | 1,729 | 1,759 | | Claims received (number) | 236 | 292 | | Claims resolved (number) | (212) | (304) | | Claims open, end of period (number) | 1,753 | 1,747 | | Average cost per claim ($) | $4,160 | $5,233 | Seasonality Trex Residential's operating results are subject to quarterly variations due to seasonal weather impacting home improvement and construction. Incentive programs are used to manage inventory levels and demand fluctuations - Operating results for Trex Residential vary quarter to quarter due to seasonal weather conditions impacting home improvement and construction[161] - Incentive programs are offered to distributors and dealers to build inventory before the prime deck-building season, which often offsets seasonal effects[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there were no material changes to the company's market risk exposure during the six months ended June 30, 2023, and refers to the Annual Report on Form 10-K for detailed information - No material changes to the Company's market risk exposure during the six months ended June 30, 2023[162] Item 4. Controls and Procedures Management, including the CEO and Acting CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2023, and concluded they are effective. No material changes to internal control over financial reporting occurred during the period - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023[163] - No material changes to internal control over financial reporting occurred during the six-month period ended June 30, 2023[163] PART II OTHER INFORMATION This section covers legal proceedings, equity security sales, use of proceeds, other information, and a comprehensive list of exhibits filed with the report Item 1. Legal Proceedings The company is involved in routine litigation and claims, but management believes their ultimate resolution will not materially affect the company's financial condition, results of operations, liquidity, or competitive position - Management believes the ultimate resolution of pending lawsuits and claims will not materially affect the Company's financial condition, results of operations, liquidity, or competitive position[166] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended June 30, 2023, the company repurchased 264,896 shares of common stock under its new 2023 Stock Repurchase Program, which authorizes up to 10.8 million shares and has no set expiration date | Period | Total Number of Shares Purchased (1) (number) | Average Price Paid per Share ($) | Shares Purchased as Part of Publicly Announced Plans or Programs (2) (number) | Maximum Number of Shares that May Yet Be Purchased Under the Plan or Program (number) | | :----------------------------- | :----------------------------------- | :------------------------------- | :--------------------------------------------------- | :--------------------------------------------------------------------------- | | April 1, 2023 – April 30, 2023 | — | $— | — | 10,800,000 | | May 1, 2023 – May 31, 2023 | 15,663 | $54.56 | — | 10,800,000 | | June 1, 2023 – June 30, 2023 | 264,896 | $59.44 | 264,896 | 10,535,104 | | Quarterly period ended June 30, 2023 | 280,559 | N/A | 264,896 | N/A | - A new 2023 Stock Repurchase Program was adopted on May 4, 2023, authorizing the repurchase of up to 10.8 million shares, replacing the previous program[167] Item 5. Other Information This section details recent amendments to the company's By-Laws, including provisions for remote stockholder meetings and enhanced advance notice requirements for stockholder proposals and director nominations. It also outlines changes to various stock incentive plans and severance agreements to align with the 2023 Stock Incentive Plan and update terms - Amended and Restated By-Laws of the Company dated July 26, 2023, allow for remote stockholder meetings and require additional information for stockholder proposals and director nominations[168][170] - Amendments to the 1999 Incentive Plan for Outside Directors and various 2023 Stock Incentive Plan agreements (SAR, Time-Based RSU, Performance-Based RSU) were approved to align with the 2023 Plan, including changes to vesting and shareholder rights[174][175][176][178][179] - Amended and Restated Severance Agreements for the CEO and other officers were updated to include auto-renewal terms, clarify bonus payouts, and specify earned salary in case of termination for cause[180][181] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, stock incentive plans, severance agreements, and certifications - The exhibit index includes corporate governance documents (Restated Certificate of Incorporation, Amended and Restated By-Laws), stock incentive plans (2023 Stock Incentive Plan, 1999 Incentive Plan for Outside Directors), various stock appreciation rights and restricted stock unit agreements, and severance agreements[188] - Certifications from the CEO and CFO pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act are also filed[188]