Trex(TREX) - 2023 Q4 - Annual Report

Part I Business Trex is the world's largest manufacturer of wood-alternative composite decking and railing, operating in the Trex Residential segment and focusing on market conversion, innovation, and manufacturing expansion - Trex is the world's largest manufacturer of composite decking and railing, operating under the Trex Residential segment after divesting the Trex Commercial segment in late 2022[12][17] - The company's growth strategy is centered on converting the market from wood to composite materials, expanding its product line, leveraging its strong brand, and improving manufacturing productivity[16] Trex Residential Product Offerings | Category | Products | | :--- | :--- | | Decking & Accessories | Trex Signature®, Trex Transcend® Lineage™, Trex Transcend®, Trex Select®, Trex Enhance®, Trex Hideaway® fasteners, Trex DeckLighting™ | | Railing | Trex Transcend Railing, Trex Select Railing, Trex Select T-Rail, Trex Signature® aluminum railing | | Fencing | Trex Seclusions® composite fencing | - Trex is investing approximately $450 million in a new manufacturing facility in Little Rock, Arkansas, to expand capacity, with construction beginning in Q2 2022[33][146] - The company has a significant customer concentration, with three customers representing approximately 72% of total net sales in 2023[28] - As of December 31, 2023, the company employed 1,765 full-time employees, none of whom are covered by collective bargaining agreements[53][58] Risk Factors The company faces risks from market competition, customer concentration, product quality, raw material sourcing, supply chain, and external factors like inflation and cybersecurity - A primary risk is the ability to compete with traditional wood products, which constitute the majority of the decking and railing market, and other wood-alternative manufacturers[75] - The company has significant customer concentration risk, with three customers accounting for 72% of total net sales in 2023, where the loss of a major customer could materially impact the business[78] - Product quality and performance are critical, as the company continues to manage a warranty reserve for surface flaking issues on decking produced at its Nevada facility before 2007, which could impact profitability[89] - The business depends on obtaining adequate supplies of raw materials, particularly wood fiber and scrap polyethylene, where sourcing challenges or price volatility could negatively affect profitability[92] - The business is subject to risks from cybersecurity attacks, which could compromise confidential information and disrupt operations despite proactive security measures being in place[112][113][114] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[118] Cybersecurity The company maintains a comprehensive cybersecurity risk management program, overseen by the CIO and Audit Committee, which has not materially impacted business operations or financial condition - The company's cybersecurity program is managed by the Chief Information Officer and Director of Information Security, with oversight from an Executive Information Security Oversight Committee and the Audit Committee of the Board of Directors[122][123] - Risk management processes include engaging third-party security monitoring, annual employee training, phishing simulations, and vulnerability scanning[120] - The company has not experienced any cybersecurity risks that have had a material effect on its business strategy, results of operations, or financial condition[121] Properties Trex owns and leases significant corporate, manufacturing, and warehouse properties across multiple states, with 2023 capital expenditures of $166.1 million primarily for the new Arkansas facility Owned and Leased Properties | Type | Square Footage / Acres | Status | Location(s) | | :--- | :--- | :--- | :--- | | Corporate Headquarters | 62,942 SF / 8 Acres | Owned | Virginia | | Trex Residential Facilities | 1,848,535 SF | Leased | Virginia / Nevada / Arkansas | | Trex Residential Facilities | 1,236,360 SF / 455 Acres | Owned | Virginia / Nevada / Arkansas | - Total capital expenditures in 2023 were $166.1 million, with a primary focus on the new Arkansas facility ($98.0 million) and cost reduction initiatives at existing plants ($23.9 million)[125] Legal Proceedings The company is involved in routine litigation and claims not expected to materially affect its financial condition or operations - The company faces routine litigation and claims incidental to its business, which are not expected to have a material financial impact[128] Mine Safety Disclosures This item is not applicable to the company - Not applicable[129] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Trex common stock is listed on the NYSE, with the company prioritizing reinvestment and share repurchases over dividends, and its five-year cumulative total stockholder return significantly outperformed the Russell 2000 Index - The company has never paid cash dividends and has no current intention to do so, prioritizing reinvestment and share repurchases[132] - On May 4, 2023, the Board authorized a new stock repurchase program for up to 10.8 million shares, with no shares repurchased under this program in the quarter ended December 31, 2023[134] Comparison of 5-Year Cumulative Total Return | Index | 12/31/2018 | 12/31/2023 | Cumulative Return | | :--- | :--- | :--- | :--- | | Trex Company, Inc. | $100.00 | $278.94 | 178.94% | | Russell 2000 Index | $100.00 | $161.09 | 61.09% | | S&P 600 Building Products | $100.00 | $276.54 | 176.54% | [Reserved]](index=27&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2023, total net sales decreased 1.0% to $1.09 billion due to divestiture, while Trex Residential sales grew 3.3%, gross margin improved to 41.3%, and net income increased 11.2% to $205.4 million, supported by strong cash flow and capital investments Financial Performance Highlights (2023 vs. 2022) | Metric | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,094.8M | $1,106.0M | $(11.2M) | (1.0)% | | Gross profit | $452.4M | $404.0M | $48.4M | 12.0% | | Net income | $205.4M | $184.6M | $20.8M | 11.2% | | Diluted EPS | $1.89 | $1.65 | $0.24 | 14.5% | - The 1.0% decrease in total net sales was due to the divestiture of Trex Commercial, while Trex Residential net sales increased by 3.3% due to a 2.6% rise in sales volume[183] - Gross margin for Trex Residential improved from 37.7% in 2022 to 41.3% in 2023, driven by cost savings and improved plant performance, offsetting reduced production absorption[184] - Selling, general and administrative (SG&A) expenses increased by 24.2% to $176.2 million, primarily due to higher personnel, branding, and R&D expenses[185] - The company continues to manage a warranty reserve for surface flaking claims on products made before 2007, with a decrease in estimated future claims leading to a $3.8 million reduction in the reserve in Q3 2023[163] Cash Flow Summary (in thousands) | Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $389,420 | $216,220 | $258,064 | | Net cash used in investing activities | $(166,089) | $(168,884) | $(158,039) | | Net cash used in financing activities | $(233,697) | $(176,064) | $(80,673) | - Capital expenditures for 2024 are projected to be between $210 million and $230 million, continuing the investment in the Arkansas facility and other growth initiatives[219] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure from its variable-rate revolving line of credit, with a $5.5 million outstanding balance, which is not expected to materially impact financial results from a 1% rate increase - The company is exposed to interest rate risk from its variable-rate revolving line of credit, which had $5.5 million outstanding at year-end 2023[224] - A hypothetical 1% increase in interest rates is not expected to materially impact the company's financial results[224] Financial Statements and Supplementary Data This section incorporates the company's audited consolidated financial statements for fiscal year 2023, including comprehensive income, balance sheets, equity changes, cash flows, and notes Consolidated Statements of Comprehensive Income (Year Ended Dec 31, in thousands) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $1,094,837 | $1,106,043 | $1,196,952 | | Gross profit | $452,407 | $403,989 | $460,504 | | Income from operations | $276,204 | $246,735 | $275,376 | | Net income | $205,384 | $184,626 | $208,737 | Consolidated Balance Sheets (As of Dec 31, in thousands) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Total current assets | $172,254 | $286,842 | | Total Assets | $932,885 | $933,705 | | Total current liabilities | $91,062 | $290,599 | | Total Liabilities | $216,214 | $415,356 | | Total Stockholders' Equity | $716,671 | $518,349 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[227] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with an unqualified opinion from Ernst & Young LLP - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[228] - Management assessed internal control over financial reporting based on the COSO framework and concluded it was effective as of December 31, 2023[232] - Ernst & Young LLP, the independent auditor, provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting[237] - No material changes to internal control over financial reporting occurred during the fourth fiscal quarter of 2023[234] Other Information The Board amended by-laws on February 21, 2024, to clarify director stock ownership and meeting leadership, with no Rule 10b5-1 trading plan changes by directors or officers in Q4 2023 - The company's by-laws were amended on February 21, 2024, to clarify director stock ownership guidelines and meeting leadership protocols[245] - No directors or officers made changes to any Rule 10b5-1 trading arrangements in Q4 2023[246] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[247] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 proxy statement - Information for this item is incorporated by reference from the 2024 proxy statement[249] Executive Compensation Executive compensation information is incorporated by reference from the 2024 proxy statement - Information for this item is incorporated by reference from the 2024 proxy statement[251] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2024 proxy statement - Information for this item is incorporated by reference from the 2024 proxy statement[252] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2024 proxy statement - Information for this item is incorporated by reference from the 2024 proxy statement[253] Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2024 proxy statement - Information for this item is incorporated by reference from the 2024 proxy statement[254] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section lists the financial statements, schedules, and exhibits filed with the Form 10-K[256][257] Form 10-K Summary No Form 10-K summary is provided - None[258]