Company Quick10K Filing
Quick10K
Trex
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$62.47 58 $3,650
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-29 Earnings, Exhibits
8-K 2019-06-06 Other Events, Exhibits
8-K 2019-05-13 Officers
8-K 2019-05-01 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-04-29 Earnings, Exhibits
8-K 2019-02-14 Earnings, Exhibits
8-K 2018-10-29 Earnings, Exhibits
8-K 2018-07-30 Earnings, Exhibits
8-K 2018-07-23 Officers
CB Chubb 65,320
WCG Wellcare Health Plans 13,400
GATX GATX 2,740
BLBD Blue Bird 462
OSTK Overstock.com 433
EYES Second Sight Medical Products 117
LCTC Lifeloc Technologies 0
VRC Vanjia 0
CCSB Community Savings Bancorp 0
NUMD Nu-Med Plus 0
TREX 2019-06-30
Part I
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 d760534dex101.htm
EX-10.2 d760534dex102.htm
EX-10.3 d760534dex103.htm
EX-31.1 d760534dex311.htm
EX-31.2 d760534dex312.htm
EX-32 d760534dex32.htm

Trex Earnings 2019-06-30

TREX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q
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Table of Contents 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the quarterly period ended
June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the transition period from                      to                     
Commission File Number:
001-14649
 
 
Trex Company, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
54-1910453
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
160 Exeter Drive
Winchester
,
Virginia
 
22603-8605
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Registrant’s telephone number, including area code: (
540
)
 
542-6300
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   
    No   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   
    No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
 
 
Accelerated filer
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
Emerging growth company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule
12b-2
of the Exchange Act):    Yes  
    No  
The number of shares of the registrant’s common stock, par value $.01 per share, outstanding at July 11, 2019 was 58,424,677 shares.
Securities registered pursuant to Section 12(b) of the Act:
         
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common stock
 
TREX
 
New York Stock Exchange
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table of Contents 
  
 
TREX COMPANY, INC.
INDEX
             
 
 
Page
 
   
1
   
             
Item 1.
     
1
 
             
     
1
 
             
     
2
 
             
     
3
 
             
     
4
 
             
     
5
 
             
Item 2.
     
18
 
             
Item 3.
     
27
 
             
Item 4.
     
27
 
           
   
28
   
             
Item 1.
     
28
 
             
Item 2.
     
28
 
             
Item 6.
     
28
 
 
 
 
 
 
 
 
 
 
 
Table of Contents 
 
 
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TREX COMPANY, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except share and per share data)
                                 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Net sales
  $
206,453
    $
206,692
    $
386,024
    $
377,899
 
Cost of sales
   
123,009
     
115,577
     
233,214
     
210,071
 
                                 
Gross profit
   
83,444
     
91,115
     
152,810
     
167,828
 
Selling, general and administrative expenses
   
35,705
     
33,513
     
65,872
     
62,472
 
                                 
Income from operations
   
47,739
     
57,602
     
86,938
     
105,356
 
Interest (income) expense, net
   
(1
)    
370
     
(57
)    
598
 
                                 
Income before income taxes
   
47,740
     
57,232
     
86,995
     
104,758
 
Provision for income taxes
   
12,030
     
14,413
     
19,730
     
24,828
 
                                 
Net income
  $
35,710
    $
42,819
    $
67,265
    $
79,930
 
Basic earnings per common share
  $
0.61
    $
0.73
    $
1.15
    $
1.36
 
Basic weighted average common shares outstanding
   
58,486,192
     
58,760,753
     
58,514,676
     
58,807,694
 
Diluted earnings per common share
  $
0.61
    $
0.73
    $
1.14
    $
1.35
 
Diluted weighted average common shares outstanding
   
58,687,540
     
59,051,413
     
58,758,201
     
59,125,258
 
Comprehensive income
  $
35,710
    $
42,819
    $
67,265
    $
79,930
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (Unaudited).
 
 
1
 
 
Table of Contents
 
 
TREX COMPANY, INC.
Condensed Consolidated Balance Sheets
(In thousands)
                 
 
June 30,
2019
   
December 31,
2018
 
 
(Unaudited)
   
 
Assets
   
     
 
Current assets:
   
     
 
Cash and cash equivalents
  $
106,084
    $
105,699
 
Accounts receivable, net
   
117,909
     
91,163
 
Inventories
   
42,919
     
57,801
 
Prepaid expenses and other assets
   
19,251
     
15,562
 
                 
Total current assets
   
286,163
     
270,225
 
Property, plant and equipment, net
   
129,612
     
117,144
 
Goodwill and other intangibles
   
74,294
     
74,503
 
Operating lease assets
   
42,571
     
  
 
Other assets
   
3,558
     
3,250
 
                 
Total assets
  $
536,198
    $
465,122
 
Liabilities and Stockholders’ Equity
   
     
 
Current liabilities:
   
     
 
Accounts payable
  $
27,307
    $
31,084
 
Accrued expenses and other liabilities
   
48,762
     
56,291
 
Accrued warranty
   
5,400
     
5,400
 
Line of credit
   
  
     
  
 
                 
Total current liabilities
   
81,469
     
92,775
 
Operating lease liabilities
   
37,056
     
  
 
Deferred income taxes
   
2,125
     
2,125
 
Non-current
accrued warranty
   
23,936
     
25,354
 
Other long-term liabilities
   
79
     
1,905
 
                 
Total liabilities
   
144,665
     
122,159
 
                 
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, 120,000,000 shares authorized; 70,137,027 and 69,998,336 shares issued and 58,440,204 and 58,551,653 shares outstanding at June 30, 2019 and December 31, 2018, respectively
   
701
     
700
 
Additional
paid-in
capital
   
122,720
     
124,224
 
Retained earnings
   
484,207
     
416,942
 
Treasury stock, at cost, 11,696,823 and 11,446,683 shares at June 30, 2019 and December 31, 2018, respectively
   
(216,095
)    
(198,903
)
                 
Total stockholders’ equity
   
391,533
     
342,963
 
                 
Total liabilities and stockholders’ equity
  $
536,198
    $
465,122
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (Unaudited).
 
2
 
 
Table of Contents 
 
 
TREX COMPANY, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
(In thousands, except share data)
                                                         
 
Common Stock
   
Additional
Paid-In

Capital
   
Retained
Earnings
   
Treasury Stock
   
Total
   
 
Shares
   
Amount
   
Shares
   
Amount
   
Balance, December 31, 2018
   
58,551,653
    $
700
    $
124,224
    $
416,942
     
11,446,683
    $
(198,903
)   $
342,963
 
Net income
   
—  
     
—  
     
—  
     
31,555
     
—  
     
—  
     
31,555
 
Employee stock plans
   
24,472
     
—  
     
302
     
—  
     
—  
     
—  
     
302
 
Shares withheld for taxes on awards
   
(74,010
)    
—  
     
(5,727
)    
—  
     
—  
     
—  
     
(5,727
)
Stock-based compensation
   
160,359
     
1
     
2,793
     
—  
     
—  
     
—  
     
2,794
 
Repurchases of common stock
   
(124,989
)    
—  
     
—  
     
—  
     
124,989
     
(8,730
)    
(8,730
)
                                                         
Balance, March 31, 2019
   
58,537,485
    $
701
    $
121,592
    $
448,497
     
11,571,672
    $
(207,633
)   $
363,157
 
Net income
   
—  
     
—  
     
—  
     
35,710
     
—  
     
—  
     
35,710
 
Employee stock plans
   
14,905
     
—  
     
257
     
—  
     
—  
     
—  
     
257
 
Shares withheld for taxes on awards
   
(19,174
)    
—  
     
(1,254
)    
—  
     
—  
     
—  
     
(1,254
)
Stock-based compensation
   
32,139
     
     
2,125
     
—  
     
—  
     
—  
     
2,125
 
Repurchases of common stock
   
(125,151
)    
—  
     
—  
     
—  
     
125,151
     
(8,462
)    
(8,462
)
                                                         
Balance, June 30, 2019
   
58,440,204
    $
701
    $
122,720
    $
484,207
     
11,696,823
    $
(216,095
)   $
391,533
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                         
 
Common Stock
   
Additional
Paid-In

Capital
   
Retained
Earnings
   
Treasury Stock
   
Total
   
 
Shares
   
Amount
   
Shares
   
Amount
   
Balance, December 31, 2017
   
58,856,860
    $
698
    $
121,694
    $
282,370
     
10,987,362
    $
(173,512
)   $
231,250
 
Net income
   
—  
     
—  
     
—  
     
37,110
     
—  
     
—  
     
37,110
 
Employee stock plans
   
26,832
     
—  
     
195
     
—  
     
—  
     
—  
     
195
 
Shares withheld for taxes on awards
   
(13,028
)    
—  
     
(3,782
)    
—  
     
—  
     
—  
     
(3,782
)
Stock-based compensation
   
80,988
     
1
     
2,295
     
—  
     
—  
     
—  
     
2,296
 
Repurchases of common stock
   
(100,044
)    
—  
     
—  
     
—  
     
100,044
     
(5,211
)    
(5,211
)
                                                         
Balance, March 31, 2018
   
58,851,608
    $
699
    $
120,402
    $
319,480
     
11,087,406
    $
(178,723
)   $
261,858
 
Net income
   
—  
     
—  
     
—  
     
42,819
     
—  
     
—  
     
42,819
 
Employee stock plans
   
22,549
     
1
     
209
     
—  
     
—  
     
—  
     
210
 
Shares withheld for taxes on awards
   
(7,493
)    
—  
     
(420
)    
—  
     
—  
     
—  
     
(420
)
Stock-based compensation
   
9,735
     
  
     
1,350
     
—  
     
—  
     
—  
     
1,350
 
Repurchases of common stock
   
(150,000
)    
—  
     
—  
     
—  
     
150,000
     
(7,818
)    
(7,818
)
                                                         
Balance, June 30, 2018
   
58,726,399
    $
700
    $
121,541
    $
362,299
     
11,237,406
    $
(186,541
)   $
297,999
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (Unaudited).
 
3
 
 
Table of Contents
 
 
TREX COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
                 
 
Six Months Ended
June 30,
 
 
2019
   
2018
 
Operating Activities
   
     
 
Net income
  $
67,265
    $
79,930
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
   
     
 
Depreciation and amortization
   
6,857
     
9,363
 
Stock-based compensation
   
4,918
     
3,645
 
Loss (gain) on disposal of property, plant and equipment
   
10
     
(29
)
Other
non-cash
adjustments
   
(373
)    
(406
)
Changes in operating assets and liabilities:
   
     
 
Accounts receivable
   
(26,746
)    
(104,250
)
Inventories
   
14,882
     
(1,664
)
Prepaid expenses and other assets
   
210
     
(2,616
)
Accounts payable
   
(3,777
)    
14,863
 
Accrued expenses and other liabilities
   
(16,548
)    
(5,705
)
Income taxes receivable/payable
   
(3,640
)    
5,195
 
                 
Net cash provided by (used in) operating activities
   
43,058
     
(1,674
)
                 
Investing Activities
   
     
 
Expenditures for property, plant and equipment and intangibles
   
(19,061
)    
(17,697
)
Proceeds from sales of property, plant and equipment
   
—  
     
83
 
                 
Net cash used in investing activities
   
(19,061
)    
(17,614
)
                 
Financing Activities
   
     
 
Borrowings under line of credit
   
89,500
     
167,750
 
Principal payments under line of credit
   
(89,500
)    
(159,250
)
Repurchases of common stock
   
(24,172
)    
(17,230
)
Proceeds from employee stock purchase and option plans
   
560
     
405
 
                 
Net cash used in financing activities
   
(23,612
)    
(8,325
)
                 
Net increase (decrease) in cash and cash equivalents
   
385
     
(27,613
)
Cash and cash equivalents, beginning of period
   
105,699
     
30,514
 
                 
Cash and cash equivalents, end of period
   
106,084
    $
2,901
 
Supplemental Disclosure:
   
     
 
Cash paid for interest
  $
321
    $
385
 
Cash paid for income taxes, net
  $
23,371
    $
19,618
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (Unaudited).
 
4
 
 
Table of Contents 
 
 
TREX COMPANY, INC.
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2019 and 2018
(Unaudited)
1
.
BUSINESS AND ORGANIZATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trex Company, Inc. (Company) is the world’s largest manufacturer of wood-alternative decking and railing products, with more than 25 years of product experience, which are marketed under the brand name Trex
®
. The Company manufactures and distributes high-performance,
low-maintenance
wood/plastic composite outdoor living products and related accessories. A majority of its products are manufactured in a proprietary process that combines reclaimed wood fibers and scrap polyethylene. Also, the Company is a leading national provider of custom-engineered railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues. The Company operates in
two
reportable segments, Trex Residential Products (Trex Residential) and Trex Commercial Products (Trex Commercial). The Company is incorporated in Delaware. The principal executive offices are located at 160 Exeter Drive, Winchester, Virginia 22603, and the telephone number at that address is (540)
 542-6300.
2.
BASIS OF PRESENTATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form
10-Q
and Article 10 of Regulation
S-X
and, accordingly, the accompanying condensed consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments except as otherwise described herein) considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Trex Wood-Polymer Espana, S.L. and Trex Commercial Products, Inc., for all periods presented.
The consolidated results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2018 and 2017 and for each of the three years in the period ended December 31, 2018 included in the Annual Report of Trex Company, Inc. on Form
10-K,
as filed with the U.S. Securities and Exchange Commission.
3.
RECENTLY ADOPTED ACCOUNTING STANDARDS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In June 2018, the FASB issued ASU No.
 2018-07,
Compensation – Stock Compensation (Topic 718)
.” The ASU 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 Subtopic
505-50,
Equity—Equity-Based Payment to Non-Employees
.” Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU was effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted the guidance on January 1, 2019. Adoption did not have an impact on the Company’s financial condition or results of operations.
In February 2016, the FASB issued ASU No.
 2016-02,
Leases (Topic 842),
” and issued subsequent amendments to the initial guidance in January 2018 within ASU No.
 2018-01,
in July 2018 within ASU Nos.
2018-10
and
2018-11,
in December 2018 within ASU No.
 2018-20,
and in March 2019 within ASU No.
 2019-01
(collectively, the standard). The standard requires lessees to recognize operating leases on the balance sheet as a
right-of-use
asset and a lease liability. The liability is equal to the present value of the lease payments over the remaining lease term. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense. The Company adopted the standard on January 1, 2019, and elected the transition method of adoption, which allowed the Company to apply the standard as of the beginning of the period of adoption. The Company opted to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs, and certain other practical expedients, including the use of hindsight to determine the lease term for existing leases and in assessing impairment of the
right-of-use
asset, and the exception for short-term leases. For its current classes of underlying assets, the Company did not elect the practical 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 applicable lease agreements. Adoption of the standard had a significant impact on the Company’s condensed consolidated balance sheet due to the recognition of a
right-of-use
asset and lease liability of $45.8 million and $47.2 million, respectively, upon adoption. As the 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.
 
5
 
 
 
Table of Contents 
 
 
4.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In August 2018, the FASB issued ASU No.
 2018-15,
Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of FASB Emerging Issues Task Force)”
. The new guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an
internal-use
software license. Under that model, implementation costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred. Capitalized implementation costs are amortized over the term of the associated hosted cloud computing arrangement service contract on a straight-line basis, unless another systematic and rational basis is more representative of the pattern in which the entity expects to 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 effective for fiscal years beginning after December 15, 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 intends to adopt the guidance on January 1, 2020, and 
does not believe adoption will have a material impact on its financial condition or results of operations.
In January 2017, the FASB issued ASU No.
 2017-04,
Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
”. The guidance removes Step 2 of the goodwill impairment test and eliminates the need to determine the fair value of individual assets and liabilities to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The guidance 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 intends to adopt the guidance on January 1, 2020. The Company continues to evaluate the guidance and does not believe adoption will have a material impact on its financial condition or results of operations.
In June 2016, the FASB issued ASU
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses in Financial Instruments,
” and issued subsequent amendments to the initial guidance in November 2018 within ASU No.
 2018-09,
April 2019 within ASU No.
 2019-04,
and May 2019 within ASU No.
 2019-05.
The ASU amends the guidance on the impairment of financial instruments and adds an impairment model, known as the current expected credit loss (CECL) model. The CECL model requires an 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 intends to adopt the guidance on January 1, 2020. The Company continues to evaluate the guidance and does not believe adoption will have a material impact on its financial condition or results of operations.
 
5.
INVENTORIES
Inventories valued at LIFO
(last-in, 
first-out),
consist of the following (in thousands):
                 
 
 
June 30,
2019
 
 
December 31,
2018
 
Finished goods
  $
25,518
    $
46,638
 
Raw materials
   
33,924
     
27,321
 
                 
Total FIFO
(first-in, 
first-out)
inventories
   
59,442
     
73,959
 
Reserve to adjust inventories to LIFO value
   
(18,442
)    
(18,442
)
                 
Total LIFO inventories
  $
41,000
    $
55,517
 
 
 
 
 
 
 
 
 
6
 
 
Table of Contents 
 
The Company utilizes the LIFO method of accounting related to its Trex Residential wood-alternative decking and residential railing products, which generally provides for the matching of current costs with current revenues. However, under the LIFO method, reductions in annual inventory balances cause a portion of the Company’s cost of sales to be based on historical costs rather than current year costs (LIFO liquidation). Reductions in interim inventory balances expected to be replenished by
year-end
do not result in a LIFO liquidation. Accordingly, interim LIFO calculations are based, in part, on management’s estimates of expected
year-end
inventory levels and costs which may differ from actual results. Since inventory levels and costs are subject to factors beyond management’s control, interim results are subject to the final
year-end
LIFO inventory valuation. As of June 30, 2019, management estimates that interim inventory balances will be replenished by
year-end
and there were
no
LIFO inventory liquidations or related impact on cost of sales in the six months ended June 30, 2019.
Inventories valued at lower of cost (FIFO method) and net realizable value were $1.9 million at June 30, 2019 and $2.3 million at December 31, 2018, consisting primarily of raw materials. The Company utilizes the FIFO method of accounting related to its 
Trex Commercial
architectural railing and staging systems for the commercial and multi-family market.
 
6.
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following (in thousands):
                 
 
June 30,
2019
   
December 31,
2018
 
Revenues in excess of billings
  $
5,793
    $
7,987
 
Prepaid expenses
   
5,581
     
3,390
 
Contract retainage
   
3,046
     
2,469
 
Income tax receivable
   
4,370
     
471
 
Other
   
461
     
1,245
 
                 
Total prepaid expenses and other assets
  $
19,251
    $
15,562
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
                 
 
June 30,
2019
   
December 31,
2018
 
Intangible assets:
   
     
 
Customer backlog
  $
4,000
    $
4,000
 
Trade names and trademarks
   
900
     
900
 
Domain names
   
6,327
     
6,327
 
                 
Total intangible assets
   
11,227
     
11,227
 
                 
Accumulated amortization:
   
     
 
Customer backlog
   
(4,000
)    
(4,000
)
Trade name and trademarks
   
(900
)    
(900
)
Domain names
   
(494
)    
(285
)
                 
Total accumulated amortization
   
(5,394
)    
(5,185
)
                 
Intantible assets, net
  $
5,833
    $
6,042
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible asset amounts were determined based on the estimated economics of the asset and are amortized over the estimated useful lives on a straight-line basis over 12 months for customer backlog and trade names and trademarks and 15 years for domain names, which approximates the pattern in which the economic benefits are expected to be received. In May 2018, the Company purchased certain domain names for $6.3 million. We evaluate the recoverability of intangible assets periodically and consider events or circumstances that may warrant revised estimates of useful lives or that may indicate an impairment. Intangible asset amortization expense for the six months ended June 30, 2019 and 2018 was $0.2 million and $2.5 million, respectively. As of June 30, 2019, the Company had goodwill of $68.5 million.
 
7
 
 
 
Table of Contents 
 
8.
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in thousands):
                 
 
June 30,
2019
   
December 31,
2018
 
Sales and marketing
  $
22,670
    $
25,379
 
Compensation and benefits
   
8,257
     
19,124
 
Operating lease liabilities
   
6,857
     
  
 
Customer deposits
   
2,926
     
2,058
 
Manufacturing costs
   
2,199
     
3,744
 
Billings in excess of revenues
   
1,466
     
512
 
Other
   
4,387
     
5,474
 
                 
Total accrued expenses and other liabilities
  $
48,762
    $
56,291
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9.
DEBT
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company’s outstanding debt consists of a revolving credit facility.
Revolving Credit Facility
On January 12, 2016, the Company entered into a Third Amended and Restated Credit Agreement, as amended, with Bank of America, N.A. as Lender, Administrative Agent, Swing Line Lender and Letter of Credit Issuer, and certain other lenders including Citibank, N.A., Capital One, N.A., and SunTrust. The Third Amended Credit Agreement, as amended, provides 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 ends
January 12, 2021
.
The Company had 
no
outstanding borrowings under its revolving credit facility and remaining available borrowing capacity of $250 million at June 30, 2019.
Compliance with Debt Covenants and Restrictions
The Company’s ability to make 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 the Company’s ability to generate sufficient cash flow from operations.
As of June 30, 2019, the Company was in compliance with all of the covenants contained in its debt agreements. Failure to comply with the loan covenants might cause lenders to accelerate the repayment obligations under the credit facility, which may be declared payable immediately based on a default.
 
10.
LEASES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company leases office space, storage warehouses and certain plant equipment under various operating leases. The Company determines if an arrangement is a lease at inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Operating leases are included in operating lease
right-of-use
(ROU) assets, accrued expenses and other current liabilities, and operating lease liabilities in the condensed consolidated balance sheets. Operating leases with an initial term of
12 months or less
are not included in the condensed consolidated balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company gives consideration to instruments with similar characteristics when calculating its incremental borrowing rate. The Company’s operating leases have remaining lease terms of 1 year to 10 years. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
 
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For the six months ended June 30, 2019, total operating lease cost was $4.2 million. The weighted average remaining lease term and weighted average discount rate at June 30, 2019 were 6.8 years and 3.67%, respectively.
 
The following table includes supplemental cash flow information for the six months ended June 30, 2019 and supplemental balance sheet information at June 30, 2019 related to operating leases (in thousands):
         
Supplemental cash flow information
(in thousands)
 
 
Cash paid for amounts included in the measurement of operating lease liabilities
  $
4,242
 
Operating ROU assets obtained in exchange for lease liabilities
  $
388
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental balance sheet information
(in thousands)
 
 
Operating lease ROU assets
  $
42,571
 
Operating lease liabilities:
   
 
Accrued expenses and other current liabilities
  $
6,857
 
Operating lease liabilities
   
37,056
 
         
Total operating lease liabilities
  $
43,913
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table includes maturities of operating lease liabilities at June 30, 2019 (in thousands):
         
Maturities of operating lease liabilities
 
 
2019 (excluding the six months ended June 30, 2019)
  $
4,197
 
2020
   
8,290
 
2021
   
8,095
 
2022
   
6,278
 
2023
   
5,932
 
Thereafter
   
17,063
 
         
Total lease payments
   
49,855
 
Less imputed interest
   
(5,942
)
         
Total operating liabilities
  $
43,913
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11.
FINANCIAL INSTRUMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company considers the recorded value of its financial assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, other current liabilities, and debt to approximate the fair value of the respective assets and liabilities on the Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018.
 
12.
STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):
 
                                 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Numerator:
   
     
     
     
 
Net income available to common shareholders
  $
35,710
    $
42,819
    $
67,265
    $
79,930
 
Denominator:
   
     
     
     
 
Basic weighted average shares outstanding
   
58,486,192
     
58,760,753
     
58,514,676
     
58,807,694
 
Effect of dilutive securities:
   
     
     
     
 
Stock appreciation rights and options
   
129,839
     
173,571
     
141,958
     
183,814
 
Restricted stock
   
71,509
     
117,089
     
101,567
     
133,750
 
Diluted weighted average shares outstanding
   
58,687,540
     
59,051,413
     
58,758,201
     
59,125,258
 
Basic earnings per share
  $
0.61
    $
0.73
    $
1.15
    $
1.36
 
Diluted earnings per share
  $
0.61
    $
0.73
    $
1.14
    $
1.35
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Table of Contents 
 
Diluted earnings per share is computed using the weighted average number of shares determined for the basic earnings per share computation plus the dilutive effect of common stock equivalents using the treasury stock method. The computation of diluted earnings per share excludes the following potentially dilutive securities because the effect would be anti-dilutive:
                                 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Stock appreciation rights
   
24,536
     
21,260
     
18,675
     
16,063
 
Performance-based restricted stock units
   
—  
     
854
     
—  
     
427
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock Repurchase Programs
On February 16, 2018, the Board of Directors adopted a stock repurchase program of up to 5.8 million shares of the Company’s outstanding common stock (Stock Repurchase Program). As of
June 30, 2019,
the Company had repurchased 709,461 shares of the Company’s outstanding common stock under the Stock Repurchase Program. 
 
13.
REVENUE FROM 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 or as the Company satisfies the performance obligation. Revenue is recognized 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.
Trex Residential Products
Trex Residential principally generates revenue from the manufacture and sale of its high performance, low maintenance composite decking and residential railing products and accessories. Substantially all of its revenues are from contracts with customers, which are purchase orders of short-term duration of less than one year. Its customers, in turn, sell primarily to the residential market, which includes replacement, remodeling and new construction related to outdoor living products. Trex Residential satisfies its performance obligations at a point in time. The shipment of each product is a separate performance obligation as the customer is able to derive benefit from each product shipped and no performance obligation remains after shipment. Upon shipment of the product, the customer obtains control over the distinct product and Trex Residential satisfies its performance obligation. Any performance obligation that remains unsatisfied at the end of a reporting period is part of a contract that has an original expected duration of one year or less. Any variable consideration related to the unsatisfied performance obligation is allocated wholly to the unsatisfied performance obligation and recognized when the product ships and the performance obligation is satisfied.
For each product shipped, the transaction price by product is specified in the purchase order. The Company recognizes revenue on the transaction price less any amount offered under a sales incentive program. The Company recognizes an account receivable (contract asset) for the amount of revenue recognized as it has an unconditional right to consideration at the time of shipment and payment from the customer is due based solely on the passage of time. The Company receives payments from its customers based on the payment terms applicable to each individual contract and the customer pays in accordance with the billing terms specified in the purchase order, which is less than one year. The related accounts receivables are included in “
Accounts receivable, net
” in the Condensed Consolidated Balance Sheets.
 
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Trex Residential may offer various sales incentive programs throughout the year. It estimates the amount of sales incentive to allocate to each performance obligation, or product shipped, based on direct sales to the customer. The estimate is updated each reporting period and any changes are allocated to the performance obligations on the same basis as at inception. Changes in estimate allocated to a previously satisfied performance obligation are recognized as a reduction of revenue in the period in which the change occurs under the cumulative
catch-up
method. In addition to sales incentive programs, Trex Residential may offer a payment discount. It estimates the payment discount that it believes will be taken by the customer based on prior history.
Trex Residential pays commissions to certain employees. However, the sales commissions are not directly attributable to identifiable contracts, are discretionary in nature and are based on other factors not related to obtaining a contract, such as individual performance, profitability of the entity, annual sales targets, etc. These costs are included in selling, general and administrative expenses as incurred. Trex Residential does not grant contractual product return rights to customers other than pursuant to its assurance product warranty (see related disclosure on product warranties in Note 18, “
Commitments and Contingencies
”). Trex Residential accounts for all shipping and handling fees invoiced to the customer in net sales and the related costs in cost of sales.
Trex Commercial Products
Trex Commercial generates revenue from the manufacture and sale of its modular and architectural railing and staging systems. All of its revenues are from fixed-price contracts with customers. Trex Commercial contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and is, therefore, not distinct.
Trex Commercial satisfies its performance obligation over time as work progresses because control is transferred continuously to its customers. Revenue and estimated profit is recognized over time based on the proportion of actual costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the performance obligation. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Incurred costs include all direct material, labor, subcontract and certain indirect costs. The Company reviews and updates its estimates regularly and recognizes adjustments in estimated profit on contracts under the cumulative
catch-up
method. Under this method, the impact of the adjustment on revenue and estimated profit to date on a contract is recognized in the period 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 the total loss in the period it is identified. During the six months ended June 30, 2019, no adjustment to any one contract was material to the Company’s Condensed Consolidated Financial Statements. In accordance with ASC
606-10-50-15,
the Company discloses only the transaction price allocated to its remaining performance obligations on contracts with an original duration greater than one year, which was $48.2 million as of June 30, 2019. The Company will recognize this revenue as contracts are completed, which is expected to occur within the next 24 months.
The Company recognizes an account receivable (contract asset) for satisfied performance obligations as it has an unconditional right to consideration and payment from the customer is due based solely on the passage of time. The Company receives payments from its customers on the accounts receivable based on the payment terms applicable to each individual contract and the customer pays in less than one year. Accounts receivables are included in “
Accounts receivable, net
” in the Condensed Consolidated Balance Sheets.
In addition, the timing of revenue recognition, billings and cash collections may result in revenues in excess of billings and contract retainage (contract assets), and billings in excess of revenues and customer deposits (contract liabilities) in the Condensed Consolidated Balance Sheet. These assets and liabilities are reported on a