Louisiana-Pacific Corporation (LPX) — Q2 2020 Form 10-Q
Business context and period. LP makes building products for new-home construction, repair and remodeling, and outdoor structures. This unaudited report covers the quarter and six months ended June 30, 2020; amounts are in millions of dollars except per-share data. The company operates in Siding, OSB, Engineered Wood Products (EWP), and South America.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $548 | $588 | $1,133 | $1,170 |
| Gross profit | $117 | $78 | $225 | $159 |
| Gross margin | 21.4% | 13.3% | 19.9% | 13.6% |
| Income from operations | $53 | $23 | $97 | $45 |
| Net income attributed to LP | $33 | $17 | $66 | $44 |
| Diluted EPS | $0.29 | $0.14 | $0.58 | $0.34 |
| Adjusted EBITDA (non-GAAP) | $97 | $53 | $180 | $111 |
| Adjusted diluted EPS (non-GAAP) | $0.43 | $0.11 | $0.77 | $0.23 |
Q2 revenue fell 7% year over year, while LP-attributable net income and Adjusted EBITDA increased. The improved results reflected stronger OSB pricing, lower raw-material costs and cost controls; reported adjusted measures exclude certain impairment and product-discontinuance charges and are not GAAP measures.
- Segment performance, Q2: Siding sales were $220 (down 5%) and Adjusted EBITDA was $51 (up from $45); OSB sales were $204 (up 3%) and Adjusted EBITDA was $46 (versus a $3 loss); EWP sales were $79 (down 26%) and Adjusted EBITDA was $3 (down from $10); South America sales were $38 (down 5%) and Adjusted EBITDA was $11 (up from $9).
- Cash flow: Operating cash flow was $129 in Q2 versus $54 a year earlier, and $120 for the first half versus approximately breakeven a year earlier. First-half capital expenditures were $39 versus $81.
- Liquidity and debt: Cash and equivalents were $259 at June 30, up from $181 at December 31, 2019. Long-term debt was $348, principally the $350 face-value 4.875% notes due 2024, net of debt costs. No revolving borrowings were outstanding; the amended revolving facility provides up to $550 of capacity. LP reported compliance with its financial covenants.
Changes, outlook and notable items
- OSB was the principal earnings driver: Q2 commodity OSB average selling prices rose 27% year over year while shipments fell 13%; Structural Solutions prices rose 18% while shipments fell 19%. Management cited higher prices, lower raw-material costs and cost containment for the segment’s EBITDA recovery.
- Siding sales declined mainly because SmartSide fiber shipments dropped 55%; strand siding shipments increased 3%. EWP sales and EBITDA weakened with lower shipments and prices across key product lines.
- Management said COVID-19 had not materially affected results through June 30, but its duration and financial effects could not be reasonably estimated. Mill schedules, initially reduced to match demand, had returned to full schedules by quarter-end. Management described pandemic effects as mixed: adverse for new-home construction and favorable for repair and remodeling activity.
- U.S. single-family housing starts were lower year over year in April, May and June, by 23%, 15% and 2%, respectively. LP provided no quantified earnings or revenue guidance. It cut planned 2020 capital spending by 50% to approximately $70.
- Q2 included $10 of product-line discontinuance charges, $8 of impairment charges (including $5 for Entekra goodwill and $4 related to fiber-producing assets; reported components may overlap in presentation), and $4 of Canadian wage subsidies. LP sold its East River facility and CanExel assets for $16, recognizing a $2 gain; $14 was received in cash at closing.
- LP borrowed $350 under its revolver in March as a precautionary COVID-19 liquidity measure and repaid it in June. Q2 financing cash outflow was $368, largely reflecting that repayment. The company continued quarterly dividends of $0.145 per share; no purchases had been made under its newly authorized $200 share-repurchase program as of August 6.
- Key risks include uncertainty around COVID-19, housing demand, OSB commodity-price volatility, raw-material and transportation costs, foreign exchange, manufacturing interruptions, environmental and product-liability contingencies, and possible future impairments. Environmental reserves totaled $9; management cautioned that ultimate contingency payments could exceed accrued amounts.
Investor verification checklist
- Verify OSB pricing, shipment trends and sustainability of the Q2 EBITDA recovery, given the commodity-price exposure and lower volumes.
- Assess COVID-19’s subsequent effects on housing, repair-and-remodel demand, operations, customers and suppliers; the filing gives no reliable estimate of future impact.
- Review the assumptions behind Entekra goodwill and other asset valuations, and potential further impairment or restructuring charges.
- Confirm liquidity, revolver availability, covenant headroom, and planned capital spending against operating cash generation.
- Track EWP performance, foreign-currency impacts in South America, and environmental, warranty and other legal exposures.
- Distinguish GAAP results from management’s non-GAAP Adjusted EBITDA and adjusted earnings, including the exclusions and revised treatment of discontinuance charges.