Louisiana-Pacific Corporation (LPX) — Q3 2020 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2020. LP makes building products for new-home construction, repair and remodeling, and outdoor structures, operating in Siding, OSB, Engineered Wood Products (EWP), and South America. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $795 | $603 | $1,928 | $1,773 |
| Gross profit | $292 | $75 | $517 | $233 |
| Income from operations | $242 | $8 | $339 | $53 |
| Net income attributable to LP | $177 | $2 | $243 | $46 |
| Diluted EPS | $1.57 | $0.02 | $2.15 | $0.36 |
| Adjusted EBITDA (non-GAAP) | $273 | $49 | $453 | $160 |
| Operating cash flow | $218 | $59 | $338 | $58 |
| Capital expenditures | $14 | $37 | $53 | $118 |
Q3 gross margin was approximately 36.7% versus 12.4% a year earlier; operating margin was approximately 30.4% versus 1.3%. Nine-month gross margin was approximately 26.8% versus 13.1%. Stronger OSB pricing and SmartSide sales supported the improvement. Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP results.
Liquidity and debt: Cash and cash equivalents were $420 at September 30, up from $181 at December 31, 2019. Long-term debt was $348, including $350 principal of 4.875% senior notes due 2024, net of debt costs. LP had no borrowings under its $550 revolving credit facility and was in covenant compliance. Current assets were $904 versus current liabilities of $244.
Changes versus prior comparable period
- Q3 sales increased 32%, while nine-month sales increased 9%. Q3 net income attributable to LP rose to $177 from $2; nine-month income rose to $243 from $46.
- OSB was the primary earnings driver: Q3 segment sales rose 87% to $368 and Adjusted EBITDA was $189 versus a $1 loss. Commodity OSB average selling price increased 120%, while shipments fell 6% year over year.
- Siding Q3 sales rose 10% to $268 and Adjusted EBITDA increased 73% to $76, reflecting SmartSide growth, efficiency gains, and lower raw-material costs. SmartSide Q3 shipments increased 19% and average price increased 3%.
- EWP Q3 sales declined 2% to $103; South America sales increased 25% to $45, although currency movements reduced reported sales and EBITDA.
- Q3 operating cash flow improved to $218 from $59. Nine-month capital spending fell to $53 from $118, following a pandemic-related reduction in spending plans. Nine-month share repurchases were $29 versus $480 in 2019.
Outlook, commentary, risks, and unusual items
- Management said market activity had continued to improve and expected that trend to continue through Q4, but emphasized that demand remained uncertain as COVID-19 cases increased. No specific numerical earnings or sales guidance was provided.
- LP reported full mill operating schedules at quarter-end. U.S. single-family housing starts were 15% higher in Q3 than in Q3 2019; management also cited indications of significant growth in repair-and-remodel activity.
- OSB is a commodity business with volatile prices. Management said it could not predict whether OSB prices would remain at, rise above, or fall below current levels. Housing-market conditions, raw-material availability and costs, and transportation are material risks.
- LP reduced 2020 capital expenditure plans by 50% as a precaution during the pandemic. It said future operating adjustments may be made as needed; pandemic effects on future operations and financial results could not be reasonably estimated.
- LP recorded $16 of impairment losses for the nine-month period, including a $5 non-cash goodwill impairment for Entekra and charges primarily related to fiber-producing assets and the announced facility conversion. Further impairments may result if demand or pricing weakens.
- LP sold the East River facility and CanExel assets and brand rights for $17: $15 cash at closing and a $2 note payable in installments; it recorded a $2 gain. The divested operations contributed $14 of nine-month 2020 sales.
- Other items included $9 of Canadian wage subsidies for the nine months, $9 of product-line discontinuance charges, and $2 of additional estimated environmental costs. Environmental reserves totaled $11; management cautioned that eventual costs could exceed recorded reserves. Management considered other legal proceedings not likely to have a material adverse effect based on information available.
- The board authorized up to $200 of share repurchases. LP had repurchased $29 through September 30; the filing says it repurchased a further $71 from September 30 through November 4, 2020.
Investor verification priorities
- Whether elevated OSB prices and margins are sustainable, and how price changes affect earnings relative to shipment volumes.
- Q4 and subsequent housing, repair-and-remodel, and COVID-19 trends, including potential effects on operations, customers, suppliers, and estimates of asset values.
- Actual capital spending versus the reduced 2020 plan, and the pace and price of repurchases under the remaining authorization.
- Potential additional impairment, environmental, warranty, or litigation charges; recorded reserves and ultimate exposure may differ.
- Liquidity and covenant headroom if operating cash flow declines; the filing reports no revolver borrowings at quarter-end and compliance with covenants.