Louisiana-Pacific Corporation — Q2 2016 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2016, compared with the same 2015 periods. LP makes building products used mainly in residential construction, repair and remodeling, and outdoor structures. Its segments are North America OSB, Siding, Engineered Wood Products (EWP), and South America. U.S. housing starts were up 2% in the quarter and 7% year to date versus 2015.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $582.4 million | $493.0 million | $1,087.0 million | $964.7 million |
| Operating income (loss) | $52.2 million | $(14.1) million | $71.1 million | $(47.3) million |
| Net income (loss) | $31.7 million | $(19.5) million | $42.0 million | $(54.0) million |
| Diluted EPS | $0.22 | $(0.14) | $0.29 | $(0.38) |
| Operating cash flow | $109.1 million | $41.5 million | $104.2 million | $(2.5) million |
- Q2 sales rose 18%; six-month sales rose 13%. Q2 operating margin was approximately 9.0%, versus a loss in the prior-year quarter; net margin was approximately 5.4%.
- Management reported Q2 adjusted EBITDA of $98.9 million, compared with $16.2 million in Q2 2015; six-month adjusted EBITDA was $150.7 million versus $22.3 million. These are non-GAAP measures.
- At June 30, cash was $474.8 million, current assets $876.1 million and current liabilities $176.9 million. Total debt was approximately $747.3 million, including $2.1 million current; cash exceeded debt by approximately $272.5 million. Stockholders’ equity was $1,084.3 million.
- Six-month capital expenditures were $51.1 million. Net cash used in investing and financing activities was $51.5 million and $16.1 million, respectively.
Material changes and segment performance
- Higher North American OSB pricing was the principal earnings driver. LP estimated the pricing benefit to operating results and adjusted EBITDA at $59.1 million for Q2 and $86.8 million for the first half. OSB average net selling prices increased 30% in Q2 and 22% year to date, while shipments declined 7% and 4%, respectively.
- OSB segment sales grew 20% in Q2 and 17% year to date; operating income improved to $44.0 million for Q2 and $59.3 million for the first half, from losses in 2015. Lower shipments reflected capacity converted at the Swan Valley mill.
- Siding sales increased 26% in Q2 and 15% year to date, supported by higher volumes, lower raw-material costs and improved utilization. EWP sales rose 8% and 10%, respectively, and segment results improved but remained slightly loss-making year to date. South America operating income improved, although six-month sales declined 4%.
- Q2 included $11.4 million of other operating charges, primarily a $10.9 million increase to product warranty reserves and a related value-added-tax adjustment for certain CanExel products. Q2 2015 had no comparable charge. The first half of 2015 included an $11.6 million write-off of a Quebec forest license.
Outlook, risks and contingencies
- LP expects 2016 capital expenditures of approximately $120–$130 million for productivity, growth, maintenance and South American expansion. It expects pension contributions of $2–$4 million in the remainder of 2016.
- The filing provides no specific earnings or revenue guidance. Management said existing cash, operating cash flow, credit facilities and other capital resources are expected to meet future cash needs.
- Results remain sensitive to cyclical housing activity and volatile OSB prices, supply and demand, raw-material costs, transportation availability and costs, weather, foreign exchange, and environmental and regulatory changes. LP stated a $1 change in annual average OSB price per square foot (7/16-inch basis) would affect annual pretax profit by about $5.1 million, based on assumed capacity.
- Warranty, product-related litigation, environmental remediation, tax positions and asset impairment estimates involve uncertainty. Management considered warranty reserves adequate at June 30 but said further charges may be required; it could not estimate the range of potential changes in environmental contingencies.
- LP reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. The filing notes valuation allowances on certain deferred tax assets and an increase in the reserve for unrecognized tax benefits associated with South American operations.
Investor verification priorities
- Assess whether elevated OSB prices and the resulting earnings improvement are sustainable, and track OSB shipment volumes and capacity.
- Review the assumptions and future claims experience underlying the $11.4 million warranty-related charge and the adequacy of remaining reserves.
- Monitor execution, timing and returns on the $120–$130 million 2016 capital program, including the South American expansion.
- Check for developments in product litigation, environmental matters, tax reserves and deferred-tax-asset valuation allowances.
- Compare operating cash generation and liquidity with debt service and planned capital spending as market conditions change.