Louisiana-Pacific Corporation (NYSE: LPX) — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports unaudited fourth-quarter results. LP manufactures engineered wood building products, including OSB, siding and engineered wood products, and operates in North America and South America.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $2,233.4 million | $1,892.5 million |
| Operating income (loss) | $204.0 million | $(63.3) million |
| Net income (loss) | $149.8 million | $(88.1) million |
| Diluted EPS | $1.03 | $(0.62) |
| Adjusted EBITDA from continuing operations | $346.1 million | $67.0 million |
| Cash from operating activities | $342.3 million | $29.2 million |
| Capital expenditures | $124.8 million | $113.8 million |
| Cash and cash equivalents at year-end | $659.3 million | $434.7 million |
| Long-term debt, excluding current portion | $374.4 million | $751.8 million |
Sales increased 18%. Operating margin was approximately 9.1% (versus negative 3.3%); net margin was approximately 6.7% (versus negative 4.7%). Adjusted EBITDA margin was approximately 15.5% (versus 3.5%). Margins are calculated from reported figures. Operating cash flow less capital expenditures was approximately $217.5 million, a derived measure and not a company-reported non-GAAP measure.
Cash from investing activities was $286.3 million, driven largely by $410.0 million collected on notes receivable from asset sales. Financing activities used $407.0 million. Working capital excluding cash was $128.4 million, compared with $191.4 million. The $200 million revolving credit facility was undrawn at year-end; the company reported compliance with its financial covenants.
Changes versus prior periods and segment results
- The turnaround chiefly reflected stronger North American OSB pricing: the average OSB selling price rose 25% year over year, while shipments increased 3%. Management attributed about $204 million of OSB segment improvement to higher selling prices.
- OSB segment sales were $1,027.7 million and operating profit was $186.2 million, compared with a $46.3 million operating loss in 2015. Siding sales rose 18% to $752.3 million, with operating profit of $126.1 million. EWP sales reached $296.9 million, but the segment remained loss-making at $5.8 million. South America sales were $136.9 million and operating profit was $17.0 million.
- Fourth-quarter sales were $550.0 million, versus $462.9 million in Q4 2015. Net income was $42.2 million, versus a $7.6 million loss; Adjusted EBITDA was $84.5 million, versus $33.7 million.
- Cash increased and debt declined after LP issued $350 million of 4.875% senior notes due 2024, redeemed its 7.5% notes due 2020, and repaid other debt. The company recorded a $17.3 million loss on early debt extinguishment.
Outlook, commentary and key risks
- Management expected 2017 capital expenditures of approximately $175 million to $200 million, for productivity, growth, maintenance and South American expansion. It expected pension contributions of approximately $10 million to $12 million and anticipated $31.3 million in 2017 payments of taxes payable from prior years.
- Management cited improving long-term housing fundamentals, but said near-term U.S. construction remained constrained by delayed household formation, labor shortages and restrictive mortgage availability. U.S. housing starts rose about 5% in 2016.
- OSB is a significant and price-volatile commodity exposure. Results are also sensitive to housing and repair activity, competition, wood fiber and resin costs, energy and transportation availability, weather, foreign exchange rates, and environmental regulation.
- Defined benefit pension plans were underfunded by $92.0 million at year-end. Product warranty reserves were $24.1 million; a $16.9 million charge in 2016 increased reserves for certain CanExel products. Management considered the reserve adequate but noted additional charges could be required.
- Environmental and other contingency reserves totaled $16.1 million, including $15.9 million for environmental matters. Management said outcomes and ultimate payments could materially exceed recorded reserves, although it did not expect current environmental proceedings to materially affect the company.
- Other notable items included a $10.6 million gain from exchanging an idled OSB mill and the settlement of remaining hardboard-trim cases for immaterial amounts on an individual, non-class basis.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective. The auditor noted adoption of share-based payment guidance resulted in a $16.3 million cumulative increase to retained earnings.
Important facts for investors to verify
- Whether OSB prices and supply-demand conditions can sustain the 2016 earnings recovery, and the degree to which profits remain exposed to commodity pricing.
- Whether siding volume growth and the South American expansion generate returns sufficient to support planned capital spending.
- The terms, covenants and maturity profile of debt, as well as liquidity after the 2024 notes issuance and repayment of prior debt.
- Developments in CanExel warranty claims, environmental contingencies and the underfunded pension plans.
- The quality and recurrence of 2016 cash generation, given the significant one-time $410 million collection of asset-sale notes and other unusual items.