LPX

Business Context and Reporting Period

Company: Louisiana-Pacific Corporation (LP)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2011
Business Overview: LP manufactures and distributes building products, primarily Oriented Strand Board (OSB), wood-based siding, and Engineered Wood Products (EWP). Operations are concentrated in North America with facilities in Chile and Brazil. Demand is highly correlated with residential construction activity, which was reported 10% lower in Q1 2011 compared to Q1 2010.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 12% to $331.7 million, driven by volume increases in the Siding segment (18% growth) and OSB segment (12% growth), despite a 5% decrease in average OSB selling prices.
• Operating Performance: While the company reported a net loss, the operating loss narrowed from $22.7 million to $18.2 million. Adjusted EBITDA improved significantly from $2.9 million to $9.9 million.
• Segment Results:
  • Siding: Operating profit increased 49% to $12.7 million due to higher sales volumes in SmartSide siding.
  • OSB: Operating loss widened to $9.1 million (from $4.5 million) due to lower commodity prices, partially offset by manufacturing efficiencies.
  • Engineered Wood Products (EWP): Operating loss narrowed to $5.5 million (from $6.6 million) due to higher selling prices and facility improvements.
• Cash Flow: Cash used in operating activities increased to $68.4 million, primarily due to the absence of a $46.8 million tax refund received in Q1 2010 and increased inventory/receivables.
• Impairments: Recorded a $5.5 million loss on sale or impairment of long-lived assets, compared to $1.3 million in the prior year.

Guidance, Outlook, and Risks

• Outlook: Management notes that building activity is unlikely to improve to "normal" levels until housing inventory is reduced and foreclosure activity subsides. OSB prices are volatile and subject to market supply/demand dynamics.
• Capital Expenditures: Expected not to exceed $25 million for 2011. Additionally, LP anticipates paying $20-$25 million in Q2 2011 to purchase the remaining 25% of its Brazil operations.
• Pension Contributions: Anticipates contributing $10-$12 million to defined benefit pension plans in 2011.
• Key Risks:
  • Commodity Pricing: OSB prices fluctuate daily; a $1 change in annual average price impacts pre-tax profits by approximately $4.3 million.
  • Asset Impairment: Continued review of mills and investments; further impairment charges possible if market conditions deteriorate or assets are disposed of.
  • Auction Rate Securities (ARS): Holds $18.9 million in ARS subject to valuation uncertainties due to failed auctions and credit market conditions.
  • Legal/Environmental: Significant reserves exist for hardboard siding litigation ($17.4 million) and environmental remediation ($14.1 million).

Investor Verification Checklist

• OSB Pricing Trends: Verify current market prices for OSB relative to the reported 5% decline and the impact on future margins.
• Asset Impairment Status: Confirm the status of the two indefinitely curtailed OSB mills and the valuation of assets held for sale ($52.6 million).
• ARS Valuation: Review the fair value assessment of the $18.9 million auction rate securities portfolio for potential further write-downs.
• Hardboard Litigation Reserves: Monitor the adequacy of the $17.4 million reserve against the rate of claim settlements (average payment $1,000).
• Liquidity Covenants: Verify compliance with the fixed charge coverage ratio covenant (1.1 to 1.0) on the $100 million credit facility, noting management's expectation that the ratio may fall below this threshold in 2011.