Louisiana-Pacific Corporation (LPX) — FY 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. LP manufactures engineered wood building products, including OSB, siding and engineered wood products, with operations in North America and South America. Results are exposed to housing activity, commodity prices, input costs and foreign exchange rates.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $2,733.9 million | $2,233.4 million |
| Operating income | $523.4 million | $204.0 million |
| Income from continuing operations | $391.1 million | $150.3 million |
| Net income | $389.8 million | $149.8 million |
| Diluted EPS | $2.66 | $1.03 |
| Adjusted EBITDA from continuing operations | $666.8 million | $346.1 million |
| Cash from operating activities | $473.7 million | $342.3 million |
| Capital expenditures | $148.6 million | $124.8 million |
Sales grew approximately 22%. Operating margin was approximately 19.1%, versus 9.1% in 2016; net margin was approximately 14.3%, versus 6.7%. These percentages are calculated from reported figures. OSB price improvement was the principal earnings driver: management attributed $307.3 million of year-over-year operating-results improvement to higher North American OSB pricing, including $293 million in the OSB segment.
Fourth quarter: Net sales were $710.6 million, income from continuing operations was $130.7 million, net income was $130.5 million, and diluted EPS was $0.89. Fourth-quarter Adjusted EBITDA was $199.0 million.
Segments
| Segment | 2017 sales | 2017 operating profit | Change in sales vs. 2016 |
|---|---|---|---|
| Siding | $884.0 million | $186.8 million | +18% |
| North America OSB | $1,302.5 million | $425.7 million | +27% |
| Engineered Wood Products | $365.9 million | $14.9 million | +23% |
| South America | $155.3 million | $24.3 million | +13% |
OSB remained the largest contributor: its 2017 sales were about 54% of North American sales. OSB segment sales volumes were essentially flat year over year while average selling prices rose 29%. Siding benefited from higher shipment volumes and prices; EWP improved with higher volumes and prices; South America benefited from price increases and stronger OSB export volumes.
Liquidity, debt and capital
- Cash and cash equivalents were $928.0 million at year-end, up from $659.3 million. Total debt carrying value was $375.9 million, including $25.1 million current and $350.8 million long-term; cash exceeded debt by approximately $552 million.
- LP had no borrowings outstanding on its $200 million revolving credit facility, due December 2022, and reported compliance with its financial covenants.
- Net cash used in investing activities was $198.6 million, including $148.6 million of capital expenditures, $20.8 million for the acquisition of International Barrier Technology, and a $32.0 million IRS deposit. Financing activities used $9.4 million.
- Management expected 2018 capital expenditures of approximately $200–$250 million, primarily for siding expansion, South American expansion, and growth and maintenance projects.
- No dividends were paid in 2017 or 2016. No purchases had been made under the authorized $100 million share-repurchase program as of February 13, 2018.
Outlook, commentary and material risks
- Management cited improving U.S. housing activity and positive long-term household-formation fundamentals, but noted that construction remained constrained by labor availability and below historical levels. The filing provides no formal earnings or revenue guidance.
- LP announced plans to convert its Dawson Creek OSB mill to siding during 2018, with production expected to begin in early 2019. This is intended to expand higher-value siding capacity.
- The Tax Cuts and Jobs Act resulted in a provisional $18.4 million tax benefit from remeasurement of deferred tax liabilities; management had not completed its analysis of certain foreign-income provisions, including GILTI.
- Other notable items included $5.4 million of additional CanExel warranty reserves, $6.8 million net loss on asset sales and impairments, and an $8.0 million net charge for other operating credits and charges. The 2016 comparison included a $10.6 million gain on an exchange of an idled OSB mill and $17.3 million of early debt-extinguishment loss.
- Key risks include volatile OSB pricing and supply-demand conditions, concentration in OSB, housing-market cyclicality, wood-fiber, resin, energy and freight costs, competition, environmental compliance, product and legal claims, foreign-exchange exposure, and cyber-security events. Contingency reserves were $15.1 million; the company cautioned that actual costs could materially exceed recorded amounts.
Important facts for investors to verify
- Whether OSB pricing and demand remain strong, and how earnings would respond to a price decline; management estimated that a $1 change in annual average OSB price per thousand square feet could change annual pretax profit by about $4.2 million.
- Whether the planned siding conversion and $200–$250 million 2018 capital program proceed on schedule and generate expected returns.
- The ultimate tax effects of the 2017 tax law, including any GILTI-related impact not yet reflected in the statements.
- Adequacy of CanExel and discontinued-product warranty reserves, and environmental and other contingency estimates.
- Cash-flow conversion and working-capital requirements as sales and OSB prices change; year-end receivables and inventories increased year over year.