Louisiana-Pacific Corporation (LPX) — Q1 2019 10-Q
Reporting period: Quarter ended March 31, 2019. LP manufactures building products across Siding, North America OSB, Engineered Wood Products (EWP), and South America. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $582 | $691 |
| Gross profit / margin | $81 / 13.9% | $177 / 25.6% |
| Operating income / margin | $22 / 3.8% | $127 / 18.4% |
| Net income | $26 | $91 |
| Diluted EPS | $0.20 | $0.62 |
| Adjusted EBITDA from continuing operations | $58; 10% margin | $159; 23% margin |
| Cash from operating activities | $(54) | $31 |
| Capital expenditures | $43 | $43 |
Net sales declined 16%. Management attributed the sharp earnings and Adjusted EBITDA decline primarily to lower OSB prices: OSB pricing reduced operating results by $97 overall, including $93 in the OSB segment. Reported continuing-operations income also included a $14 gain on obtaining control of Entekra.
Segments and material changes
- Siding: Sales rose 4% to $236; operating income was $33 versus $36, and Adjusted EBITDA was $42 versus $45. SmartSide strand sales benefited from higher prices and shipments; conversion-related costs and weaker OSB results weighed on performance.
- OSB: Sales fell 33% to $208; the segment reported an $8 operating loss and $8 Adjusted EBITDA, versus $89 operating income and $105 Adjusted EBITDA a year earlier. Average selling prices fell 35% for commodity OSB and 25% for value-add OSB.
- EWP: Sales declined 15% to $90; operating income was $3 and Adjusted EBITDA increased to $7 from $5. Lower shipments reflected market weakness.
- South America: Sales rose 5% to $45, while operating income fell to $8 from $9 and Adjusted EBITDA to $10 from $11. Lower prices and startup costs at a third Chilean mill offset higher demand.
U.S. single-family housing starts were 5% lower year over year, and the reported average U.S. OSB price for Q1 was materially below Q1 2018. The filing also notes lower North American OSB demand relative to available supply and higher raw-material costs, primarily logs.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $361 at March 31, down from $878 at year-end; restricted cash was $14. The quarter-end balance of cash, cash equivalents, and restricted cash was $375.
- Long-term debt was $352, including $5 current and $347 noncurrent. The filing reports $24 of lease liabilities following adoption of the new lease standard.
- Current assets were $846 and current liabilities $238. Operating cash use was attributed mainly to weaker results, with working-capital movements also affecting cash flow.
- Financing activities used $459, including $438 for share repurchases and $17 of dividends. LP initiated a $400 accelerated share repurchase in February and received approximately 12 million shares during the quarter. Final settlement was expected by the end of Q3 2019.
- Management expects 2019 capital expenditures of approximately $150–$180, mainly for Siding expansion, growth and maintenance projects, and South American expansion.
Outlook, risks, and unusual items
- The filing provides no specific earnings or sales guidance. Management cautions that OSB prices are volatile and cannot be predicted; a $1 change in annual average OSB price per thousand square feet could change annual pretax profit by approximately $4, based on stated production capacity.
- Key risks include housing and repair-and-remodel activity, building-product and raw-material supply/demand and pricing, energy and transportation costs, foreign exchange, tariffs and other policy changes, environmental requirements, and litigation.
- LP consolidated Entekra after obtaining a controlling interest, accounting for the transaction as a step acquisition and recognizing a $14 gain. Entekra contributed acquired assets, including goodwill and intangibles, and a $14 redeemable noncontrolling interest was reported at quarter-end.
- LP adopted lease accounting standard ASC 842 on January 1, 2019; quarter-end operating lease assets were $23 and operating lease liabilities totaled $22, with finance lease liabilities also reported.
- LP recorded $2 of severance and other charges related to corporate reorganizations and hurricane damage at its Wilmington facility. Environmental and product-warranty reserves remain subject to estimation; management believes warranty reserves are adequate but says future changes may be required. Management stated other legal proceedings were not expected to have a material adverse effect.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to the risk factors in the 2018 Form 10-K were reported.
Important facts for investors to verify
- Whether OSB prices and margins recover, and the sensitivity of results to commodity pricing and log costs.
- Execution, costs, and returns from the $150–$180 capital expenditure program and the Dawson Creek conversion.
- Final share count and settlement economics of the $400 accelerated repurchase, alongside the effect of buybacks on liquidity.
- Entekra’s subsequent operating contribution, purchase accounting, and potential additional lease commitments.
- Developments in environmental, legal, and warranty exposures, and any impairment indicators if demand, pricing, or cost assumptions worsen.