Louisiana-Pacific Corporation (LPX) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results; dollar amounts are in millions except per-share amounts.
Business context
LP manufactures building products across Siding, North America OSB, Engineered Wood Products (EWP), and South America. Results are exposed to homebuilding activity and commodity OSB pricing. U.S. single-family housing starts were down 6% for Q2 and 5% for the first half year over year. The company reported that average OSB prices were sharply lower than in 2018.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $588 | $811 | $1,170 | $1,502 |
| Gross profit | $78 | $261 | $159 | $437 |
| Income from operations | $23 | $215 | $45 | $342 |
| Net income attributable to LP | $17 | $163 | $44 | $254 |
| Diluted earnings per share | $0.14 | $1.11 | $0.34 | $1.73 |
| Adjusted EBITDA, non-GAAP | $53 | $242 | $111 | $401 |
| Cash provided by operating activities | $54 | $237 | $0 | $268 |
Q2 gross margin was approximately 13.3%, versus 32.2% a year earlier; operating margin was approximately 3.9%, versus 26.5%. For the first six months, operating cash flow was reported as $0 million. The filing attributes the year-over-year cash flow deterioration primarily to lower operating results, partly offset by reduced working-capital changes.
At June 30, cash and cash equivalents were $348, down from $878 at December 31, 2018; restricted cash was $14. Current assets were $828 and current liabilities $229. Long-term debt was $348, plus $3 current debt, for reported debt of $351. Cash, cash equivalents and restricted cash together totaled $362. The company’s 2024 Senior Notes had a reported fair value of $356.
Six-month capital expenditures were $81. Investing activities used $50; financing activities used $481, including $438 for share repurchases and $33 for dividends. The company received $33 net cash in connection with consolidating Entekra, as presented in the cash flow statement.
Material changes versus the prior comparable period
- Q2 sales fell 27% and first-half sales fell 22%. LP said lower OSB pricing reduced operating results by $166 in Q2 and $264 in the first half.
- OSB segment sales declined 49% in Q2 and 42% in the first half. Segment Adjusted EBITDA moved to a $3 loss in Q2 from $163 income and fell to $5 for the first half from $268. LP attributed $159 of Q2 and $253 of first-half operating-result impact to lower OSB selling prices.
- Siding Q2 sales decreased 9%; segment Adjusted EBITDA fell 27% to $46. Higher SmartSide strand pricing partly offset Dawson Creek conversion costs, lower OSB sales, and increased sales and marketing costs.
- EWP Q2 sales fell 6%, while operating income was $6, unchanged year over year. South America sales declined 11% and operating income fell 32%, with startup costs at Chile’s third mill and weaker prices weighing on results.
- LP consolidated Entekra after obtaining control in Q1 and recognized a $14 gain on remeasurement of its previously held interest. It also acquired certain PSPI assets in Q2, recording $4 of intangible assets.
Outlook, management commentary, risks and unusual items
- LP expected 2019 capital expenditures of approximately $160–$170, for siding expansion, growth and maintenance projects, and South American expansion. The filing provides no specific revenue or earnings guidance.
- Management stated that OSB prices are market-driven and difficult to predict. It noted that Q2 average OSB prices were down 56% year over year and first-half prices down 49%, using the cited Random Lengths benchmark.
- The company announced a planned curtailment of an OSB mill in British Columbia and recorded severance and related charges. Q2 also included a $4 reduction in product warranty reserves and $1 of insurance recoveries for prior-year property damage.
- Environmental remediation estimates are subject to significant uncertainty; management said it could not estimate the range of potential changes. Management believed existing warranty reserves were adequate but noted future adjustments could be required. Other legal proceedings were not expected to have a material adverse effect based on information available.
- Key risks include housing and repair activity, OSB supply and pricing, raw-material and energy costs, transportation, foreign exchange, environmental regulation, product litigation, and weather or other events beyond the company’s control. LP reported no material changes to the risk factors in its 2018 Form 10-K.
- LP authorized an additional $600 share-repurchase program and entered a $400 accelerated share repurchase agreement. Final settlement was expected by the end of Q3 2019 and could involve delivery of additional shares or, in certain circumstances, shares or cash from LP.
- LP adopted the new lease standard in 2019; at June 30 it reported $22 of operating lease assets and $14 of non-current operating lease liabilities, in addition to current lease liabilities included in accrued liabilities.
Most important facts for investors to verify
- Whether OSB prices and margins stabilized or recovered after the steep year-over-year decline, and the resulting performance of the OSB segment.
- Progress and costs of the Dawson Creek conversion, the British Columbia mill curtailment, and the Chilean mill startup.
- Operating cash generation and liquidity after the large first-half repurchase outlay; the filing does not state a clear amount of available borrowing capacity under credit facilities.
- Final share count and settlement economics of the $400 accelerated repurchase, and remaining authorization under the repurchase program.
- Entekra’s operating contribution, lease commitment when its facility comes under company control, and any subsequent purchase-accounting updates.
- Developments in environmental contingencies, product warranties, and other litigation that could affect reserves or cash requirements.