Louisiana-Pacific Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. LP manufactures building products used mainly in residential construction, repair and remodeling. Its segments are North America OSB, Siding, Engineered Wood Products (EWP), and South America.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $596.4 million | $464.9 million | $1,683.4 million | $1,429.6 million |
| Operating income (loss) | $76.9 million | $(17.4) million | $148.0 million | $(64.7) million |
| Net income (loss) | $65.6 million | $(26.5) million | $107.6 million | $(80.5) million |
| Diluted EPS | $0.45 | $(0.19) | $0.74 | $(0.57) |
| Adjusted EBITDA from continuing operations | $110.9 million | $11.0 million | $261.6 million | $33.3 million |
- Q3 operating margin was approximately 12.9%, compared with negative 3.7% in Q3 2015; net margin was approximately 11.0%, compared with negative 5.7%. Nine-month operating margin was approximately 8.8%, versus negative 4.5%.
- Q3 sales increased 28% year over year. Management attributed the improvement principally to higher OSB prices; OSB pricing contributed $79.4 million to operating results and Adjusted EBITDA in the quarter and $172.1 million in the first nine months.
- For the first nine months, operating cash flow was $240.3 million, versus cash use of $1.3 million in 2015. Capital expenditures were $78.7 million; investing activities used $172.4 million and financing activities provided $53.3 million.
- At September 30, cash and cash equivalents were $559.7 million, restricted cash was $108.5 million, and total debt carrying value was $832.4 million, including $458.1 million classified as current. Current assets were $1,445.8 million and current liabilities $653.2 million; these include the accelerated $410.0 million notes receivable and related debt due for settlement in November.
Changes, segments, and capital structure
- OSB sales rose 41% in Q3 to $282.1 million; segment operating income was $67.4 million versus a loss of $11.1 million. Average OSB selling prices increased 36% in the quarter and unit shipments increased 5%.
- Siding sales increased 23% to $194.8 million and operating income more than doubled to $35.2 million, supported by higher volumes, OSB prices, and lower raw-material costs. EWP sales rose 8% to $80.7 million, while segment operating results were approximately break-even. South America sales increased 18% to $31.7 million and operating income rose to $3.3 million.
- LP issued $350 million of 4.875% senior notes due 2024 and used proceeds in part to repurchase $262.4 million principal of its 7.5% notes due 2020. It recorded a $13.2 million Q3 loss on early debt extinguishment. The remaining 2020 notes were redeemed on October 14, 2016; LP expects a further $4.0 million extinguishment loss in Q4.
- In August, LP accelerated collection of $410.0 million in asset-sale notes receivable to November 2016, also accelerating repayment of related non-recourse notes payable. The acceleration is expected to bring taxable income into Q4; LP estimated related taxes of $120.8 million and reported $73.4 million of available carryover benefits to offset part of its 2016 tax liability.
Outlook, commentary, and risks
- LP expected 2016 capital expenditures of approximately $115–$125 million for productivity, growth, maintenance, and South American expansion. The filing gives no specific sales, earnings, or OSB-price forecast.
- Management reported U.S. housing starts 2% lower year over year in Q3 but 4% higher for the first nine months. It noted OSB prices are volatile and cannot be predicted; Random Lengths’ reported North American OSB prices were materially higher year over year.
- Key risks include cyclical housing demand, commodity-price and supply-demand swings, OSB and raw-material price volatility, wood-fiber availability and cost, competition, transportation, weather, foreign exchange, environmental obligations, product warranty and litigation exposure, pension funding, taxes, and the ability to service or refinance debt.
- LP recorded an $11.4 million Q2 charge related to increased product warranty reserves and a related value-added-tax adjustment for certain CanExel products. Warranty reserves totaled $21.1 million at September 30; management considered them adequate but said additional charges may be required.
- Environmental and legal exposures involve estimation uncertainty; management said it could not estimate the range of possible changes to environmental loss estimates. Management believed other proceedings would not materially adversely affect the company, based on information then available.
- On October 28, LP announced an agreement to exchange its Chambord, Quebec OSB mill for Norbord’s Val-d’Or mill, with completion expected in early November. Management said no impairment was then necessary for facilities not indefinitely curtailed, but asset dispositions could result in impairment charges.
Important facts for investors to verify
- Whether elevated OSB pricing and demand persist, and how commodity-price changes affect earnings and cash generation.
- The timing and cash impact of the November collection and repayment of the linked $410.0 million receivable and $368.6 million debt, as well as the tax payment and available carryovers.
- Completion and financial effects of the October 2020-note redemption and Quebec mill exchange, including the expected Q4 debt-extinguishment loss.
- Adequacy of warranty, environmental, litigation, tax, and pension estimates, and the planned full-year capital spending level.