Louisiana-Pacific Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. LP manufactures building products, including OSB, siding and engineered wood products; results are materially linked to housing activity and commodity pricing.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $467.8m | $350.6m | $1,257.1m | $1,044.7m |
| Operating income (loss) | $43.5m | ($72.7m) | $60.4m | ($114.5m) |
| Net income (loss) attributable to LP | $31.3m | ($65.6m) | ($17.3m) | ($124.1m) |
| Diluted EPS | $0.22 | ($0.49) | ($0.13) | ($0.94) |
| Operating cash flow | $65.8m | $5.1m | $48.8m | ($33.8m) |
- Q3 sales rose 33% year over year; operating margin was approximately 9.3%, versus a loss in the prior-year quarter. Nine-month operating margin was approximately 4.8%.
- Management’s non-GAAP adjusted EBITDA from continuing operations was $75.2m in Q3 versus ($3.1m) a year earlier, and $132.8m for nine months versus $6.7m.
- At September 30, cash and cash equivalents were $490.5m, up from $340.0m at year-end 2011. Current assets were $963.4m and current liabilities $275.2m.
- Total debt, including limited-recourse notes payable, was $891.1m, compared with $729.1m at December 31, 2011; $105.7m was classified as current. LP had no borrowings under its $100m asset-based credit facility, with $100m of borrowing-base capacity reported.
- Capital expenditures were $16.1m for the first nine months; LP expected full-year 2012 capital expenditures not to exceed $35m.
Changes and segment performance
- Improved results were principally driven by OSB pricing and higher housing activity. LP reported U.S. housing starts up 28% in Q3 and 27% for the first nine months year over year; its cited OSB benchmark price was up 70% in Q3 and 35% year to date.
- OSB Q3 sales increased 63% to $226.6m and operating income was $49.3m versus a $16.0m loss. Average OSB selling price rose 50% and shipments 11% year over year.
- Siding Q3 sales rose 20% to $134.1m and operating profit increased to $20.3m from $11.8m. SmartSide volume growth and higher selling prices contributed.
- Engineered Wood Products Q3 sales increased 12% to $61.5m but remained loss-making, with a $3.0m operating loss. South America sales rose 16% to $42.0m and operating profit was $4.5m.
- Cash from operations improved year to date, but receivables and inventories increased with higher sales and expected demand. Investing cash flow was $0.6m and financing cash flow was $102.6m for the first nine months.
Outlook, unusual items and risks
- No specific sales or earnings guidance was provided. Management said housing activity had improved but might not return to normal until foreclosure activity subsides, employment grows, buyer credit access improves and home prices stabilize. OSB prices are commodity-driven and cannot be predicted.
- In May 2012, LP issued $350m of 7.5% senior notes due 2020 and used approximately $248.6m of proceeds to retire its 2017 senior secured notes and related costs. The refinancing produced a $52.2m early-extinguishment loss in the first nine months.
- Q3 included a $4.4m impairment charge on an OSB mill in Quebec related to assets held for sale. LP reported total assets held for sale of $32.5m, down from $51.9m at year-end 2011.
- LP estimated a $2m–$3m fourth-quarter 2012 charge related to a pension-plan curtailment following the former CEO’s retirement. It estimated full-year pension cost of about $8.3m and total 2012 pension contributions of approximately $1m–$2m.
- Contingency reserves totaled $20.1m, including $14.3m for environmental matters and $5.8m for hardboard siding. LP faced multiple putative class actions concerning formerly manufactured hardboard trim; management said it would defend the cases and did not expect a material effect.
- The IRS proposed a $17.5m assessment plus interest concerning accelerated depreciation for tax years 2007–2009. LP disputed the assessment and recorded no accrual; a successful IRS challenge would also yield a comparable future tax benefit through additional depreciation deductions.
- LP held auction-rate securities with a reported fair value of $1.8m and par value of $23.4m. Their valuation and liquidity are uncertain. Other principal risks include cyclical housing demand, volatile OSB and input prices, foreign exchange, environmental obligations, product claims, pension funding and debt-service capacity.
Important facts for investors to verify
- Whether OSB pricing and demand remain strong, and how much of the earnings recovery depends on commodity prices versus sustainable volume or mix improvements.
- Debt maturities, cash requirements and covenant headroom, including the current portion of limited-recourse notes and the 7.5% 2020 notes.
- Realizability and liquidity of asset-sale receivables and auction-rate securities, and progress on assets classified as held for sale.
- Developments in hardboard-trim litigation, environmental matters, warranty claims and the IRS audit, including any changes to recorded reserves.
- Housing-market conditions, working-capital needs, planned capital spending and the expected pension curtailment charge.