Louisiana-Pacific Corporation (LPX) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in millions of dollars, except per-share data. LP provides building products for new home construction, repair and remodeling, and outdoor structures. Its segments are Siding, OSB, Engineered Wood Products (EWP), and South America.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $585 | $582 |
| Gross profit | $108 | $81 |
| Gross margin | 18.5% | 13.9% |
| Income from operations | $44 | $22 |
| Net income attributable to LP | $33 | $27 |
| Diluted EPS | $0.29 | $0.20 |
| Adjusted EBITDA (non-GAAP) | $83 | $58 |
| Cash used in operating activities | $9 | $54 |
Sales were nearly unchanged, while gross profit and operating income improved substantially. LP attributed the improvement in operating cash use primarily to higher OSB pricing and lower income taxes paid. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings.
Segments
| Segment | Sales Q1 2020 / 2019 | Adjusted EBITDA Q1 2020 / 2019 |
|---|---|---|
| Siding | $212 / $219 | $42 / $39 |
| OSB | $220 / $208 | $35 / $8 |
| EWP | $99 / $90 | $9 / $7 |
| South America | $36 / $45 | $7 / $10 |
| Other | $18 / $21 | $(3) / $1 |
OSB’s EBITDA improvement reflected stronger commodity pricing and lower raw-material costs; its commodity average selling price rose 13% while shipments fell 9%. EWP benefited from higher I-Joist and LVL shipments. South America results weakened amid lower prices, reduced export sales, Chilean mill downtime, and unfavorable currency movements. Siding sales declined as fiber siding volumes fell following the planned product-line discontinuation, partly offset by strand siding growth.
Liquidity, debt and cash flow
- Cash and cash equivalents were $488 at March 31, 2020, compared with $181 at December 31, 2019.
- Long-term debt was $698, up from $348 at year-end, including a $350 revolving-credit-facility draw in March. The draw was precautionary in response to COVID-19.
- Operating activities used $9; investing activities used $24, including $24 of capital expenditures; financing activities provided $329, principally reflecting the $350 borrowing. LP paid $16 in dividends.
- LP reduced its 2020 capital-spending plan by 50% to approximately $70. It reported compliance with debt covenants at quarter-end.
- A May 1, 2020 amendment added a $200 revolving facility, bringing stated revolving commitments to as much as $550. This occurred after the reporting date.
Material changes, outlook and risks
- COVID-19: LP said the pandemic had not materially affected Q1 results through March 31, but expected adverse effects on homebuilding, repair and remodeling demand and reduced mill schedules to balance production and demand. The duration and financial impact were not reasonably estimable; management gave no specific sales or earnings forecast.
- Impairments and asset sale: LP recorded $7 of long-lived-asset impairment charges: $5 related to converting a fiber-producing facility to pre-finishing and $2 related to classifying the East River/CanExel business as held for sale. The planned sale to Maibec was subject to customary conditions and expected to close by December 31, 2020.
- Other year-over-year comparability: Q1 2019 included a $14 gain on acquisition of a controlling interest, which did not recur in 2020. Q1 2020 also included a $23 foreign-currency translation loss in other comprehensive income.
- Key exposures: Housing-market cyclicality and COVID-19 uncertainty; OSB commodity-price volatility and product concentration; wood-fiber and resin costs and supply; foreign-exchange risk; manufacturing and transportation disruptions; environmental and product-liability matters; warranty adequacy; and debt covenant requirements.
- Environmental reserves were $9 at quarter-end; warranty reserves were $8. Management cautioned that contingency estimates are uncertain and ultimate costs could exceed accruals. LP stated that existing legal proceedings were not expected to have a material adverse effect based on information then available.
- The Board authorized up to $200 of common-stock repurchases in February 2020; no purchases under that authorization had occurred by May 6, 2020.
Important facts for investors to verify
- How COVID-19 affected subsequent demand, mill schedules, customer collections, and the company’s forecasts after March 31.
- Availability and terms of the amended credit facilities, covenant headroom, and intended use of borrowed cash.
- Whether the approximately $70 annual capital-spending plan and expected temporary production reductions were maintained.
- Completion terms and proceeds for the East River/CanExel sale, and any further impairment charges.
- Whether OSB pricing, South America performance, and raw-material and foreign-exchange costs changed after quarter-end.
- Potential changes to environmental, warranty, litigation, and asset-valuation estimates as economic conditions developed.