Business context and reporting period
Louisiana-Pacific Corporation (LP) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. LP manufactures building products and reports four segments: Siding, North America OSB, Engineered Wood Products (EWP), and South America. Amounts below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $603 | $737 | $1,773 | $2,239 |
| Gross profit | $75 | $213 | $233 | $650 |
| Gross margin (approx.) | 12.4% | 28.9% | 13.1% | 29.0% |
| Income from operations | $8 | $168 | $53 | $510 |
| Net income attributable to LP | $2 | $124 | $46 | $378 |
| Diluted EPS attributable to LP | $0.02 | $0.86 | $0.36 | $2.59 |
| Adjusted EBITDA from continuing operations | $49 | $193 | $160 | $595 |
| Operating cash flow | $59 | $151 | $58 | $419 |
LP reported $304 cash and cash equivalents at quarter-end, versus $878 at December 31, 2018. Cash, cash equivalents and restricted cash totaled $318 in the cash-flow statement. Total debt was $351 ($3 current and $348 long-term), compared with $352 at year-end. Current assets were $761 and current liabilities $216. Capital expenditures were $118 for the first nine months. Cash used in investing activities was $90; cash used in financing activities was $541.
Changes versus the prior comparable period
- Q3 sales fell 18%; nine-month sales fell 21%. LP attributed much of the deterioration to OSB pricing: reported North American OSB benchmark prices were 41% lower in Q3 and 47% lower for the first nine months year over year.
- OSB segment sales declined 43% in Q3 and 42% year to date. Segment operating results shifted to a $16 loss in Q3 and a $41 loss for nine months, versus profits of $106 and $345, respectively, in 2018. Lower OSB selling prices reduced operating results by $119 in Q3 and $275 year to date, according to LP.
- Siding sales rose 8% in Q3 and were essentially flat year to date, but segment operating income and Adjusted EBITDA declined. EWP and South America also reported lower operating income for the periods shown.
- Operating cash flow fell to $58 for nine months from $419. Management cited weaker operating results, particularly lower OSB pricing, partly offset by working-capital changes.
- LP repurchased $480 of stock during the first nine months, including its $400 accelerated repurchase program. Weighted-average diluted shares fell to 125.9 million for the nine months from 145.6 million.
Outlook, management commentary, risks and unusual items
- LP expected 2019 capital expenditures to be less than $160, for siding expansion, growth and maintenance projects, and South American expansion. The filing provides no specific earnings or revenue guidance.
- Management noted that U.S. single-family housing starts were 5% higher in Q3 but 2% lower for the first nine months compared with 2018. It cautioned that OSB is a commodity with prices affected by market supply and demand and that future prices cannot be predicted.
- LP consolidated Entekra after obtaining control in Q1 2019 and recorded a $14 gain on remeasurement of its previously held interest. It also acquired certain PSPI assets in Q2. Entekra contributed to the new $12 redeemable noncontrolling interest balance.
- Q3 included a $5 impairment charge for a Canadian facility LP expected to sell within 12 months, $2 of corporate reorganization severance, and $2 of charges associated with curtailing an OSB mill in British Columbia. LP reported no impairment indication for asset groups that included indefinitely curtailed facilities.
- Environmental and legal matters remain subject to estimation uncertainty. Management said other legal proceedings were not expected to materially affect financial position, results, cash flows or liquidity; environmental exposure could change, and the filing does not provide a clear estimate of the possible range of changes.
- Key risks include cyclicality in construction and remodeling, commodity OSB prices and market balance, raw-material and energy costs, foreign exchange, transportation, environmental regulation, and product warranty claims. LP said there had been no material changes to the risk factors in its 2018 Form 10-K.
- LP adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $41 of operating lease assets and $33 of non-current operating lease liabilities at September 30, in addition to current lease liabilities.
Important facts for investors to verify
- Whether OSB pricing and supply-demand conditions improve, and the effect on segment profitability and cash generation.
- Progress and costs associated with the Dawson Creek conversion, British Columbia mill curtailment, and planned capital projects.
- Cash and liquidity available after substantial share repurchases, alongside future capital spending and dividend requirements.
- Entekra’s operating performance and the measurement or redemption terms of its noncontrolling interest.
- Potential changes to warranty reserves, environmental contingencies, or asset values, particularly for facilities considered for sale.