Louisiana-Pacific Corporation (LP) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. LP manufactures building products, including siding, oriented strand board (OSB), and engineered wood products. Its four reportable segments are Siding, OSB, EWP, and South America.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $736.8 | $718.3 | $2,238.9 | $2,023.3 |
| Gross profit | $212.8 | $210.6 | $650.2 | $521.0 |
| Income from operations | $167.6 | $161.5 | $509.8 | $373.0 |
| Income from continuing operations | $124.1 | $110.9 | $381.9 | $260.3 |
| Net income | $124.0 | $109.8 | $377.6 | $259.2 |
| Diluted EPS | $0.86 | $0.75 | $2.59 | $1.77 |
| Operating cash flow | — | — | $419.2 | $305.0 |
Q3 gross, operating, and net margins were approximately 28.9%, 22.7%, and 16.8%, respectively, compared with 29.3%, 22.5%, and 15.3% a year earlier. Nine-month margins were approximately 29.0%, 22.8%, and 16.9%, compared with 25.8%, 18.4%, and 12.8%.
- Cash and liquidity: Cash and cash equivalents were $986.7 at quarter-end, with $13.3 of restricted cash. Total cash, cash equivalents, and restricted cash were $1,000.0. Current assets were $1,426.5 and current liabilities $232.8.
- Debt: Long-term debt, including current portion, was $353.8 ($5.2 current and $348.6 long-term), versus $375.9 at December 31, 2017. Cash exceeded reported debt by approximately $646 million.
- Cash uses and investment: Nine-month investing cash outflow was $172.7, including $150.4 of capital expenditures and a $45.0 investment in Entekra. Financing cash outflow was $183.3, including $56.1 in dividends and $98.7 in treasury-stock purchases; the filing also reports $108.0 of share repurchases including purchases related to employee tax withholding.
- Capital returns and equity: LP repurchased 2.1 million shares during Q3 for an average $28.29 per share. It reported 141.2 million shares outstanding as of November 5, 2018.
Changes versus the prior comparable period
- Q3 sales increased 3%, but management reported Adjusted EBITDA from continuing operations decreased $1.0 to $193.4; its margin fell to 26% from 27%.
- Q3 OSB segment sales were down 1% and operating income down 9%; lower OSB pricing reduced operating results and Adjusted EBITDA by $3.8 in the segment. Management cited lower North American OSB prices and higher resin costs.
- Nine-month sales rose 11%, and net income rose 46%. Adjusted EBITDA from continuing operations increased $119.8 to $594.8, mainly reflecting stronger OSB pricing. Higher OSB selling prices contributed $117.4 to nine-month OSB results and Adjusted EBITDA.
- For nine months, Siding, EWP, and South America operating income increased 17%, 58%, and 52%, respectively; OSB operating income increased 27%. In Q3, Siding, EWP, and South America operating income improved, while OSB declined.
- U.S. housing starts were 4% higher in Q3 and 7% higher for the first nine months year over year. Random Lengths’ North Central 7/16-inch OSB average price was $369 per thousand square feet in Q3 2018 versus $401 in Q3 2017.
Outlook, commentary, risks, and unusual items
- Capital spending: LP expected 2018 capital expenditures of approximately $200–$225, for siding expansion, growth, maintenance, and South American projects. The filing provides no specific earnings or revenue guidance.
- Hurricane Florence: Damage temporarily shut down the Wilmington, North Carolina EWP operation. LP recorded $0.5 of Q3 costs and expected an additional $10–$15, including capital costs, in Q4. Insurance reimbursement was expected for costs above the $5 deductible.
- Warranty and other credits: Q3 operating credits included a $7.7 gain from reducing CanExel product warranty reserves, based on lower claims in specified locations and periods. Nine-month other operating credits also included an $8.3 environmental-cost recovery and reorganization-related charges. Warranty reserves were $14.4 at quarter-end; LP said reserves were adequate but additional adjustments could be required.
- Discontinued operations: Nine-month discontinued-operations loss was $4.3, including a $5.0 increase in reserves for discontinued composite decking products.
- Pensions: LP contributed $40.9 to defined-benefit plans during the first nine months, including a discretionary $33.2 contribution intended to capture tax savings and reduce future pension-funding costs. It expected to contribute about $3.0 more in 2018.
- Tax and accounting: The nine-month effective tax rate was 24%, versus 27% in 2017; the Tax Act lowered the U.S. federal statutory rate to 21%. LP adopted ASC 606 in 2018; the Q3 adoption increased reported sales by $11.7 and net income by $4.9 versus balances without adoption, while nine-month net income was unchanged. LP expected adoption of the new lease standard in 2019 to significantly increase balance-sheet lease assets and liabilities; the amount was still being assessed.
- Exposure and contingencies: Results are sensitive to cyclical housing demand, commodity OSB prices, wood fiber and resin costs, freight and logistics, and foreign exchange rates. The company cited weakening South American housing demand and currency depreciation. Environmental reserves were $11.4; uncertain tax-position liabilities, including interest, were $43.0. Management said other legal proceedings were not expected to materially adversely affect results, financial position, cash flows, or liquidity. No material risk-factor changes from the 2017 Form 10-K were reported.
Important facts for investors to verify
- Whether OSB prices and margins remain under pressure after the sharp Q3 price decline, and how resin costs and production/logistics constraints evolve.
- Timing of Wilmington facility recovery, total hurricane costs, and the amount and timing of insurance reimbursement.
- Execution and returns on planned capital spending, including siding expansion and the $45.0 Entekra investment.
- Whether warranty, environmental, discontinued-product, and tax contingencies require further reserve changes.
- Cash generation and capital allocation after dividends, repurchases, pension contributions, and increased capital expenditures.
- Final balance-sheet impact of adopting lease accounting in 2019 and comparability effects of the 2018 accounting-standard changes.