Louisiana-Pacific Corporation (LP) — Q1 2017 Form 10-Q
Business context and reporting period. LP manufactures engineered wood building products, including oriented strand board (OSB), siding and engineered wood products. This unaudited report covers the quarter ended March 31, 2017; comparisons are with Q1 2016 unless noted. Results are sensitive to housing activity and commodity OSB prices.
Financial performance and position
- Revenue: Net sales were $610.9 million, up 21.1% from $504.6 million.
- Profitability: Operating income rose to $72.7 million from $18.9 million; operating margin was approximately 11.9%, versus 3.7%. Net income was $55.0 million, or $0.38 per diluted share, compared with $10.3 million, or $0.07 per share. Net margin was approximately 9.0%, versus 2.0%.
- Cash flow: Operating cash flow was $20.8 million, versus cash used of $4.9 million. Capital expenditures were $26.1 million, implying cash flow after capital expenditures of approximately negative $5.3 million. Cash and equivalents ended the quarter at $649.5 million, down from $659.3 million at year-end 2016.
- Debt and liquidity: Total reported debt was $376.2 million ($1.6 million current and $374.6 million long-term); cash exceeded debt by approximately $273.3 million. Current assets were $1,074.0 million and current liabilities $215.5 million.
- Balance sheet: Total assets were $2,080.2 million and stockholders’ equity was $1,254.1 million at March 31, 2017, compared with $2,031.2 million and $1,195.7 million, respectively, at December 31, 2016.
Material changes and segment results
- Management attributed the improvement primarily to stronger OSB prices and higher siding sales. Adjusted EBITDA, a non-GAAP measure, increased to $112.2 million from $51.8 million.
- OSB: Sales were $268.4 million, up 24%; operating income was $60.4 million versus $15.3 million. Average selling price increased 25%, while shipments declined 1%. Management said higher selling prices added $54.1 million to segment operating results and Adjusted EBITDA; production downtime on capital projects partly offset gains.
- Siding: Sales rose 18% to $214.0 million and operating income increased 49% to $40.2 million. SmartSide shipment volume increased 16%; management cited higher volumes, OSB prices and lower fiber costs.
- Engineered Wood Products: Sales increased 14% to $82.1 million; the segment reported operating income of $0.6 million versus a $2.5 million loss. Management cited higher sales and lower manufacturing costs.
- South America: Sales increased 24% to $37.8 million, while operating income remained $5.1 million. Currency movements lifted reported U.S.-dollar prices despite lower local-currency prices; Brazilian demand remained affected by political uncertainty.
- U.S. housing starts were 8% higher year over year. The filing reports Random Lengths North American OSB prices 30% higher year over year for the quarter.
Outlook, risks and unusual items
- Capital spending: LP expected 2017 capital expenditures of approximately $175 million to $200 million for productivity, growth, maintenance and South American expansion. The filing provides no specific revenue or earnings guidance.
- Warranty charge: LP recorded a $3.4 million expense for increased CanExel product warranty reserves tied to products sold in specified locations and periods. Total warranty reserves were $24.5 million at quarter-end; management considered them adequate but noted additional future charges are possible.
- Other items: The quarter included a $0.6 million loss on sale or impairment of long-lived assets. Net interest expense declined to $5.0 million from $8.0 million.
- Key risks: Results depend on cyclical housing demand and volatile OSB prices; other disclosed risks include raw-material costs and availability, transportation, weather, foreign exchange, environmental obligations, product claims, pension funding and potential asset impairments. Environmental loss estimates are subject to substantial uncertainty; the filing states that no range of possible changes can be estimated.
- LP reported defined-benefit pension contributions of $1.5 million in Q1 and expected to contribute $7 million to $9 million during the remainder of 2017. Its risk-factor discussion separately cited an expected full-year contribution of $10 million to $12 million; investors should reconcile these figures.
Important facts for investors to verify
- Whether higher OSB pricing and housing demand persist, and how commodity-price changes affect margins and cash generation.
- Whether the planned $175 million to $200 million of 2017 capital expenditures are delivered on schedule and within budget.
- Developments in CanExel warranty claims and the adequacy of warranty reserves, plus any changes in environmental or legal exposures.
- The pension contribution outlook, including the differing full-year figures stated in the filing.
- Adjusted EBITDA is non-GAAP and should be assessed alongside GAAP income and operating cash flow; LP cautions that the measure may not be comparable with similarly named measures at other companies.