Louisiana-Pacific Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. LP manufactures building products, including OSB, siding and engineered wood products. Results are closely tied to residential construction and commodity pricing.
Financial performance
- Sales: $471.7 million, up 6.1% from $444.7 million.
- Profitability: Gross profit was $43.9 million (9.3% of sales), versus $56.3 million (12.7%). Operating loss was $33.2 million, versus $10.2 million; net loss was $34.5 million, or $0.24 per diluted share, versus $14.2 million, or $0.10 per share. Adjusted EBITDA, a non-GAAP measure, was $6.1 million versus $22.9 million.
- Cash flow: Operating cash use was $44.0 million, improved from $73.0 million. Investing cash use was $14.5 million, including $14.9 million of capital expenditures. Financing cash use was $3.7 million. Cash declined by $64.4 million to $468.3 million.
- Liquidity and debt: Current assets were $928.8 million and current liabilities $186.6 million. Total debt was approximately $760.1 million, including $757.9 million long term; cash was $468.3 million. The balance sheet also included $432.2 million in notes receivable from asset sales, which is not cash.
- Other measures: Interest expense, net of capitalized interest, was $7.5 million. Income tax benefit was $6.3 million; the effective tax rate was 15%, affected by Canadian valuation allowances and a reduction in uncertain-tax-position reserves. Comprehensive loss was $40.6 million, including $7.8 million of foreign-currency translation loss.
Material changes and segment results
- OSB: Sales fell 2% to $190.2 million; operating loss widened to $28.4 million from $1.9 million. Average selling prices declined 13%, while shipments rose 14%. Lower OSB pricing reduced operating results and adjusted EBITDA by approximately $28.8 million.
- Siding: Sales increased 21% to $173.5 million and operating income rose 71% to $32.9 million. SmartSide sales grew 31%, supported by higher volume and prices.
- Engineered Wood Products: Sales increased 4% to $64.8 million, but operating loss widened to $4.1 million from $3.1 million.
- South America: Sales declined 2% to $35.9 million and operating income fell to $2.4 million from $4.2 million, reflecting lower prices and weaker Brazil demand, partly offset by higher Chilean shipments.
- U.S. housing starts were 4% higher year over year, but reported OSB benchmark prices were down 11% for the quarter. LP attributed the OSB price weakness to lower-than-forecast housing demand and continued supply.
Outlook, risks and unusual items
- LP expected approximately $130 million of 2015 capital expenditures for siding and Chilean capacity expansion, productivity projects and maintenance. It also expected to contribute $2 million to $5 million to defined-benefit pension plans in 2015.
- Management said it expected to meet existing-business cash requirements using operating cash flow, existing cash and investments, credit facilities and other capital resources. No specific revenue or earnings guidance was provided.
- LP wrote off an $11.6 million timber-license intangible after Quebec terminated the forest license associated with an indefinitely curtailed OSB mill. Management reported no further impairment at quarter-end based on its probability-weighted facility scenarios, but further impairment could result if assumptions or options change.
- Key risks include cyclical housing demand; volatile OSB and other product prices; wood-fiber, resin, energy and transportation costs; foreign-exchange movements; environmental obligations; product and other litigation; pension funding; and the ability to generate cash and service or refinance debt.
- An IRS audit covering 2007–2009 had reached a tentative resolution subject to Joint Committee on Taxation approval, expected in 2015. LP had deposited $17.1 million with the IRS. Management stated that other proceedings were not expected to have a material adverse effect, while noting uncertainty in environmental and legal estimates.
Important facts for investors to verify
- Whether OSB prices recover or remain under pressure, and how pricing, shipments and supply affect OSB profitability.
- Whether SmartSide growth and planned capacity investments deliver sufficient returns to offset weakness in other segments.
- Cash conversion and liquidity, including the timing and collectability of the $432.2 million in asset-sale notes receivable and the funding needs of planned capital expenditures.
- Potential further charges related to the Quebec OSB facility, environmental matters, warranties, litigation or tax audits.
- That adjusted EBITDA is non-GAAP and should be assessed alongside GAAP earnings and operating cash flow.