Louisiana-Pacific Corporation — Q3 2014 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2014; comparisons are with Q3 and the first nine months of 2013. LP makes building products, including oriented strand board (OSB), siding and engineered wood products. Demand is closely tied to housing construction and repair activity; OSB pricing is commodity-driven.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $518.1m | $507.4m | $1,481.3m | $1,605.5m |
| Operating income (loss) | $(14.6)m | $47.6m | $(28.7)m | $224.7m |
| Net income (loss) | $(20.4)m | $38.1m | $(32.5)m | $197.5m |
| Diluted EPS | $(0.14) | $0.26 | $(0.23) | $1.37 |
| Adjusted EBITDA from continuing operations | $11.6m | $64.8m | $60.9m | $306.4m |
| Cash from (used in) operating activities | $27.5m | $59.2m | $(30.3)m | $222.8m |
Q3 sales rose about 2%, but operating results deteriorated sharply. Management attributed approximately $44m of lower Q3 results and Adjusted EBITDA to reduced OSB prices; the comparable nine-month impact was approximately $282m. Q3 operating margin was approximately negative 2.8%, versus positive 9.4% a year earlier.
- Segment trends: Q3 OSB sales fell 5% and the segment recorded a $16.4m operating loss, versus $30.2m profit. Siding sales rose 10% to $163.2m, while operating profit eased to $20.8m. EWP sales increased 14% to $82.1m and its operating loss narrowed to $0.3m. South America sales fell 13% to $36.0m and operating profit declined to $0.3m.
- Liquidity and debt: September 30 cash and equivalents were $579.9m, down from $656.8m at year-end 2013. Long-term debt was $761.5m, including current maturities, compared with $765.0m at year-end. Cash exceeded reported debt by about $181.6m. Current assets were $982.7m and current liabilities $176.2m.
- Investing and financing: Nine-month capital expenditures were $54.8m; investing activities used $41.1m and financing activities used $3.7m. LP repaid $2.2m of debt. The Board authorized up to $100m of common-stock repurchases on October 31, 2014.
Changes, outlook, risks and unusual items
- Random Lengths’ North Central 7/16-inch OSB average price was $216 per 1,000 square feet in Q3 2014, versus $252 a year earlier; management reported average OSB selling prices down 16% for the quarter and 30% year to date. Unit shipments increased 13% in Q3 and 10% year to date.
- U.S. housing starts were reported 15% higher year over year in Q3 and 10% higher for the nine-month period. Management nevertheless cited lower-than-forecast housing demand and increased OSB supply as factors behind pricing weakness.
- Management expected 2014 capital expenditures of approximately $80m, mainly for productivity and maintenance projects, and pension contributions of $11m–$13m. LP had contributed $9.1m through September. The filing gives no specific earnings or revenue forecast.
- Q3 2013 results included a $17.3m gain from reducing the estimated contingent consideration on a business combination; this boosted the prior-year comparison. Q3 2014 included a $3.6m gain on sale or impairment of long-lived assets. Discontinued operations recorded a $3.0m increase in reserves for warranties on discontinued composite decking products.
- Environmental and other contingency reserves totaled $14.6m at September 30. Total warranty reserves were $23.7m; management considered them adequate but warned further charges could be required. Management said existing legal proceedings were not expected to have a material adverse effect, while noting estimation uncertainty. An IRS dispute concerning 2007–2009 federal returns remained in settlement discussions; $17.1m had been deposited with the IRS in 2013.
- Key risks include volatile OSB and other commodity prices, housing-market cyclicality, raw-material and transportation costs, foreign-exchange movements, environmental and product-warranty exposures, pension funding, and the ability to generate cash and service debt in a downturn. Management reported no impairment indicators for the identified asset groupings as of September 30.
Important facts for investors to verify
- Whether OSB prices stabilize or continue to weaken, and the resulting effect on segment profitability and operating cash flow.
- Whether the $100m repurchase authorization is used, and its impact on cash, share count and capital allocation.
- Cash conversion and working-capital movements: nine-month operating cash flow was negative despite substantial cash balances.
- Future warranty and environmental claims, the IRS settlement outcome, and any changes to related reserves.
- Whether planned capital expenditures and pension contributions remain within the stated estimates.