Louisiana-Pacific Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in millions of dollars except per-share data. LP makes building products, including OSB, siding and engineered wood products; results are sensitive to housing activity and commodity prices.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $572.6 | $427.8 | $1,110.1 | $789.3 |
| Income (loss) from operations | $88.9 | $19.0 | $178.1 | $16.9 |
| Net income (loss) | $94.1 | $(37.3) | $159.4 | $(48.6) |
| Diluted EPS | $0.65 | $(0.27) | $1.10 | $(0.35) |
| Operating cash flow | $146.8 | $47.1 | $163.6 | $(17.3) |
- Q2 sales increased 34% year over year; six-month sales increased 41%. Gross margin, calculated as sales less cost of sales, was approximately 26.2% in Q2 versus 15.9%; six-month gross margin was approximately 26.6% versus 14.7%.
- Operating margin was approximately 15.5% in Q2 versus 4.4% in Q2 2012. Q2 adjusted EBITDA from continuing operations, a non-GAAP measure, was $122.0 versus $36.6; six-month adjusted EBITDA was $242.9 versus $57.9.
- Q2 net income included a $35.9 gain from the Peace Valley acquisition. The prior-year comparisons included a $52.2 early-debt-extinguishment charge in 2012. These items affect comparability.
- Six-month cash from operations was $163.6; investing activities used $76.0, including $67.4 for the acquisition, and capital expenditures were $25.6. Cash and equivalents were $630.7 at June 30, 2013, versus $560.9 at December 31, 2012.
- Total debt was $874.8, including $97.5 current debt; long-term debt excluding current maturities was $777.3. The $90.0 limited-recourse note maturity and matching $91.4 receivable were settled July 1, 2013. LP reported $100 of borrowing-base capacity and no revolver borrowings; $8.1 of letters of credit were cash-collateralized.
Business trends and material changes
- OSB was the main earnings driver: Q2 segment sales rose 57% to $306.2 and operating profit increased to $95.4 from $17.0. LP’s average OSB selling price rose 59% in Q2 and 69% for the six months, while unit shipments rose 2% and 6%, respectively. Management attributed the improvement primarily to higher prices.
- LP reported U.S. housing starts 17% higher in Q2 and 24% higher for the first six months than in the comparable 2012 periods. Random Lengths’ reported Q2 OSB benchmark price was 49% higher year over year; LP cautioned that OSB prices are volatile.
- Siding Q2 sales increased 11% to $152.7 and operating profit rose 40% to $27.1, supported by SmartSide volumes and higher OSB prices. EWP sales rose 18% to $60.9, but its operating loss widened to $5.1, with higher raw-material costs cited. South America sales increased 4% to $44.3 and operating profit rose to $6.3, despite lower volumes.
- On May 31, LP acquired the remaining 50% of the Peace Valley OSB joint venture for $74.6 cash, plus contingent consideration tied to future EBITDA. The $24.3 fair value of contingent consideration is a Level 3 estimate subject to remeasurement. LP’s previously held interest was revalued, generating the $35.9 non-cash acquisition gain. Full consolidation began after the acquisition; LP said sales were not expected to change materially because it had previously distributed all venture output.
Outlook, risks and unusual items
- LP gave no specific earnings or revenue guidance. It expected 2013 capital expenditures of no more than $75 for continuing operations and growth, plus $10 for its information-technology upgrade. Management expected existing cash, operating cash flow, credit facilities and other resources to meet future cash needs.
- Management said near-term volumes were expected to remain below capacity until housing recovered further. A $1 change in annual average OSB price per square foot on a 7/16-inch basis was estimated to change annual pretax profit by approximately $5, based on assumed production capacity.
- Q2 operating charges included a $4.1 increase in CanExel warranty reserves for claims tied to products sold in certain areas during 2004–2008 and a $1.5 prior-period depreciation correction. LP said the warranty reserve was adequate but warned further charges were possible. Total warranty reserves were $21.0 at June 30.
- Environmental contingency reserves totaled $13.8. LP reported multiple hardboard-trim lawsuits; certain claims had been dismissed, while other warranty and consumer claims remained. Management did not believe the proceedings would materially affect the company, but outcomes and costs remain uncertain.
- Key risks include cyclical housing demand, OSB price and supply-demand volatility, wood-fiber and resin costs, foreign exchange, environmental and product-liability exposures, pension funding, and execution of the information-technology upgrade. LP estimated approximately $4.0 of additional pension contributions for the remainder of 2013 and approximately $7.5 of pension expense for the year.
Most important facts for investors to verify
- How much of the earnings improvement is sustainable operating performance versus the $35.9 acquisition gain and unusually favorable OSB pricing?
- Whether OSB prices, production volumes and housing demand remain strong, and how higher raw-material costs affect EWP and other businesses.
- Final purchase accounting and future contingent consideration for Peace Valley, including changes in its fair-value estimate.
- Developments in CanExel warranty claims, hardboard-trim litigation, environmental obligations and tax audits.
- Cash flow and debt after the July 1 matched note payment, planned capital and IT spending, and the availability and terms of credit facilities.