Louisiana-Pacific Corporation — Q1 2013 Form 10-Q
Reporting period: Quarter ended March 31, 2013. Amounts are in millions of U.S. dollars except per-share data. Louisiana-Pacific manufactures building products, including oriented strand board (OSB), siding and engineered wood products. Results are unaudited.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $537.5 | $361.5 |
| Gross profit (sales less cost of sales) | $144.9; 27.0% margin | $48.2; 13.3% margin |
| Operating income (loss) | $89.2; 16.6% margin | $(2.1); (0.6)% margin |
| Net income (loss) | $65.3; diluted EPS $0.45 | $(11.3); diluted loss per share $0.08 |
| Adjusted EBITDA from continuing operations | $120.9 | $20.8 |
| Cash from (used in) operating activities | $16.8 | $(64.4) |
Sales increased 49% year over year, and the company moved from a loss to a profit. Net income included $7.2 of equity-method income from unconsolidated affiliates; the filing does not identify that entire amount as recurring. The 2013 quarter also included a $1.6 operating charge related to a prior-year inventory adjustment. Income tax provision was $23.2, or 26% of pretax continuing-operations income.
Cash, debt and liquidity: Cash and equivalents were $560.5 at March 31, versus $560.9 at December 31, 2012. Total debt was $880.1, including $97.9 current and $782.2 long-term; the company reported no borrowings on its $100 credit facility, with $7.9 of letters of credit outstanding. Current assets were $1,143.1 and current liabilities $254.5. Operating cash flow improved, but receivables and inventories absorbed cash, increasing $52.4 and $48.6, respectively. Capital expenditures were $13.2; financing cash use included $11.8 for tax withholding on employee equity awards.
Material changes and segment results
- OSB: Sales rose 92% to $286.7; operating income was $98.1 versus a $0.3 loss. Company-reported average OSB selling price increased 82% and shipments 12%. Management attributed the turnaround mainly to stronger pricing and demand; higher raw-material costs and costs to prepare a temporarily curtailed mill for restart partly offset the gains. The filing also reports an industry OSB benchmark up 105% year over year.
- Siding: Sales rose 18% to $133.8 and operating profit increased 23% to $20.7. SmartSide sales and shipments benefited from stronger demand and customer buying ahead of an April 1 price increase.
- Engineered Wood Products: Sales increased 30% to $63.4, but operating loss widened to $3.5 from $2.8, mainly due to higher OSB and lumber input costs.
- South America: Sales increased 6% to $45.1 and operating profit doubled to $6.2, with price increases cited as a driver.
Outlook, risks and unusual items
- Management cited U.S. housing starts 36% higher year over year in Q1 and stronger OSB demand, but gave no specific revenue or earnings guidance. It cautioned that OSB is a volatile commodity and near-term volumes were expected to remain below capacity until housing recovered further.
- For 2013, planned capital expenditures were about $75, plus $70 associated with the planned acquisition of the remaining interest in the Peace Valley OSB mill and $10 for a systems upgrade. Management anticipated the acquisition would close in Q2 2013.
- Key exposures include housing and commodity-price cycles, raw-material and energy costs, foreign exchange, environmental obligations, pension costs, and execution risks for the IT upgrade. A $1 change in annual average OSB price was estimated to affect annual pretax profit by about $5, based on stated capacity assumptions.
- Hardboard-trim putative class actions seek unspecified damages and other relief. Management disputed class-based claims and said it did not expect resolution to materially affect the company, but outcomes remain uncertain. Environmental contingency reserves totaled $14.0.
- U.S. Greenfiber, a joint venture, defaulted on bank debt guaranteed in part by LP and its partner. LP recorded a $2.1 current liability, representing half of the outstanding loan, and an equal increase to its investment; LP and its partner made $0.2 in payments during the quarter.
- The company reported no impairment indications for the asset group that includes indefinitely curtailed facilities at quarter end. It warned that future asset-disposition decisions could result in impairment charges.
Important facts for investors to verify
- Whether OSB pricing and housing demand persist, and how quickly the temporarily curtailed mill restart affects costs and output.
- Completion terms, financing and expected contribution of the planned Peace Valley transaction, alongside the stated 2013 spending plans.
- Cash conversion as seasonal inventory and higher-priced receivables unwind, and liquidity available after planned investments.
- Developments in hardboard-trim litigation, environmental matters and the Greenfiber default, including whether reserves or payments change.
- Performance of EWP amid elevated input costs and execution, cost and control risks related to the systems upgrade.