Louisiana-Pacific Corporation (LPX) — FY2014 Form 10-K
Reporting period: Year ended December 31, 2014. This is an annual filing; fourth-quarter figures are noted separately where useful. LP manufactures OSB, siding, engineered wood products and South American building products, primarily for construction, repair and remodeling.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $1,934.8 million | $2,085.2 million |
| Operating income (loss) | $(77.6) million | $202.8 million |
| Continuing operations income (loss) | $(73.4) million | $177.4 million |
| Net income (loss) | $(75.4) million | $177.1 million |
| Diluted EPS | $(0.53) | $1.23 |
| Adjusted EBITDA from continuing operations (non-GAAP) | $44.1 million | $330.2 million |
| Cash from (used in) operating activities | $(52.9) million | $242.5 million |
| Capital expenditures | $80.1 million | $75.6 million |
- Revenue fell 7%; the filing attributes the deterioration chiefly to lower OSB selling prices. Average OSB selling prices declined 26% year over year while shipments increased 7%. Management estimated the price decline reduced 2014 operating results and Adjusted EBITDA by about $298 million.
- OSB sales were $855.2 million and segment operating loss was $52.6 million, versus operating profit of $230.3 million in 2013. Siding sales rose 8% to $617.3 million, while operating profit slipped to $79.8 million. EWP sales rose 12% to $281.0 million but the segment remained loss-making at $14.0 million. South America sales declined 12% to $150.4 million and operating profit fell to $11.3 million.
- Fourth-quarter 2014 sales were $453.5 million versus $479.7 million a year earlier; net loss was $42.9 million versus $20.4 million, and diluted loss per share was $0.30 versus $0.15. Fourth-quarter Adjusted EBITDA was $(16.8) million versus $23.7 million.
- At year-end, cash and cash equivalents were $532.7 million, total assets $2,353.5 million and stockholders’ equity $1,115.8 million. Total debt was $761.9 million, including $759.5 million of long-term debt excluding current maturities. The $200 million revolving facility had no borrowings outstanding.
- Cash declined $124.1 million during the year. Working-capital movements included a $34.1 million increase in receivables in the cash-flow statement. Interest expense, net of capitalized interest, was $29.8 million, down from $36.0 million.
- LP recorded a $27.2 million income-tax benefit for 2014. The filing reports no dividends paid in 2014 or 2013.
Material changes, outlook and management commentary
- Management linked the OSB downturn to weaker-than-forecast housing demand and increased industry supply, despite U.S. housing starts increasing about 9% in 2014. It emphasized cost reduction, operational efficiency, improved OSB realizations, product development and capacity management.
- LP expects approximately $130 million of capital expenditures in 2015 for siding expansion, productivity improvements and maintenance. It expects 2015 pension expense of about $7.6 million and anticipates contributing $2 million to $5 million to pension plans, subject to reassessment. No specific consolidated revenue or earnings guidance is provided.
- Industry supply is a key uncertainty: third-party estimates cited by LP projected North American OSB capacity growth of about 1.6 billion square feet from 2015 through 2018. OSB represented 44% of continuing sales in 2014 and remains the company’s largest segment.
- LP had one OSB mill indefinitely curtailed at year-end. In February 2015, Quebec’s Ministry of Forestry notified LP of its intent to terminate the forest license associated with that mill. The facility’s net book value was $35.8 million; a first-quarter 2015 impairment might be required, but the amount was not yet determinable.
- FY2014 included a $11.3 million increase in CanExel product warranty reserves, mainly for products sold in specified locations and periods. Total warranty reserves were $31.4 million at year-end. Management stated that reserves were estimates and actual claims could differ.
- The pension plans were underfunded by $96.1 million at year-end, compared with $51.8 million in 2013. LP’s credit agreement requires a funded-debt-to-total-capitalization ratio no greater than 40% and at least $200 million of unrestricted cash; the company reported compliance at year-end.
- Other notable items: LP held auction-rate securities with $23.4 million par value and $4.6 million estimated fair value. A $100 million share repurchase authorization was approved in October 2014; no purchases had occurred by March 2, 2015. Senior management announced the planned retirements of the sales and marketing executive and the OSB executive in 2015.
Risks, contingencies and unusual items
- Results are highly exposed to housing cycles, OSB commodity-price volatility, competition and potential excess industry capacity. OSB price declines, raw-material and energy cost increases, and the ability to pass costs through to customers are key sensitivities.
- LP purchases about 80% of its wood-fiber requirements on the open market and relies on a small number of major resin suppliers. Transportation availability and costs, foreign exchange movements, and environmental regulation also pose risks.
- Contingency reserves totaled $14.2 million, principally environmental reserves; warranty reserves totaled $31.4 million. The filing cautions that actual environmental and legal costs could materially exceed recorded amounts. Product-related litigation includes hardboard-trim class actions; LP said it intended to defend the claims and did not expect resolution to materially affect results.
- The 2014 loss included $7.5 million of other operating charges, including the CanExel warranty-reserve increase, partly offset by a $3.2 million reduction in contingent acquisition consideration. The contingent-consideration remeasurement reflected lower projected OSB prices.
- The filing identifies pension funding requirements, tax exposures, foreign exchange, information-technology implementation, and the ability to service or refinance debt as additional risks. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether OSB prices and demand stabilize, and how projected industry capacity additions affect realizations and plant utilization.
- Whether the Quebec forest-license termination leads to an impairment, and the resulting amount and timing.
- Whether operating cash flow recovers after the 2014 cash outflow and funds planned capital spending, debt service and pension contributions.
- Whether CanExel and other product warranty claims remain within reserves, and whether legal or environmental contingencies require additional accruals.
- Liquidity and covenant headroom under the credit facility, including the minimum unrestricted-cash requirement and debt maturities concentrated in 2018.
- Whether the $100 million repurchase authorization is used and whether dividend restrictions or business conditions change.