Louisiana-Pacific Corporation (LPX) — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing; selected quarterly data show fourth-quarter results separately.
Business context
LP manufactures building products used primarily in new home construction, repair and remodeling, and manufactured housing. Its segments are North America OSB, Siding, Engineered Wood Products (EWP), and South America. Results are highly exposed to housing activity and commodity OSB prices.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $1,715.8 million | $1,356.9 million |
| Operating income (loss) | $107.4 million | $(140.1) million |
| Net income (loss) attributable to LP | $28.8 million; diluted EPS $0.20 | $(181.3) million; diluted EPS $(1.36) |
| Cash from operating activities | $111.8 million | $(40.2) million |
| Adjusted EBITDA from continuing operations | $203.3 million | $(5.2) million |
| Cash and cash equivalents at year-end | $560.9 million | $340.0 million |
| Total debt, including limited-recourse notes payable | $880.5 million | $729.1 million |
| Stockholders’ equity | $1,033.8 million | $1,000.9 million |
Operating margin was approximately 6.3% in 2012, versus a 10.3% operating loss margin in 2011; net margin was approximately 1.7%. Interest expense, net of capitalized interest, was $49.3 million. The company reported $31.2 million of capital expenditures and generated $21.5 million from investing activities. It paid no common dividends in 2012 or 2011.
The $100 million asset-based credit facility had no borrowings outstanding at year-end; reported unused borrowing-base capacity was $91 million. It had $9 million of letters of credit, collateralized by $10 million of cash. Current debt maturities were $97.8 million, largely due to limited-recourse notes.
Material changes versus 2011
- Revenue increased 26%, reflecting a 36% increase in average OSB selling price and 12% higher OSB shipments. The company estimated higher OSB selling prices improved 2012 operating results and adjusted EBITDA by about $201 million year over year.
- OSB segment sales rose 50% to $814.1 million and segment profit was $124.0 million, compared with a $63.5 million loss in 2011. Siding sales rose 17% to $500.9 million; South America sales rose 16% to $168.8 million. EWP remained loss-making, with a $13.9 million segment loss.
- Operating cash flow improved by $152.0 million to $111.8 million, alongside the return to annual profitability and higher working-capital needs, including a $44.5 million inventory increase.
- LP issued $350 million of 7.5% Senior Notes due 2020 and used part of the proceeds to retire its 13% Senior Secured Notes due 2017. The refinancing generated a $52.2 million early-extinguishment loss.
- Fourth-quarter 2012 net income was $46.1 million, versus a $57.2 million net loss in fourth-quarter 2011; quarterly sales were $458.7 million versus $312.2 million.
Outlook, commentary, and risks
- Management said housing conditions improved in 2012, but U.S. housing starts remained about 43% below the prior ten-year average. It cited unemployment, delayed household formation, foreclosures, and restrictive mortgage availability as constraints. The filing provides no company-wide earnings or revenue guidance.
- LP planned 2013 capital expenditures of up to $75 million, including approximately $70 million associated with a planned acquisition of Canfor’s remaining interest in the Peace Valley OSB mill and $10 million of systems-upgrade capital. It expected total system-upgrade costs of about $30 million and anticipated completing the first stage in early 2014.
- LP planned to restart the indefinitely curtailed Thomasville, Alabama OSB facility in mid-2013. Three OSB mills were indefinitely curtailed at year-end 2012.
- Management estimated $3 million to $13 million of capital spending over six years to meet finalized EPA air-pollution standards. It expected approximately $1.9 million of pension contributions in 2013; the pension plans were underfunded by $92.7 million at year-end.
- Principal risks include cyclical housing demand, volatile OSB prices and production capacity, concentration in OSB, wood-fiber and resin availability and costs, energy and transport costs, foreign-exchange movements, environmental compliance, pension obligations, and product-liability and other legal claims.
- Environmental and hardboard-related contingency reserves totaled $14.8 million at year-end. LP stated that actual costs could materially exceed recorded reserves. In hardboard-trim class actions, plaintiffs seek unspecified damages and other relief; LP disputed class-based claims and said it would defend them.
- LP settled its auction-rate-securities litigation with Deutsche Bank for $20 million, recognized as a gain in 2012. Litigation against other parties remained pending. The company also held auction-rate securities with $23.4 million par value and a $2.0 million estimated market value.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether OSB prices and housing demand can sustain the sharp 2012 improvement, given forecast industry capacity additions and LP’s curtailed mills.
- The planned Peace Valley mill acquisition’s completion, price, financing, and expected effect on debt, capacity, and returns.
- Debt repayment requirements and covenant headroom, including the $97.8 million current maturities and restrictions under the credit facility and 2020 notes.
- The sufficiency of pension, environmental, warranty, and litigation reserves, and the status and potential exposure of pending hardboard and auction-rate-securities matters.
- Execution costs and operational risks of the information-systems upgrade and planned 2013 capital program.