Louisiana-Pacific Corporation (LP) — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. LP manufactures building products, primarily for residential construction, repair and remodeling, across OSB, Siding, Engineered Wood Products (EWP) and South America. Results are unaudited.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $427.8m | $362.4m | $789.3m | $694.1m |
| Operating income (loss) | $19.0m | ($23.6m) | $16.9m | ($41.8m) |
| Net loss attributable to LP | ($37.3m) | ($35.5m) | ($48.6m) | ($58.5m) |
| Diluted loss per share | ($0.27) | ($0.27) | ($0.35) | ($0.45) |
| Adjusted EBITDA from continuing operations (non-GAAP) | $36.6m | ($3.5m) | $57.9m | $9.7m |
Q2 operating margin was approximately 4.4%, versus approximately negative 6.5% a year earlier; six-month operating margin was approximately 2.1%, versus approximately negative 6.0%. Despite improved operating results, Q2 net loss widened because of a $52.2m early debt-extinguishment charge. Six-month net loss narrowed year over year.
- Cash flow: Operating cash flow was $47.1m in Q2, but cash used in operations was $17.3m for the first six months, compared with $39.0m used in the prior-year period. Six-month investing cash flow was $1.4m; capital expenditures were $6.8m.
- Cash and liquidity: Cash and equivalents were $427.1m at June 30, up from $340.0m at year-end 2011. Current assets were $903.8m and current liabilities $259.0m. The $100m asset-based credit facility had no borrowings; $9.1m of letters of credit were backed by $10.0m cash collateral.
- Debt: Reported debt totaled $888.8m, including limited-recourse notes; $104.4m was classified as current. LP issued $350m of 7.5% senior notes due 2020 and used approximately $248.4m of proceeds to retire 2017 senior secured notes and cover related costs. The company reported $784.4m of long-term debt excluding current portions.
- Other balance-sheet items: Notes receivable from asset sales were $533.6m in total, including $101.4m current. Inventories rose to $203.5m from $163.6m at year-end, mainly finished products.
Material changes and segment trends
- Sales increased 18% in Q2 and 14% in the first half. Q2 housing starts were 23% above the prior-year quarter; six-month starts were up 27%.
- OSB: Q2 sales rose 39% to $194.9m; segment operating income was $17.0m versus a $22.9m loss. LP’s average OSB selling price increased 22% and shipments 13% in Q2. Management attributed improved results principally to pricing.
- Siding: Q2 sales rose 16% to $137.0m and operating profit increased to $19.4m from $11.3m. SmartSide sales grew 21%, supported by higher shipments and pricing; Canexel sales fell 30%.
- EWP: Q2 sales declined 4% to $51.7m; the segment recorded a $3.4m operating loss. LVL/LSL demand weakened, partly offset by higher I-joist shipments.
- South America: Q2 sales rose 8% to $42.7m, but operating profit declined 14% to $3.6m. Chile grew; Brazil weakened amid softer export demand, particularly to China.
- Q2 sales growth and the return to positive operating income did not translate into lower net loss, primarily because of the refinancing charge and other non-operating costs. Interest expense excluding the extinguishment charge was $13.1m in Q2, down from $14.4m.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance is provided. LP expected 2012 capital expenditures not to exceed $25m, for projects considered critical to continuing operations.
- Management said housing activity had improved but might not return to “normal” until foreclosure activity subsides, employment improves, buyer access to credit increases and housing prices stabilize. OSB pricing is volatile and outside LP’s control; the company cautioned it could not predict future prices.
- LP expects to meet cash needs through operations, existing cash, credit facilities and other capital resources, but disclosed recent operating losses and cash use as risks to debt service and liquidity. The credit facility’s fixed-charge coverage ratio was below its 1.1-to-1.0 threshold; this restricted access to the last $15m of adjusted borrowing-base capacity.
- LP continued to review curtailed facilities and investments for impairment. Management said current undiscounted cash-flow estimates supported their carrying values, but prolonged weak demand or pricing, or asset-disposition decisions, could trigger charges. Three OSB mills and other sites were held for sale; assets held for sale totaled $43.5m. LP sold two non-operating properties for $8.5m in the first quarter.
- Legal and environmental: Contingency reserves totaled $20.1m, including $14.2m for environmental matters and $5.9m for hardboard siding claims. Five new putative hardboard-trim class actions were disclosed (one was voluntarily dismissed); LP disputed class-based claims and said it did not expect a material effect. Existing hardboard siding settlements had 72,500 settled claims, with an average payment of $954.
- Tax matter: The IRS proposed an assessment concerning accelerated depreciation for 2007–2009. LP disagreed and recorded no accrual; a full IRS victory could require a $17.5m cash payment plus interest, with an additional $17.5m of depreciation deductions in future periods.
- Other exposures: LP held auction-rate securities with $23.4m par value carried at $1.0m fair value and warned that further market deterioration could lead to impairment. Product warranty liabilities were $26.5m. Management estimated pension cost of approximately $6.8m for 2012 and anticipated $1m–$2m of total 2012 pension contributions.
Important facts for investors to verify
- Whether higher OSB prices and housing activity persist, and how commodity pricing, production volumes and raw-material costs affect margins.
- Debt and liquidity capacity, including refinancing economics, 2020 note covenants and the effect of the fixed-charge coverage restriction on letters of credit and borrowing availability.
- Progress and potential outcomes of the IRS assessment and hardboard-trim and siding litigation; compare possible exposure with recorded reserves.
- Whether held-for-sale assets or indefinitely curtailed facilities require additional impairment charges, and whether working-capital growth reverses into cash generation.
- The recoverability of auction-rate securities and the adequacy of environmental, warranty and pension estimates.