Louisiana-Pacific Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial amounts are in millions unless noted. LP manufactures engineered wood building products, including siding, OSB and engineered wood products, across four reporting segments.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $810.8 | $694.1 | $1,502.1 | $1,305.0 |
| Gross profit | $260.6 | $182.3 | $437.4 | $310.4 |
| Income from operations | $215.0 | $136.2 | $342.2 | $211.6 |
| Income from continuing operations | $162.9 | $94.5 | $257.8 | $149.5 |
| Net income | $162.7 | $94.5 | $253.6 | $149.5 |
| Diluted EPS | $1.11 | $0.65 | $1.73 | $1.02 |
| Operating cash flow | $237.3 | $140.8 | $268.0 | $161.6 |
| Capital expenditures | $44.4 | $19.6 | $87.6 | $45.7 |
- Q2 sales rose 17%; six-month sales rose 15%. Gross margin increased to approximately 32.1% in Q2 and 29.1% for the first half, from 26.3% and 23.8%, respectively.
- Q2 net margin was approximately 20.1%, versus 13.6% a year earlier. First-half net margin was approximately 16.9%, versus 11.5%.
- Adjusted EBITDA from continuing operations, a non-GAAP measure, was $242.0 in Q2 versus $166.6, and $401.4 for the first half versus $280.7. Adjusted EBITDA margin was 30% versus 24% in Q2, and 27% versus 22% year to date.
- At June 30, cash and cash equivalents were $1,000.9; restricted cash was $13.3. Total debt was $375.7, comprising $27.3 current and $348.4 long-term. Cash exceeded reported debt by approximately $625.2. Current assets were $1,462.6 and current liabilities $257.5.
- Six-month investing cash outflow was $109.8, including $87.6 of capital expenditures and a $45.0 investment in Entekra; financing cash outflow was $81.4, including dividends and share repurchases.
Changes and business drivers
- OSB was the principal earnings driver: management attributed $84.8 of Q2 and $134.2 of first-half operating-results improvement to higher OSB pricing across North American operations. The OSB segment’s Q2 sales increased 19% and operating income 53%; first-half sales increased 18% and operating income 56%.
- Management cited higher housing starts and strong OSB prices: U.S. housing starts were 8% higher year over year for both Q2 and the first half; reported OSB benchmark prices were 30% higher in Q2 and 28% higher for the first half. OSB shipment volumes were lower, with weaker retail demand and operating/logistics constraints also noted.
- All four operating segments reported higher Q2 sales and operating income. Siding sales rose 13%, EWP 16%, and South America 17%. SmartSide strand volume and pricing supported Siding; higher pricing and product mix supported South America. EWP benefited from pricing and improved mill utilization.
- Six-month discontinued-operations loss was $4.2, including a $5.0 increase in reserves for discontinued composite decking products. Q2 discontinued-operations loss was $0.2.
Liquidity, outlook, risks and unusual items
- Management expected 2018 capital expenditures of approximately $200–$250, for siding expansion, growth and maintenance projects, and South American expansion. It anticipated a discretionary pension contribution of approximately $33.2 in Q3; the filing also states expected remaining-2018 pension contributions of about $40.0.
- Q2 other operating credits and charges included an $8.3 gain tied to settlement/reimbursement of environmental costs and $3.8 of severance and reorganization charges, including costs associated with the former CFO’s retirement; the net operating credit was $4.5. A discrete $3.1 tax benefit was recorded in Q2 for revised estimates related to discretionary pension contributions.
- On July 2, 2018, LP repaid $22.0 of limited-recourse notes at maturity, funded by $22.2 received on related asset-sale notes on June 30. On August 7, the board authorized an additional $150.0 stock-repurchase program, after quarter-end; 1.1 million shares had been repurchased through August 2 under the existing authorization.
- LP invested $45.0 in Entekra, an off-site framing start-up, and reported an 81.8% interest in its A units and 55% in its B units; it accounts for the investment as an equity-method investment due to joint control.
- ASC 606 adoption reduced reported Q2 sales by $7.6 and net income by $2.0 compared with balances without adoption; first-half sales were lower by $18.7 and net income by $4.9. Comparative periods were not restated. LP expected the 2019 lease-accounting adoption to significantly affect the balance sheet but have an immaterial income-statement impact.
- Risks include cyclical housing and repair demand, volatile OSB commodity prices, supply/demand and raw-material costs, transportation and logistics, foreign-exchange exposure, environmental obligations, product warranty and litigation matters, and potential asset impairments. The filing reported no material change to the risk factors in the 2017 Form 10-K. Management said other proceedings were not expected to materially affect financial position, results, cash flows or liquidity; environmental estimates remain subject to substantial uncertainty.
- Management gave no specific sales, earnings or OSB-price forecast. It cautioned that OSB prices are market-driven and may rise or fall. For scale, it estimated that a $1 change in annual average OSB price per thousand square feet could change annual pretax profit by approximately $4.2.
Most important facts to verify
- Whether OSB pricing and margins remain strong, given the substantial contribution of price increases to earnings and the segment’s commodity exposure.
- Whether demand, shipment volumes, resin and other input costs, and Western Canadian logistics develop as management described.
- Cash deployment and capital needs, including planned capex, pension contributions, dividends, and the expanded repurchase authorization.
- Entekra’s performance and the accounting implications of LP’s joint-control investment.
- Adequacy and potential variability of environmental, warranty, discontinued-decking and other contingency reserves.
- Effects of ASC 606 on period-to-period comparability, and the balance-sheet impact of the upcoming lease standard.