Louisiana-Pacific Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. LP manufactures engineered wood building products, including OSB, siding and engineered wood products, and reports four operating segments: Siding, North America OSB, EWP and South America.
Financial performance and liquidity
- Q3 revenue: $718.3 million, up 20% from $596.4 million a year earlier. Operating income was $158.9 million versus $76.9 million; net income was $109.8 million versus $65.6 million. Diluted EPS was $0.75 versus $0.45. Q3 included a $1.1 million loss from discontinued operations.
- First nine months: Revenue was $2.023 billion, up 20%; operating income was $364.4 million versus $148.0 million; net income was $259.2 million versus $107.6 million. Diluted EPS was $1.77 versus $0.74.
- Margins and adjusted results: Adjusted EBITDA from continuing operations was $192.2 million in Q3, with a 26.8% margin, versus $110.9 million and 18.6%. For nine months, it was $467.8 million and 23.1%, versus $261.6 million and 15.5%. These are non-GAAP measures.
- Segment results: Q3 OSB sales rose 24% to $350.9 million and operating income increased to $126.4 million from $67.4 million. Siding sales rose 16% to $226.2 million, with operating income of $52.8 million. EWP sales rose 22% to $98.1 million and operating income was $6.3 million. South America sales rose 21% to $38.3 million and operating income was $5.8 million.
- Cash flow: Nine-month operating cash flow was $305.0 million versus $240.3 million. Investing activities used $109.3 million, including $80.7 million of capital expenditures; financing activities used $8.2 million. Cash increased $189.4 million to $848.7 million.
- Balance sheet at September 30: Cash was $848.7 million and total assets were $2.308 billion. Long-term debt was $353.0 million, with $0.5 million current; the balance sheet also reported $22.0 million of current limited-recourse notes payable. Stockholders’ equity was $1.465 billion. Cash substantially exceeded reported debt.
Changes and drivers
- Management attributed most of the earnings improvement to higher North American OSB prices. OSB pricing contributed an estimated $83.6 million to Q3 operating results and $211.3 million for the first nine months compared with 2016.
- Random Lengths’ North Central OSB price was 33% higher in Q3 and 30% higher for the first nine months year over year. Company-reported OSB average selling prices rose 29% in Q3 and 27% year to date, while unit shipments were down 3% and 1%, respectively.
- U.S. housing starts were 2% higher in Q3 and 3% higher for the nine-month comparison. Siding benefited from increased volumes and pricing; EWP benefited from stronger sales and higher mill utilization.
- Higher resin and other manufacturing costs partly offset OSB pricing gains. Capital and maintenance project downtime also increased manufacturing costs.
- Interest expense, net of capitalized interest, fell to $4.9 million in Q3 from $9.0 million, and to $14.8 million for nine months from $26.3 million. The 2016 comparative periods included a $13.2 million early debt-extinguishment loss.
Outlook, risks and unusual items
- LP forecast 2017 capital expenditures of approximately $155–$165 million for productivity, growth, maintenance and South American expansion. It expected an additional $1–$2 million of pension contributions in the remaining months of 2017; $12.8 million had been contributed year to date.
- The filing provides no specific revenue or earnings guidance. Management cautioned that OSB is a commodity with volatile prices and that interim results are not necessarily indicative of full-year results.
- Q3 included a $0.9 million refund of sales and use taxes in other operating credits. Earlier in 2017, LP recorded $5.4 million of additional CanExel product warranty reserves; in Q3 it added $1.5 million to reserves for discontinued composite decking products. Total warranty reserves were $26.0 million.
- LP deposited $32.0 million with the U.S. IRS to suspend interest on potential underpayments of disputed 2016 income taxes. The filing does not state a clear final resolution or amount payable.
- Key risks include housing-market cyclicality; OSB price and supply-demand swings; wood-fiber, resin, energy and transportation costs; foreign-exchange exposure; weather and operational disruptions; pension funding; environmental obligations; product warranties and litigation. Management said other legal proceedings were not expected to have a material adverse effect based on information then available, while noting uncertainty in environmental estimates and potential future warranty charges.
- LP continued to review certain facilities and investments for possible impairment or disposition. Management reported adequate support for carrying values at the reporting date but acknowledged that future disposition decisions could result in impairment charges.
Most important facts for investors to verify
- Whether elevated OSB prices and margins persist, given their outsized contribution to earnings and the company’s exposure to commodity price volatility.
- Whether demand, shipment volumes and housing activity support ongoing growth, and whether resin, fiber and other costs erode margins.
- Progress against the $155–$165 million 2017 capital-spending plan and expected returns from expansion and productivity projects.
- Developments in the disputed 2016 tax matter, warranty claims and reserves, environmental contingencies, and pension funding needs.
- Debt and liquidity details, including the nature and repayment terms of the $22.0 million limited-recourse notes payable.