Louisiana-Pacific Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in millions of dollars except per-share data. LP manufactures building products, including OSB, siding and engineered wood products; demand is closely tied to housing and construction activity.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $464.9 | $518.1 | $1,429.6 | $1,481.3 |
| Gross profit (sales less cost of sales) | $48.7 | $41.1 | $142.2 | $154.4 |
| Gross margin | 10.5% | 7.9% | 9.9% | 10.4% |
| Operating loss | $(17.4) | $(14.6) | $(64.7) | $(28.7) |
| Net loss | $(26.5) | $(20.4) | $(80.5) | $(32.5) |
| Net loss per share | $(0.19) | $(0.14) | $(0.57) | $(0.23) |
| Adjusted EBITDA, non-GAAP | $11.0 | $11.6 | $33.3 | $60.9 |
| Cash from (used in) operations | $1.2 | $27.5 | $(1.3) | $(30.3) |
| Capital expenditures | $33.6 | $12.6 | $67.1 | $54.8 |
- Q3 sales fell 10.3% year over year; the net loss widened by $6.1 million. Gross margin improved, but operating and net results remained negative.
- For the first nine months, sales declined 3.5% and the net loss increased substantially. The filing attributes an approximately $80.7 million adverse impact on operating results and Adjusted EBITDA to lower OSB pricing.
- At September 30, cash and cash equivalents were $447.7, down $85.0 from December 31, 2014. Total debt was approximately $753.9, including $2.2 current and $751.7 long-term; cash less total debt was approximately $306.2 net cash. Current assets were $840.8 and current liabilities $166.7.
- Investing activities used $70.8 in the first nine months, principally reflecting capital spending. Financing activities used $7.2, including $2.2 of debt repayments and $5.4 of employee equity-award tax withholding.
Segment results and material changes
- OSB: Q3 sales were $200.0, down 14.3%; segment operating loss was $11.1, versus $16.4 a year earlier. Average selling prices fell 7% and shipments fell 9%. For nine months, sales declined 8%, while the operating loss widened to $57.6 from $23.8. Lower OSB prices were the principal headwind.
- Siding: Q3 sales were $157.8, down 3%, and operating income was $17.2, down from $20.8. Nine-month sales rose 4% and operating income rose to $79.3 from $65.9. SmartSide nine-month sales increased 5%, while Q3 volume declined amid customer inventory adjustments, weather and labor constraints.
- Engineered Wood Products: Q3 sales were $74.4, down 4%, and operating loss was $0.9. Nine-month sales declined 2%; operating loss improved to $7.3 from $8.5.
- South America: Q3 sales fell 26% to $26.8, but operating income increased to $2.4 from $0.3. Nine-month sales fell 11% and operating income fell 20% to $6.8. Brazil’s recession and currency weakness weighed on results; Chilean volumes improved.
Outlook, management commentary and risks
- U.S. housing starts were reported 13% higher year over year in Q3 and 12% higher for the first nine months. However, U.S. OSB benchmark prices were down 7% for Q3 and 10% for the nine-month period. Management cautioned that OSB prices are market-driven and difficult to predict.
- LP expected 2015 capital expenditures of approximately $130, principally for siding capacity expansion, Chilean expansion, productivity and maintenance. It expected to contribute $2–$5 to defined-benefit pension plans in 2015.
- LP began converting its Swan Valley OSB mill to a SmartSide siding facility during Q3; the mill was not operating for much of the quarter, and conversion-related expenses were approximately $4.5. Management cited the conversion, lower siding volumes and higher wood costs as Q3 segment headwinds. The company did not provide specific earnings or revenue guidance.
- LP wrote off $11.6 of the remaining value of a forest license after Quebec terminated the license for an indefinitely curtailed OSB mill. Management reported no further impairment was required at September 30 based on its probability-weighted cash flow assessment, but changes in assumptions could lead to future impairment.
- Foreign currency translation reduced other comprehensive income by $19.9 in the first nine months; the Brazilian real declined 54% and the Chilean peso 16% against the U.S. dollar. Foreign-exchange losses in non-operating results were $5.5 for the nine-month period.
- Discontinued operations included a $2.5 increase in warranty reserves for discontinued composite decking products in 2015. Total warranty reserves were $25.5 at quarter-end; LP said reserves were adequate but acknowledged additional charges could be required.
- Key risks include volatile OSB and other commodity prices, cyclical housing demand, raw-material and transportation costs, foreign-exchange exposure, pension funding, environmental liabilities, product warranty and litigation claims, and the ability to generate cash and service debt during prolonged market weakness. Management said environmental and other legal proceedings were not expected to materially affect LP based on information then available; ultimate outcomes remain uncertain.
Important facts for investors to verify
- Whether OSB prices and volumes stabilize, and how the commodity-price pressure affects segment profitability and cash generation.
- Progress, cost and expected benefits of the Swan Valley conversion and planned capacity expansions.
- Capital spending against the approximately $130 million 2015 expectation, and the effect on cash balances and liquidity.
- Potential additional impairment, warranty, environmental, legal or pension costs, including developments at the curtailed Quebec mill.
- Foreign-exchange movements and their impacts on earnings, cash flows and accumulated comprehensive loss.
- Tax assumptions and valuation allowances: LP recognized no tax benefit for anticipated Canadian losses and disclosed jurisdictional uncertainty.