Louisiana-Pacific Corporation — Q3 2013 Form 10-Q
Business context and period: Louisiana-Pacific (LP) manufactures building products, including oriented strand board (OSB), siding, engineered wood products (EWP), and products in South America. This unaudited report covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Amounts are in U.S. dollars, millions except per-share data.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $507.4 | $462.1 | $1,605.5 | $1,237.3 |
| Income (loss) from operations | $47.6 | $42.9 | $224.7 | $57.1 |
| Income (loss) from continuing operations | $37.5 | $31.0 | $196.5 | $(19.1) |
| Net income (loss) | $38.1 | $31.3 | $197.5 | $(17.3) |
| Diluted EPS | $0.26 | $0.22 | $1.37 | $(0.13) |
| Operating cash flow | $59.2 | $65.8 | $222.8 | $48.8 |
- Q3 sales increased 10%; continuing-operations income rose to $37.5 million. Cost of sales was $416.3 million, implying gross profit of $91.1 million and a gross margin of about 18.0%, versus about 21.1% a year earlier.
- Nine-month sales increased 30% and LP swung to substantial profit from a loss. Results included a $35.9 million non-operating gain from acquiring control of Peace Valley OSB and a $17.3 million operating credit from reducing estimated contingent acquisition consideration.
- Company-reported adjusted EBITDA from continuing operations, a non-GAAP measure, was $64.8 million in Q3 versus $74.5 million in Q3 2012; nine-month adjusted EBITDA was $306.4 million versus $129.1 million.
- Cash and cash equivalents were $669.5 million at September 30, up from $560.9 million at year-end 2012. Current assets were $1,059.0 million and current liabilities $177.8 million. Total debt was $765.6 million, including $2.3 million current; the filing separately identifies $368.7 million of non-recourse notes and $22.0 million of limited-recourse notes.
- Nine-month investing cash flow was $12.0 million provided, including $91.4 million received on asset-sale notes and $67.4 million of acquisition cash outflow. Financing used $125.2 million, including $113.1 million of debt repayments. Capital expenditures were $43.3 million.
Material changes and segment performance
- OSB: Q3 sales rose 8% to $245.4 million, but operating income fell 39% to $30.2 million. Average selling prices were down 5% and shipments up 15%; lower prices and costs to restart temporarily curtailed mills weighed on results. Nine-month OSB sales rose 47% and operating income rose to $223.7 million, reflecting a 38% increase in average selling prices and 9% higher shipments.
- Siding: Q3 sales rose 11% to $149.0 million and operating income rose 11% to $22.5 million, mainly on SmartSide volume growth. Nine-month operating income increased 25% to $70.3 million.
- EWP: Q3 sales rose 17% to $71.8 million; the operating loss narrowed to $2.0 million. The nine-month operating loss widened to $10.6 million, with higher raw-material costs cited.
- South America: Q3 sales were approximately flat at $41.5 million while operating income improved to $5.3 million. Nine-month operating income rose to $17.8 million.
- LP acquired the remaining 50% of Peace Valley OSB on May 31, 2013, gaining full control. The mill’s results were consolidated thereafter; LP said the acquisition was not expected to materially affect consolidated sales because it had already distributed all of the venture’s production.
- LP sold its moulding operations during Q3 and presented them as discontinued operations. The sale generated a $1.7 million gain; discontinued-operations income was $0.6 million for the quarter.
Outlook, commentary, and risks
- Management said OSB prices fell in Q3 versus the prior-year quarter amid weaker-than-forecast housing demand and increased supply from mill startups. LP noted it cannot predict future OSB prices and expects near-term volumes below capacity until housing recovers further.
- LP expected 2013 capital expenditures not to exceed $75 million and planned about $10 million for an information-technology systems upgrade. It estimated 2013 pension cost of about $7.5 million and total pension contributions of $5–$7 million; $3.2 million had been contributed in the first nine months.
- The proposed Ainsworth acquisition remained pending at the report date. Consideration was set at approximately C$467 million in cash and 27.5 million LP shares, subject to proration and closing conditions. Shareholder and court approvals had been obtained; regulatory approvals remained outstanding. LP anticipated closing in late Q4 2013 or early Q1 2014. The filing said the transaction would materially affect LP’s consolidated financial position, results, and cash flows.
- LP disclosed a later commitment for up to $200 million of senior secured revolving financing for the Ainsworth transaction and working capital. The financing documents were not yet final; contemplated covenants included minimum liquidity and maximum capitalization ratios. LP said it intended to use cash on hand and this facility for the cash consideration.
- Warranty reserves for CanExel siding were increased by $6.1 million over nine months, including $2.0 million in Q3, due to revised estimates of claims tied to a specific location and period. LP considered the reserves adequate but warned further charges were possible. Hardboard-trim putative class actions were ongoing; LP intended to defend them and did not expect a material effect based on information then available.
- Other key risks include cyclical housing demand, OSB and raw-material price volatility, supply and transportation constraints, foreign-exchange movements, environmental and product-liability exposures, pension funding, and acquisition approval and integration risks. LP reported it was in compliance with debt covenants and had no borrowings under its $100 million asset-based credit facility at September 30.
Most important facts for investors to verify
- Whether OSB pricing and margins stabilize after the sharp Q3 price decline, and how restart costs and production capacity affect segment profitability.
- How much reported earnings depended on nonrecurring or estimate-sensitive items, particularly the Peace Valley remeasurement gain and contingent-consideration credit.
- Final Ainsworth closing conditions, acquisition financing terms, share issuance, cash funding needs, and post-close leverage and integration outcomes.
- Adequacy of CanExel and other warranty reserves, and developments in hardboard-trim litigation and environmental contingencies.
- Cash generation, capital spending, and debt repayment capacity as housing demand, commodity prices, and working-capital requirements change.