Louisiana-Pacific Corporation — Q1 2012 Form 10-Q
Reporting period: Quarter ended March 31, 2012; unaudited. LP manufactures building products, primarily for residential construction, repair and remodeling, and operates OSB, Siding, Engineered Wood Products (EWP), and South America segments. Results are sensitive to housing activity and commodity prices.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 or comparator |
|---|---|---|
| Net sales | $361.5 million | $331.7 million; up 9% |
| Operating loss | $2.1 million | $18.2 million loss |
| Net loss attributable to LP | $11.3 million; $0.08 per diluted share | $23.0 million; $0.18 per diluted share |
| Adjusted EBITDA from continuing operations, non-GAAP | $20.8 million | $13.2 million |
| Cash used in operating activities | $64.4 million | $68.4 million used |
| Cash and cash equivalents | $280.5 million | $340.0 million at December 31, 2011 |
| Total debt, including current and limited-recourse debt | $733.8 million | $729.1 million at December 31, 2011 |
Gross profit was $48.2 million, about 13.3% of sales, compared with $36.7 million, about 11.1%, in Q1 2011. Operating margin improved to approximately negative 0.6% from negative 5.5%. LP reported a $1.2 million income tax benefit on continuing operations, an effective rate of 9% versus 23% a year earlier.
At March 31, 2012, current assets were $678.2 million and current liabilities were $161.4 million. Receivables rose to $107.4 million from $65.1 million and inventories to $212.3 million from $163.6 million, contributing to operating cash use; management attributed the increases to higher sales and OSB prices, and seasonal log-stock requirements. Cash declined by $59.5 million during the quarter. Investing activities provided $4.2 million, including $8.9 million in asset-sale proceeds, while capital expenditures were $2.6 million.
Segments and changes versus prior year
- OSB: Sales of $149.0 million, up 13%; operating loss narrowed to $0.3 million from $9.1 million. Higher prices and shipments contributed; management estimated higher OSB selling prices improved operating results and adjusted EBITDA by about $8 million.
- Siding: Sales of $113.1 million, up 6%; operating profit rose to $16.8 million from $12.7 million. SmartSide sales growth and higher volume were key contributors; Canexel sales declined.
- EWP: Sales of $48.6 million, roughly flat; operating loss narrowed to $2.8 million from $5.5 million. Management cited higher LVL/LSL and I-Joist volumes, facility improvements, and discrete quarterly adjustments.
- South America: Sales of $42.4 million, up 20%, while operating profit decreased to $3.1 million from $3.6 million. Increased Chilean imports supported sales but generally carried lower margins.
- Management reported U.S. housing starts were 19% higher year over year and the reported North Central 7/16-inch OSB price averaged 3% higher. Despite improvement, management said housing activity was unlikely to return to normal until foreclosure activity eased, employment improved, credit access improved, and housing prices stabilized further.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. LP expected 2012 capital expenditures not to exceed $25 million, primarily for projects critical to continuing operations. Management stated it expected to meet existing business cash requirements using operations, cash, credit facilities, and other capital resources.
- The $100 million asset-based credit facility had no borrowings outstanding; $9.2 million of letters of credit were cash-collateralized with $10.0 million. Although unused borrowing-base capacity was reported at $100 million, the fixed-charge coverage covenant and a $15 million capacity threshold constrained use; management expected its coverage ratio to remain below the 1.1-to-1.0 trigger for the foreseeable future.
- LP continued to review certain mills and investments for impairment. Management said current cash-flow estimates supported their carrying values, but prolonged below-cycle demand or pricing, or decisions to dispose of assets, could lead to future impairment charges. Three OSB mills and non-operating sites were classified as held for sale; LP sold two non-operating properties for $8.5 million during the quarter.
- The IRS was auditing tax years 2007–2009 and had informally indicated a potential assessment over accelerated depreciation positions. LP disputed the position and had not accrued a liability; a full adverse outcome could require a $17.5 million cash payment plus interest, with corresponding future depreciation deductions.
- Four new putative class actions were filed in Q1 concerning formerly manufactured nontreated hardboard trim; plaintiffs seek unspecified damages and other relief. LP intends to defend the cases and said it did not expect a material adverse effect. Existing hardboard siding settlement reserves were $6.1 million; total environmental and hardboard siding contingency reserves were $20.7 million.
- Other risks include the cyclical housing market, volatile OSB and raw-material prices, competition, foreign exchange exposure, environmental liabilities, pension funding, and the ability to service debt. LP estimated a 100-basis-point interest-rate change would affect annual pretax income and cash flows by $0.4 million, net of variable-rate notes receivable.
Most important facts for investors to verify
- Whether improving housing starts and OSB pricing persist, and how commodity pricing affects segment margins and cash generation.
- Whether working-capital needs continue to absorb cash, particularly as receivables and inventories rise.
- Availability of practical borrowing capacity under the asset-based facility given the fixed-charge coverage limitation.
- Developments in the IRS depreciation dispute, hardboard trim litigation, environmental matters, and potential impairment reviews.
- Whether planned capital spending and pension contributions remain within management’s estimates and liquidity expectations.