LOUISIANA-PACIFIC CORP annual report, FY2011

Business context and reporting period

Louisiana-Pacific Corporation (LP) filed this Form 10-K for the fiscal year ended December 31, 2011. LP manufactures building products used mainly in home construction, repair and remodeling, and manufactured housing. Its segments are North America OSB, Siding, Engineered Wood Products (EWP), and South America. The filing also reports unaudited fourth-quarter results.

Key financial metrics

LP reported an income-tax benefit of $39.1 million. Interest expense, net of capitalized interest, was $56.9 million. The filing reports adjusted EBITDA from continuing operations, a non-GAAP measure, of $(18.6) million in 2011 versus $81.5 million in 2010. The company cautions that this measure is not a substitute for GAAP results or cash flows.

At year-end, current assets were $656.8 million and current liabilities were $139.5 million. Long-term debt excluding current maturities was $715.9 million; current debt and limited-recourse notes payable totaled $13.2 million. The asset-based revolving facility had $87.3 million of unused borrowing-base capacity and no borrowings outstanding. The 2017 senior secured notes bear a 13% coupon; reported effective interest rate at issuance was 19.1% (19.7% including warrants).

Fourth-quarter 2011 net sales were $312.2 million and net loss was $57.2 million, or $0.42 per diluted share. The fourth-quarter loss included a $14.8 million impairment of an equity investment; the largest impairment charge, $62.0 million for the Houlton, Maine LSL facility, was recorded in the third quarter.

Material changes versus the prior comparable period

• Annual sales fell 2% from 2010. OSB sales declined 10% to $542.0 million, as average OSB selling prices fell 15%, partly offset by 4% higher shipments. The price decline reduced operating results and adjusted EBITDA by approximately $91 million.
• Net loss widened substantially, including $73.9 million of net losses on sales or impairment of long-lived assets. The largest item was the $62.0 million non-cash impairment of the Houlton LSL facility; other charges included impairments of assets held for sale and assets no longer used.
• OSB segment results moved from $25.8 million operating profit in 2010 to a $63.5 million operating loss. Siding operating profit declined 18% to $42.0 million; EWP’s operating loss narrowed to $15.5 million; South America operating profit rose to $11.6 million.
• Operating cash flow shifted from $47.8 million provided in 2010 to $40.2 million used in 2011, which management attributed to increased operating losses, higher inventories, and lower tax refunds. Cash declined $49.3 million during the year.
• LP indefinitely curtailed its Dawson Creek OSB mill during 2011; three OSB mills were indefinitely curtailed at year-end. LP also redeemed the remaining 25% non-controlling interest in its Brazilian OSB operation for $24.0 million, partly financed by a $10.0 million export-financing loan.
• The defined-benefit pension liability increased from $61.0 million to $92.2 million. Total contingency reserves declined from $32.9 million to $21.2 million, mainly reflecting lower hardboard siding reserves.

Outlook, risks, contingencies and unusual items

Management described demand as weak. Although total U.S. housing starts improved modestly in 2011, single-family starts fell 9% and were at a 50-year low; starts were about 55% below their prior ten-year average. Management noted long-term household-formation drivers but said a near-term recovery depended on employment, foreclosures, housing prices, and mortgage availability. No specific revenue or earnings guidance was provided.

LP expected 2012 capital expenditures not to exceed $30 million, primarily for projects critical to continuing operations. It estimated 2012 pension contributions of approximately $1 million in its pension discussion; its contractual-obligations table includes $2 million for pension contributions under applicable funding regulations. Management estimated 2012 pension expense at $6.8 million, assuming no curtailment or settlement charges.

Key risks include housing-market and OSB commodity-price cyclicality; potential industry capacity growth; competition; exposure to open-market wood fiber, resins, energy and transportation costs; currency movements; environmental compliance; product warranty and litigation claims; pension funding and asset-market risk; and the ability to service debt if operating cash flow remains weak. LP stated that its fixed-charge coverage ratio was approximately 0.2 at year-end, below the 1.1 threshold, and expected it to remain below that threshold in the foreseeable future. This limits access to part of the revolving facility’s borrowing base and may constrain non-cash-collateralized letters of credit.

At year-end, the company held auction-rate securities with $23.4 million par value but only $0.7 million estimated fair value. It sold $38.1 million par value of these securities in 2011 for $19.1 million and recorded a $15.2 million gain reflecting recovery of previously recognized impairments. Remaining market illiquidity and valuation uncertainty could result in further impairments.

Contingency reserves totaled $21.2 million, including $15.0 million for environmental matters and $6.2 million for hardboard siding claims; $4.0 million was classified as current. LP warned actual costs may materially exceed reserves. It also recorded a $12.0 million increase in warranty reserves for discontinued composite decking products, reported within discontinued operations. In an ARS lawsuit, the court dismissed LP’s claim against Merrill Lynch in February 2012; LP planned to appeal, while claims against Deutsche Bank remained and the claim against a bankrupt defendant was stayed.

LP paid no dividends in 2011 or 2010. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

• Whether weak housing demand and lower OSB pricing continue, and how production curtailments affect utilization, costs, and cash generation.
• Whether further asset or investment impairments are needed, particularly for curtailed facilities, the LSL business, and the remaining auction-rate securities.
• Liquidity and covenant headroom: confirm borrowing-base availability, fixed-charge coverage restrictions, debt maturities, and the ability to fund obligations during sustained operating losses.
• Adequacy of environmental, hardboard, decking, and other warranty reserves, and any material developments in related litigation or remediation.
• Pension underfunding, future contribution requirements, and the impact of discount-rate and investment-return assumptions.
• How the $12.0 million discontinued-product warranty reserve increase is treated in assessing continuing operating performance.