Louisiana-Pacific Corporation (LP) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited. LP manufactures building products, primarily for residential construction, repair and remodeling, through OSB, Siding, Engineered Wood Products (EWP) and South America segments.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $493.0 million | $518.5 million | $964.7 million | $963.2 million |
| Operating income (loss) | $(14.1) million | $(3.9) million | $(47.3) million | $(14.1) million |
| Net income (loss) | $(19.5) million | $2.1 million | $(54.0) million | $(12.1) million |
| Diluted EPS | $(0.14) | $0.01 | $(0.38) | $(0.09) |
| Operating cash flow | $41.5 million | $15.2 million | $(2.5) million | $(57.8) million |
| Adjusted EBITDA (non-GAAP) | $16.2 million | $26.3 million | $22.3 million | $49.2 million |
Q2 gross margin was approximately 10.1%, versus 11.0% a year earlier; operating margin was approximately negative 2.9%, versus negative 0.8%. For the first half, gross margin was approximately 9.7%, versus 11.8%, and operating margin was approximately negative 4.9%, versus negative 1.5%.
At June 30, cash and cash equivalents were $481.0 million, down from $532.7 million at year-end 2014; restricted cash was $15.8 million. Current assets were $870.8 million and current liabilities $153.4 million. Total debt was approximately $755.8 million ($2.2 million current and $753.6 million long-term), or approximately $274.8 million net of cash. LP also reported $432.2 million of notes receivable from asset sales.
First-half capital expenditures were $33.5 million. LP expects approximately $130 million of 2015 capital expenditures, principally for siding capacity expansion, Chilean expansion, productivity and maintenance projects. The filing reports no material debt repayment during Q2; first-half repayments were $1.4 million.
Material changes and segment performance
- OSB: Q2 sales fell 6% to $211.0 million; the segment reported an operating loss of $18.1 million and Adjusted EBITDA loss of $3.7 million, versus Adjusted EBITDA of $8.3 million a year earlier. Average selling price fell 15% in Q2 and 14% in the first half, while shipments rose 11% and 12%, respectively. Management attributed the price decline to weaker-than-forecast housing demand and market supply; lower OSB prices reduced results and Adjusted EBITDA by about $38 million in Q2 and $67 million in the first half.
- Siding: Q2 sales declined 3% to $163.9 million, but operating income rose 13% to $29.2 million and Adjusted EBITDA rose 14% to $34.6 million. First-half sales increased 8% and Adjusted EBITDA increased 35%. SmartSide sales grew 12% for the first half; lower petroleum-based input costs helped results.
- EWP: Q2 sales declined 5% to $72.0 million; the operating loss narrowed to $2.3 million, and Adjusted EBITDA improved to $0.6 million from a $1.3 million loss. First-half sales were down 1%.
- South America: Q2 sales fell 8% to $38.7 million and Adjusted EBITDA fell 38% to $4.1 million. Brazil was affected by recession and lower exports; currency weakness reduced reported U.S.-dollar prices in the region.
U.S. housing starts were 17% higher year over year in Q2 and 11% higher for the first half, but reported North Central OSB prices were 11% lower in both comparable periods. LP said near-term volumes were expected to remain below capacity until the housing market more fully recovers.
Outlook, unusual items and principal risks
- The filing gives no specific earnings or revenue guidance. Management expects existing liquidity and operating cash generation, credit facilities and other capital resources to meet future cash requirements.
- LP wrote off an $11.6 million forest-license intangible in Q1 after Quebec terminated the license associated with an indefinitely curtailed OSB mill. LP was evaluating options for the mill; it recorded no additional impairment at June 30, but further impairment could result if assumptions or projected cash flows change.
- LP finalized an IRS settlement for tax years 2007–2009 in June. The settlement generated a Q2 tax benefit of $1.6 million and reduced the liability for unrecognized tax benefits by $34.4 million. A $17.1 million tax deposit was applied against amounts due and resulted in a $1.4 million tax receivable.
- First-half results included a $7.9 million foreign-currency translation loss in other comprehensive income, amid declines in the Brazilian real and Chilean peso against the U.S. dollar. A 100-basis-point interest-rate change was estimated to affect annual pretax income and cash flows by $0.4 million.
- Key risks include cyclical housing demand and volatile OSB commodity prices, raw-material and transportation costs, foreign exchange, competition, pension funding, environmental obligations, product warranty and litigation exposure, and the ability to service or refinance debt. Environmental and legal outcomes may be uncertain; management said the warranty reserve was adequate but acknowledged additional future charges were possible.
- LP reported effective disclosure controls and procedures. It early adopted the debt-issuance-cost presentation standard, with no income-statement effect; the filing said it was evaluating the future revenue-recognition standard.
Important facts for investors to verify
- Whether OSB prices and margins stabilize, given their material contribution to the first-half deterioration and LP’s commodity-price exposure.
- Whether planned $130 million of 2015 capital spending and growth projects can be funded while operating cash flow remains weak.
- The outlook for the Quebec curtailed mill and any resulting impairment or disposition charges.
- Potential cash requirements from pension plans, warranties, environmental matters and other legal contingencies; the filing does not provide a clear estimate of the possible range of future environmental changes.
- Liquidity and debt-service capacity under weaker housing, commodity-price or foreign-exchange conditions, including the availability and terms of borrowing facilities.