Louisiana-Pacific Corporation (LP) — Q2 2014 Form 10-Q
Business context and reporting period. LP manufactures building products used mainly in new home construction, repair and remodeling, and manufactured housing. Its four reportable segments are OSB, Siding, Engineered Wood Products (EWP), and South America. This unaudited report covers the quarter and six months ended June 30, 2014; amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $518.5 | $567.0 | $963.2 | $1,098.1 |
| Operating income (loss) | $(3.9) | $88.7 | $(14.1) | $177.2 |
| Net income (loss) | $2.1 | $94.3 | $(12.1) | $159.4 |
| Diluted EPS | $0.01 | $0.65 | $(0.09) | $1.10 |
| Operating cash flow | $15.2 | $146.8 | $(57.8) | $163.6 |
| Adjusted EBITDA from continuing operations | $26.3 | $121.6 | $49.2 | $241.7 |
- Q2 sales declined 9% year over year; first-half sales fell 12%. Approximate operating margin contracted to negative 0.8% from 15.6% in Q2, and to negative 1.5% from 16.1% for the first half.
- Cash and equivalents were $554.7 at June 30, down from $656.8 at December 31, 2013. Total debt was $763.6, including $2.3 current and $761.3 long-term. Current assets were $982.3 and current liabilities $158.4.
- First-half investing cash outflow was $40.4, including $42.2 of capital expenditures; financing cash outflow was $2.6. First-half cash decreased by $102.1.
Material changes and segment performance
- OSB was the principal source of deterioration: Q2 segment sales fell 27% to $223.7 and operating results shifted to a $5.5 loss from $95.4 income. Average OSB selling prices fell 36% in Q2 and 37% in the first half, while shipments rose 11% and 9%, respectively. Management estimated the lower OSB price reduced operating results and adjusted EBITDA by $118.1 in Q2 and $231.0 in the first half.
- Siding sales rose 11% in Q2 and 9% in the first half, driven by SmartSide growth, but operating income declined 4% and 6%, respectively. EWP sales rose 32% in Q2 and 18% in the first half, although the segment remained loss-making on an operating basis. South America sales and operating income declined in both periods.
- Prior-year comparisons benefited from a $35.9 acquisition gain in Q2 and the first half of 2013. Q2 2013 also included $4.1 of additional CanExel warranty reserves and other unusual operating charges; Q2 2014 recorded a $0.5 environmental reserve charge and a $0.1 contingent-consideration fair-value charge.
Outlook, commentary, risks and contingencies
- LP expects 2014 capital expenditures of approximately $100 and pension contributions of $11–$13. Management said near-term volumes may remain below capacity until housing markets recover more fully. The filing does not provide specific revenue or earnings guidance.
- Management attributed weaker results chiefly to OSB price declines and a slower-than-anticipated U.S. housing recovery. U.S. housing starts were reported 12% higher in Q2 and 6% higher for the first half versus the comparable 2013 periods, but OSB prices remained substantially lower.
- Implementation of a new ERP system beginning January 1, 2014 caused invoice-processing and collection delays, increased receivables, and contributed to working-capital pressure. Management reported disclosure controls effective and said the system implementation was not in response to an identified control deficiency.
- Key exposures include housing-cycle and commodity-price volatility, raw-material availability and costs, foreign exchange, environmental obligations, product warranties and litigation, pension funding, and debt-servicing capacity. Environmental and other contingency reserves totaled $15.8 at June 30. LP said additional warranty charges may be required, although it considers current reserves adequate.
- The IRS had proposed adjustments for 2007–2009 federal tax returns; LP was in settlement discussions and had deposited $17.1 with the IRS to suspend interest accrual pending resolution. LP also disclosed tax examinations or reviews in several jurisdictions.
- After quarter-end, LP sold its Athens, Georgia facility for $11.9; it had been included in assets held for sale at June 30. LP was also incurring costs related to its proposed Ainsworth acquisition; the filing does not report completion of that transaction.
Important facts for investors to verify
- Whether OSB pricing and margins stabilize, and how sensitive earnings remain to commodity prices.
- Whether ERP-related billing and collection delays are resolved and receivables convert to cash.
- Cash generation, planned capital spending, available borrowing capacity and debt maturities; the provided filing text does not state a clear amount of unused credit-facility availability.
- Developments in warranty, environmental, legal and tax exposures, including adequacy of recorded reserves.
- Progress and costs related to the Ainsworth proposal, and whether management’s stated capital and pension contribution expectations change.