Louisiana-Pacific Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. LP manufactures building products, with results tied substantially to North American housing activity and commodity-oriented OSB pricing. Its segments are OSB, Siding, and Engineered Wood Products (EWP).
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $350.6 million | $322.8 million | $1,044.7 million | $1,067.3 million |
| Operating income (loss) | $(72.7) million | $(15.9) million | $(114.5) million | $10.3 million |
| Net income (loss) attributable to LP | $(65.6) million | $(32.0) million | $(124.1) million | $(32.2) million |
| Diluted loss per share | $(0.49) | $(0.24) | $(0.94) | $(0.25) |
| Operating cash flow | $5.1 million | $9.4 million | $(33.8) million | $45.0 million |
| Capital expenditures | $5.4 million | $6.1 million | $13.4 million | $11.5 million |
- Q3 gross margin was approximately 8.2% of sales, versus 10.4% a year earlier, calculated from reported net sales and cost of sales. The filing does not state a consolidated gross-margin percentage.
- Q3 operating loss included $65.0 million of long-lived asset sale and impairment charges, including a $62.0 million non-cash impairment at the Houlton, Maine LSL facility. Adjusted EBITDA from continuing operations, a company-defined non-GAAP measure, was $(6.4) million versus $3.6 million.
- At September 30, cash and cash equivalents were $360.1 million, down from $389.3 million at December 31, 2010. Current assets were $690.8 million and current liabilities $143.7 million.
- Total debt was $726.8 million, including $10.6 million current debt, compared with $714.7 million at year-end 2010. LP reported $75.4 million of unused borrowing-base capacity under its asset-based credit facility and no borrowings outstanding under that facility; $11.1 million of letters of credit were outstanding, backed by $12.5 million cash collateral.
- Interest expense, net of capitalized interest, was $14.2 million in Q3 and $42.6 million for the nine months. Investment income was $16.7 million in Q3 and $24.2 million for the nine months, including a $15.2 million realized investment-sale gain in Q3.
Changes versus comparable periods
- Q3 sales rose 9% year over year, but nine-month sales fell 2%. The nine-month net loss widened substantially, and operating results swung from income to loss.
- OSB remained the principal drag: nine-month OSB sales fell 13%, the segment moved from $38.4 million operating profit to a $48.0 million operating loss, and average OSB selling prices fell 19%. Management estimated lower OSB prices reduced results by about $91 million for the nine months.
- In Q3, Siding sales rose 7% and segment operating profit rose to $11.8 million; EWP sales increased 44%, though EWP remained loss-making. SmartSide growth and increased LVL/LSL and I-joist volumes helped, while OSB pricing and higher raw-material costs weighed on results.
- Operating cash flow deteriorated to a nine-month use of $33.8 million from $45.0 million provided in 2010, reflecting increased losses and the absence of a tax refund received in 2010. Investing cash flow was $18.9 million provided versus $116.3 million, largely because the prior year included $115.1 million of notes-receivable principal collections.
Outlook, commentary, and risks
- Management said housing activity was expected to remain below normal until housing inventory, foreclosures, employment, and home prices improve. U.S. housing starts were 6% higher year over year in Q3 but 2% lower for the first nine months. Random Lengths OSB prices were 2% higher in Q3 but 20% lower for the nine months compared with 2010.
- LP indefinitely curtailed its Dawson Creek, British Columbia OSB mill during the quarter; three OSB mills were indefinitely curtailed at quarter-end. Management cautioned that persistently weak demand or prices could require further impairments. A $62.0 million non-cash impairment was recorded at Houlton, Maine, and additional asset impairments were also recognized.
- LP reported $35.2 million in warranty reserves at quarter-end. It increased reserves for discontinued composite decking products by $8.2 million in Q3, following a $3.8 million increase in Q2, due to higher expected claims and costs; further charges remain possible. The filing also recorded a $10.7 million reduction in hardboard siding reserves based on lower claims activity.
- Management expected 2011 capital expenditures not to exceed $25 million, primarily for projects critical to continuing operations. It anticipated about $0.5 million of additional pension contributions in the remainder of 2011; lower discount rates could increase pension obligations and 2012 costs or funding needs.
- After quarter-end, LP amended its revolving credit facility to extend maturity from September 2012 to October 2016, lower certain interest rates, broaden eligible borrowing-base inventory, and increase debt flexibility. Management anticipated that its fixed-charge coverage ratio could fall below the required 1.1-to-1.0 threshold at times, limiting some facility availability.
- Principal risks include housing and OSB price cyclicality, competition, raw-material and energy costs, pension funding, environmental and product-liability exposures, foreign exchange, auction-rate security valuation, and ability to generate cash and service debt. Management stated it expected existing liquidity sources to meet foreseeable needs, but also disclosed recent operating losses and negative operating cash flow.
Investor verification points
- Assess the underlying operating trajectory separately from the $65.0 million Q3 long-lived-asset charge and other reserve adjustments.
- Verify OSB pricing, production curtailments, and whether housing and commodity markets support the carrying values of remaining facilities and investments.
- Review the basis and adequacy of the discontinued-decking warranty reserve, environmental reserves, and hardboard settlement reserve, including potential changes in claims.
- Confirm liquidity availability under the amended credit facility, including borrowing-base and fixed-charge covenant restrictions, and track debt maturities and cash generation.
- Monitor pension assumptions and funding needs, as well as the valuation and liquidity of auction-rate securities; the filing reports $0.5 million fair value against $23.4 million par value.