Louisiana-Pacific Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Louisiana-Pacific manufactures engineered wood building materials, including OSB, siding and structural framing products. Its four reported segments are Siding, North America OSB, Engineered Wood Products (EWP) and South America. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $694.1 | $582.4 | $1,305.0 | $1,087.0 |
| Operating income | $132.9 | $52.2 | $205.6 | $71.1 |
| Net income | $94.5 | $31.7 | $149.5 | $42.0 |
| Diluted EPS | $0.65 | $0.22 | $1.02 | $0.29 |
| Operating margin | 19.2% | 9.0% | 15.8% | 6.5% |
| Adjusted EBITDA (non-GAAP) | $163.5 | $98.9 | $275.7 | $150.7 |
| Adjusted EBITDA margin (non-GAAP) | 23.6% | 17.0% | 21.1% | 13.9% |
| Net cash provided by operating activities | $140.8 | $109.1 | $161.6 | $104.2 |
Cash and cash equivalents were $740.0 at June 30, 2017, versus $659.3 at December 31, 2016. Current assets were $1,155.7 and current liabilities $230.6. Long-term debt, including current portion, was $354.1; limited-recourse notes payable added $22.0, all current. Capital expenditures were $45.7 for the first half. Cash used in investing activities was $74.5, including a $32.0 IRS deposit; cash used in financing activities was $6.5.
Changes and operating drivers
- Q2 sales rose 19% and first-half sales rose 20% year over year. Net income increased to $94.5 in Q2 and $149.5 for the first half.
- Management attributed much of the improvement to OSB pricing: higher North American OSB prices contributed $71.0 to Q2 operating results and $127.7 for the first half compared with 2016. The OSB segment’s average selling price rose 26% in both periods, while shipments were essentially flat.
- Q2 OSB segment sales increased 29% and operating income increased to $102.6 from $44.0. Siding sales increased 11%; EWP sales increased 21% and returned to operating profit. South America sales fell 6% and operating income declined 20%.
- U.S. housing starts were reported 1% higher year over year in Q2 and 4% higher for the first half. The company said higher resin and other manufacturing costs, including downtime related to capital projects, partly offset pricing benefits.
- Interest expense, net of capitalized interest, fell to $4.9 in Q2 from $9.3, and to $9.9 for the first half from $17.3.
Outlook, risks and unusual items
- The company expected 2017 capital expenditures of approximately $175–$200, for productivity, growth, maintenance and South American expansion. The filing provides no specific revenue or earnings guidance.
- Management cautioned that OSB is a commodity whose prices fluctuate with market supply and demand and are difficult to predict. A $1 change in annual average OSB price per 7/16-inch square foot was estimated to change annual pretax profit by approximately $4.2.
- In Q2, LP deposited $32.0 with the IRS to suspend interest on potential underpayments related to disputable 2016 income tax amounts. The filing does not state the dispute’s resolution or ultimate liability.
- LP recorded $2.0 of Q2 expense and $5.4 for the first half to increase warranty reserves for CanExel products sold in specified locations and periods. Total warranty reserves were $25.3 at June 30; management considered them adequate but noted further charges may be required.
- Environmental remediation estimates are subject to significant uncertainty; LP excluded approximately $2.0 of potential environmental liabilities expected to be allocated to third parties. Management said other legal proceedings were not expected to have a material adverse effect based on information then available.
- Key risks include cyclical housing demand, OSB price volatility and product concentration, raw-material costs and availability, transportation, weather, environmental and product claims, foreign-exchange movements, pension funding, and impairment estimates. LP reported no material change in internal control over financial reporting and concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether elevated OSB prices and margins persist, and how supply, demand and production capacity evolve.
- Progress on the $175–$200 capital-spending plan, including the South American expansion, and its expected returns.
- Status and potential financial impact of the IRS tax dispute and the $32.0 deposit.
- Adequacy of warranty and environmental reserves, including potential CanExel claims and third-party cost sharing.
- Debt and liquidity terms, including the limited-recourse notes and any borrowing availability; the filing text does not provide a clear figure for undrawn credit availability.