NOTE 69 – INVENTORIES
Inventories are valued at the lower of cost or net realizable value. Inventory cost includes materials, labor and operating overhead. The major types of inventories are as follows (work in process is not material):
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| Logs | $ | 47 |
| | $ | 57 |
|
| Other raw materials | 30 |
| | 25 |
|
| Semi-finished inventory | 21 |
| | 23 |
|
| Finished products | 195 |
| | 168 |
|
| Total | $ | 293 |
| | $ | 273 |
|
|
| | | | | | | |
| Dollar amounts in millions | September 30, 2017 | | December 31, 2016 |
| Logs | $ | 46.9 |
| | $ | 54.6 |
|
| Other raw materials | 24.2 |
| | 23.0 |
|
| Semi-finished inventory | 20.8 |
| | 16.8 |
|
| Finished products | 139.1 |
| | 140.2 |
|
| Total | $ | 231.0 |
| | $ | 234.6 |
|
NOTE 710 - ACQUISITIONS AND REDEEMABLE NONCONTROLLING INTEREST
Redeemable noncontrolling interest are interests in subsidiaries that are redeemable outside of our control either for cash or other assets. These interests are classified as mezzanine equity and measured at the greater of estimated redemption value at the end of each reporting period or the historical cost basis of the noncontrolling interest adjusted for cumulative earnings allocations. The resulting increases or decreases in the estimated redemption amount of redeemable preferred noncontrolling interest are affected by corresponding charges through income. Any adjustments recognized on redeemable common noncontrolling interest are affected by corresponding charges to accumulated paid in capital.
Entekra
During the second quarter of 2018, we invested $45 million in Entekra Holdings, LLC (Entekra), a start-up design, engineering and manufacturing company that provides off-site framing for both residential and commercial construction. This investment was recorded as an equity investment based upon the joint control of Entekra’s operations. We own 81.8% of the A units and 55% of the B units of Entekra. Our portion of the earnings and losses of Entekra was included in our Consolidated Statement of Income as income (loss) from unconsolidated affiliate.
During the first quarter of 2019, we obtained a controlling interest in Entekra. Entekra's results of operations have been fully consolidated for periods after December 31, 2018 and we established a redeemable noncontrolling interest related to the minority holders. Due to the pre-existing ownership interest in Entekra, this acquisition was accounted for as a step acquisition in accordance with ASC 805, "Business Combinations". We recognized a gain of $14 million recorded within other non-operating items on our Consolidated Statements of Income in connection with this transaction to record our ownership interest in Entekra at fair value on the acquisition date based upon an appraisal.
Including our previously owned interest, we acquired net assets of $56 million, consisting of $41 million in current assets, $6 million in fixed assets, $25 million of goodwill and other intangible assets less $1 million in current liabilities and $15 million in non-controlling interest. Certain information about Entekra (e.g., pro forma financial information and allocation of purchase price) is not presented because such information is not material to our results of operations and financial position. |
| | | | | | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Beginning balance | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Purchase of redeemable common and preferred stock | — |
| | — |
| | 15 |
| | — |
|
| Net loss attributable to redeemable non-controlling interest | (2 | ) | | — |
| | (2 | ) | | — |
|
| Adjustment to redemption value | — |
| | — |
| | — |
| | — |
|
| Ending balance | $ | 13 |
| | $ | — |
| | $ | 13 |
| | $ | — |
|
As of June 30, 2019, Entekra has entered into a long-term lease associated with their manufacturing facility which is currently under construction. In accordance with ASC 842, Entekra does not yet control the underlying asset. When Entekra obtains control, we anticipate that we will increase our ROU assets by $18 million and the related lease liability by a comparable amount.
Prefinished Staining Product Incorporated (PSPI)
During the second quarter of 2019, we acquired certain assets and liabilities of Prefinished Staining Product Incorporated (PSPI), a prefinished siding company located in Green Bay, Wisconsin. The purchase resulted in us recording intangible assets of $4 million. Our assessment of fair value and the purchase price allocation related to this acquisition is final. Certain information about PSPI (e.g., pro forma financial information and allocation of purchase price) is not presented because such information is not material to our results of operations and financial position.
NOTE 11 - GOODWILL AND OTHER INTANGIBLES
Changes in goodwill and other intangible assets for the six months ended June 30, 2019 is provided in the following table:
|
| | | | | | | | | | | | | | | |
| Dollar amounts in millions | 2019 |
| | Timber and timberlands | Goodwill | Developed Technology | Other Assets | Total |
| Beginning balance December 31, | $ | 41 |
| $ | 16 |
| $ | 10 |
| $ | — |
| $ | 67 |
|
| Acquisitions (Note 10) | — |
| 14 |
| 12 |
| 3 |
| 29 |
|
| Amortization | (1 | ) | — |
| (1 | ) | — |
| (2 | ) |
| Total goodwill and other intangibles | $ | 39 |
| $ | 30 |
| $ | 21 |
| $ | 3 |
| $ | 93 |
|
NOTE 12 – INCOME TAXES
Accounting standards state that companies account for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards and other tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are recorded as necessary to reduce deferred tax assets to the amount thereof that is more likely than not to be realized. The likelihood of realizing deferred tax assets is evaluated by, among other things, estimating future taxable income, considering the future reversal of existing deferred tax liabilities to which the deferred tax assets may be applied and assessing the impact of tax planning strategies.
For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate to year-to-date results, unless this method does not result in a reliable estimate of year-to-date income tax expense. An exception is provided for situations in which an enterprise anticipates a loss in a separate jurisdiction for which no tax benefit can be recognized.
Each period, the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted to the current quarter. Changes in the profitability estimates in various jurisdictions will impact our quarterly effective income tax rates.
For the first ninesix months of 2017,2019, our income tax expense on continuing operations reflects a rate of 20% as compared to 24% in the comparable period of 2018. For the first six months of 2019, the primary differences between the U.S. statutory rate of 35%21% and the effective rate applicableof 20% relates to LP’s income relateincreases in tax deductions related to foreign tax rates, changes in Canadian valuation allowances,stock-based compensation and the deduction for U.S. domestic production activities.effects of foreign and state tax rates. For the first ninesix months of 2016,2018, the primary differences between the U.S. statutory rate of 35%21% and the effective rate applicableof 24% relates to LP’s continuing operations relate tostate income tax, discretionary pension payments, foreign tax rates changes in Canadian and state valuation allowances, excess tax benefits in connection with LP'sdeductions related to stock-based compensation plans, recognition of research and development credits from prior years and an increase in the reserve for unrecognized tax benefits associated with LP's South American operations.compensation.
LP periodically reviews the need for valuation allowances against deferred tax assets and recognizes these deferred tax assets to the extent that the realization is more likely than not. As part of our review, we consider all positive and negative evidence, including earnings history, the future reversal of deferred tax liabilities, and the relevant expirations of carryforwards. LP believes that the valuation allowances provided are appropriate. If in future periods our earnings estimates differ from the estimates used to establish these valuation allowances, or other objective positive or negative evidence arises, LP may be required to record an adjustment resulting in an impact on tax expense (benefit) for that period.
NOTE 813 - OTHER OPERATING CREDITS AND CHARGES
During the third quarter of 2017, LP recorded a refund of $0.9 million related to sales and use taxes.
During the second quarter of 2017, LP recorded an expense of $2.0 million related to an increase in2019, we reduced our product related warranty reserves by $4 million and recorded a gain of $1 million in insurance recoveries associated with CanExel products soldproperty damage from prior years. Additionally, we recorded a charge of $1 million related to severance associated with certain reorganizations within the corporate office and $1 million related to severance and other charges associated with our recently announced planned curtailment of an OSB mill in specific geographic locations and for a specific time period.British Columbia, Canada.
During the first quarter of 2017, LP2019, we recorded an expensea charge of $3.4$2 million on severance and other charges related to an increasecertain reorganizations within the corporate offices and property damage sustained by our Wilmington facility during a hurricane occurring in product related warranty reserves associated with CanExel products sold in specific geographic locations and for a specific time period.the fall of 2018.
During the second quarter of 2016, LP2018, we recorded an expensea gain of $11.4$8 million related to an increase in product related warranty reserves andthe settlement of previously-paid environmental costs or the liability for future environmental costs to be paid by a related adjustment to value added taxesthird party associated with CanExel products solda non-operating site. Additionally, we recorded a charge of $4 million in specific geographic locationsseverance and for a specific time period.
other charges related to certain reorganizations within the corporate offices, including the costs associated with the retirement of our previous chief financial officer.
NOTE 914 – LEGAL AND ENVIRONMENTAL MATTERS
Certain environmental matters and legal proceedings are discussed below.
Environmental Matters
We maintain a reserve for undiscounted estimated environmental loss contingencies. This reserve is primarily for estimated future costs of remediation of hazardous or toxic substances at numerous sites currently or previously owned by the Company. LP’sOur estimates of itsour environmental loss contingencies are based on various assumptions and judgments, the specific nature of which varies in light of the particular facts and circumstances surrounding each environmental loss contingency. These estimates typically reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and/or monitoring activities and the probable cost of these activities, and in some cases reflect assumptions and judgments as to the obligation or willingness and ability of third parties to bear a proportionate or allocated share of the cost of these activities. Due to the numerous uncertainties and variables associated with these assumptions and judgments, and the effects of changes in governmental regulation and environmental technologies, both the precision and reliability of the resulting estimates of the related contingencies are subject to substantial uncertainties. LPWe regularly monitors itsmonitor our estimated exposure to environmental loss contingencies and, as additional information becomes known, may change itsour estimates significantly. However, no estimate of the range of any such change can be made at this time.
Recorded in Other assets is $1 million related to a receivable for reimbursements of environmental costs associated with a non-operating site as of June 30, 2019.
Other Proceedings
LPWe and itsour subsidiaries are parties to other legal proceedings. Based on the information currently available, management believes that the resolution of such proceedings will not have a material adverse effect on theour financial position, results of operations, cash flows or liquidity of LP.liquidity.
NOTE 1015 – SELECTED SEGMENT DATA
LP operatesWe operate in four segments: Siding, North America Oriented Strand Board (OSB), Engineered Wood Products (EWP) and South America. LP’sOur business units have been aggregated into these four segments based upon the similarity of economic characteristics, customers and distribution methods. LP’sOur results of operations attributed to LP are summarized below for each of these segments separately as well as for the “other” category which comprises other products that are not individually significant. Segment information was prepared in accordance with the same accounting principles as those described in Note 1 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2016.
|
| | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| Dollar amounts in millions | 2017 | | 2016 | | 2017 | | 2016 |
| Net Sales | | | | | | | |
| Siding | $ | 226.2 |
| | $ | 194.8 |
| | $ | 671.2 |
| | $ | 583.3 |
|
| OSB | 350.9 |
| | 282.1 |
| | 944.3 |
| | 751.9 |
|
| EWP | 98.1 |
| | 80.7 |
| | 274.4 |
| | 230.5 |
|
| South America | 38.3 |
| | 31.7 |
| | 114.8 |
| | 103.2 |
|
| Other | 6.5 |
| | 7.6 |
| | 22.3 |
| | 20.3 |
|
| Intersegment sales | (1.7 | ) | | (0.5 | ) | | (3.7 | ) | | (5.8 | ) |
| | $ | 718.3 |
| | $ | 596.4 |
| | $ | 2,023.3 |
| | $ | 1,683.4 |
|
| Operating profit (loss): | | | | | | | |
| Siding | $ | 52.8 |
| | $ | 35.2 |
| | $ | 141.5 |
| | $ | 103.9 |
|
| OSB | 126.4 |
| | 67.4 |
| | 289.4 |
| | 126.7 |
|
| EWP | 6.3 |
| | — |
| | 12.0 |
| | (2.0 | ) |
| South America | 5.8 |
| | 3.3 |
| | 16.4 |
| | 15.3 |
|
| Other | (1.6 | ) | | (0.4 | ) | | (2.7 | ) | | (1.0 | ) |
| Other operating credits and charges, net | 0.9 |
| | — |
| | (4.5 | ) | | (11.4 | ) |
| Gain (loss) on sale or impairment of long-lived assets, net | (0.7 | ) | | (0.3 | ) | | 1.8 |
| | (1.0 | ) |
| General corporate and other expenses, net | (30.0 | ) | | (26.9 | ) | | (85.7 | ) | | (78.1 | ) |
| Interest expense, net of capitalized interest | (4.9 | ) | | (9.0 | ) | | (14.8 | ) | | (26.3 | ) |
| Investment income | 2.9 |
| | 2.5 |
| | 7.2 |
| | 6.4 |
|
| Loss on early debt extinguishment | — |
| | (13.2 | ) | | — |
| | (13.2 | ) |
| Other non-operating items | (0.6 | ) | | (0.5 | ) | | (2.4 | ) | | 1.4 |
|
| Income from continuing operations before taxes | 157.3 |
| | 58.1 |
| | 358.2 |
| | 120.7 |
|
| Provision (benefit) for income taxes | 46.4 |
| | (7.5 | ) | | 97.9 |
| | 13.1 |
|
| Income from continuing operations | $ | 110.9 |
| | $ | 65.6 |
| | $ | 260.3 |
| | $ | 107.6 |
|
NOTE 11 – POTENTIAL IMPAIRMENTS
LP continues to review certain operations and investments for potential impairments. LP’s management currently believes it has adequate support for the carrying value of each of these operations and investments based upon the anticipated cash flows that result from estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures.
LP also reviews from time to time possible dispositions of various assets in light of current and anticipated economic and industry conditions, its strategic plan and other relevant circumstances. Because a determination to dispose of particular assets can require management to make assumptions regarding the transaction structure of the disposition and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, LP may be required to record impairment charges in connection with decisions to dispose of assets.
NOTE 12 – DEFINED BENEFIT PENSION PLANS
The following table sets forth the net periodic pension cost for LP’s defined benefit pension plans during the quarter and nine months ended September 30, 2017 and 2016. The net periodic pension cost included the following components:
|
| | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| Dollar amounts in millions | 2017 | | 2016 | | 2017 | | 2016 |
| Service cost | $ | 1.4 |
| | $ | 1.2 |
| | $ | 4.1 |
| | $ | 3.6 |
|
| Interest cost | 3.3 |
| | 3.3 |
| | 9.7 |
| | 10.1 |
|
| Expected return on plan assets | (3.3 | ) | | (3.3 | ) | | (9.8 | ) | | (10.0 | ) |
Amortization of prior service cost 1 | 0.2 |
| | 0.1 |
| | 0.6 |
| | 0.3 |
|
Amortization of net loss 1 | 1.4 |
| | 1.4 |
| | 4.2 |
| | 4.1 |
|
| Net periodic pension cost | $ | 3.0 |
| | $ | 2.7 |
| | $ | 8.8 |
| | $ | 8.1 |
|
1The amortization of prior service costs and net loss are included in the amounts reclassified from accumulated other comprehensive income (loss); see Note 14 for additional details. The net periodic pension cost is included in Cost of sales and Selling and administrative expense in the Consolidated Statements of Income.
During the nine months ended September 30, 2017, LP made $12.8 million in pension contributions to its defined benefit pension plans. LP expects to contribute between $1.0 million and $2.0 million to its defined benefit pension plans in the remaining months of 2017.
NOTE 13 – PRODUCT WARRANTY
LP provides warranties on the sale of most of its products and records an accrual for estimated future claims. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The activity in warranty reserves for the quarter ended September 30, 2017 and 2016 are summarized in the following table:
|
| | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| Dollar amounts in millions | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning balance | $ | 25.3 |
| | $ | 25.6 |
| | $ | 24.1 |
| | $ | 21.0 |
|
| Accrued to expense | 0.2 |
| | 0.2 |
| | 0.6 |
| | 0.6 |
|
| Accrued to other operating credits and charges | — |
| | — |
| | 5.4 |
| | 10.9 |
|
| Accrued to discontinued operations | 1.5 |
| | — |
| | 1.5 |
| | — |
|
| Foreign currency translation | 0.6 |
| | 0.1 |
| | 2.0 |
| | 0.6 |
|
| Payments made | (1.6 | ) | | (4.8 | ) | | (7.6 | ) | | (12.0 | ) |
| Total warranty reserves | 26.0 |
| | 21.1 |
| | 26.0 |
| | 21.1 |
|
| Current portion of warranty reserves | (9.0 | ) | | (9.0 | ) | | (9.0 | ) | | (9.0 | ) |
| Long-term portion of warranty reserves | $ | 17.0 |
| | $ | 12.1 |
| | $ | 17.0 |
| | $ | 12.1 |
|
LP continues to monitor warranty and other claims associated with these products and believes as of September 30, 2017 that the reserves associated with these matters are adequate. However, it is possible that additional charges may be required in the future.
During the quarter ended September 30, 2017, LP increased the reserves associated with discontinued composite decking products by $1.5 million.
The current portion of the warranty reserve is included in the caption “Accounts payable and accrued liabilities” and the long-term portion is included in the caption “Other long-term liabilities” on LP’s Consolidated Balance Sheets.
NOTE 14 - OTHER COMPREHENSIVE INCOME
Other comprehensive income activity, net of tax, is provided in the following table for the quarter and nine months ended September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension Adjustments | | | | | | |
| Dollar amounts in millions | | Foreign currency translation adjustments | | Actuarial losses | | Prior service costs | | Unrealized gain (loss) on investments | | Other | | Total |
| Balance at June 30, 2017 | | $ | (52.0 | ) | | $ | (86.4 | ) | | $ | (4.8 | ) | | $ | 3.1 |
| | $ | (0.7 | ) | | $ | (140.8 | ) |
| Other comprehensive income (loss) before reclassifications | | 10.4 |
| | (0.4 | ) | | — |
| | 0.7 |
| | (0.2 | ) | | 10.5 |
|
| Income taxes | | — |
| | — |
| | — |
| | (0.3 | ) | | — |
| | (0.3 | ) |
| Net other comprehensive income (loss) before reclassifications | | 10.4 |
| | (0.4 | ) | | — |
| | 0.4 |
| | (0.2 | ) | | 10.2 |
|
| Amounts reclassified from accumulated comprehensive income (loss) | | — |
| | 1.4 |
| | 0.3 |
| | — |
| | 0.1 |
| | 1.8 |
|
| Income taxes | | — |
| | (0.5 | ) | | (0.1 | ) | | — |
| | — |
| | (0.6 | ) |
| Net amounts reclassified from cumulative other comprehensive income (loss) | | — |
| | 0.9 |
| | 0.2 |
| | — |
| | 0.1 |
| | 1.2 |
|
| Total other comprehensive income (loss) | | 10.4 |
| | 0.5 |
| | 0.2 |
| | 0.4 |
| | (0.1 | ) | | 11.4 |
|
| Balance at September 30, 2017 | | $ | (41.6 | ) | | $ | (85.9 | ) | | $ | (4.6 | ) | | $ | 3.5 |
| | $ | (0.8 | ) | | $ | (129.4 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension Adjustments | | | | | | |
| Dollar amounts in millions | | Foreign currency translation adjustments | | Actuarial losses | | Prior service costs | | Unrealized gain (loss) on investments | | Other | | Total |
| Balance at December 31, 2016 | | $ | (46.3 | ) | | $ | (87.7 | ) | | $ | (5.2 | ) | | $ | 2.7 |
| | $ | (0.7 | ) | | $ | (137.2 | ) |
| Other comprehensive income (loss) before reclassifications | | 4.7 |
| | (0.8 | ) | | — |
| | 1.3 |
| | (0.2 | ) | | 5.0 |
|
| Income taxes | | — |
| | — |
| | — |
| | (0.5 | ) | | — |
| | (0.5 | ) |
| Net other comprehensive income (loss) before reclassifications | | 4.7 |
| | (0.8 | ) | | — |
| | 0.8 |
| | (0.2 | ) | | 4.5 |
|
| Amounts reclassified from accumulated comprehensive income (loss) | | — |
| | 4.2 |
| | 0.9 |
| | — |
| | 0.1 |
| | 5.2 |
|
| Income taxes | | — |
| | (1.6 | ) | | (0.3 | ) | | — |
| | — |
| | (1.9 | ) |
| Net amounts reclassified from cumulative other comprehensive income (loss) | | — |
| | 2.6 |
| | 0.6 |
| | — |
| | 0.1 |
| | 3.3 |
|
| Total other comprehensive income (loss) | | 4.7 |
| | 1.8 |
| | 0.6 |
| | 0.8 |
| | (0.1 | ) | | 7.8 |
|
| Balance at September 30, 2017 | | $ | (41.6 | ) | | $ | (85.9 | ) | | $ | (4.6 | ) | | $ | 3.5 |
| | $ | (0.8 | ) | | $ | (129.4 | ) |
Other comprehensive income activity, net of tax, is provided in the following table for the quarter and six months ended September 30, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension Adjustments | | | | | | |
| Dollar amounts in millions | | Foreign currency translation adjustments | | Actuarial losses | | Prior service costs | | Unrealized gain (loss) on investments | | Other | | Total |
| Balance at June 30, 2016 | | $ | (44.9 | ) | | $ | (86.9 | ) | | $ | (5.4 | ) | | $ | 3.1 |
| | $ | (1.0 | ) | | $ | (135.1 | ) |
| Other comprehensive income (loss) before reclassifications | | 0.1 |
| | 0.1 |
| | — |
| | (0.8 | ) | | — |
| | (0.6 | ) |
| Income taxes | | — |
| | — |
| | — |
| | 0.3 |
| | — |
| | 0.3 |
|
| Net other comprehensive income (loss) before reclassifications | | 0.1 |
| | 0.1 |
| | — |
| | (0.5 | ) | | — |
| | (0.3 | ) |
| Amounts reclassified from accumulated other comprehensive income | | — |
| | 1.4 |
| | 0.1 |
| | — |
| | — |
| | 1.5 |
|
| Income taxes | | — |
| | (0.5 | ) | | (0.1 | ) | | — |
| | — |
| | (0.6 | ) |
| Net amounts reclassified from cumulative other comprehensive income | | — |
| | 0.9 |
| | — |
| | — |
| | — |
| | 0.9 |
|
| Total other comprehensive income (loss) | | 0.1 |
| | 1.0 |
| | — |
| | (0.5 | ) | | — |
| | 0.6 |
|
| Balance at September 30, 2016 | | $ | (44.8 | ) | | $ | (85.9 | ) | | $ | (5.4 | ) | | $ | 2.6 |
| | $ | (1.0 | ) | | $ | (134.5 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension Adjustments | | | | | | |
| Dollar amounts in millions | | Foreign currency translation adjustments | | Actuarial losses | | Prior service costs | | Unrealized gain (loss) on investments | | Other | | Total |
| Balance at December 31, 2015 | | $ | (55.1 | ) | | $ | (87.8 | ) | | $ | (5.5 | ) | | $ | 3.3 |
| | $ | (1.0 | ) | | $ | (146.1 | ) |
| Other comprehensive income (loss) before reclassifications | | 10.3 |
| | (0.6 | ) | | — |
| | (1.1 | ) | | — |
| | 8.6 |
|
| Income taxes | | — |
| | — |
| | — |
| | 0.4 |
| | — |
| | 0.4 |
|
| Net other comprehensive income (loss) before reclassifications | | 10.3 |
| | (0.6 | ) | | — |
| | (0.7 | ) | | — |
| | 9.0 |
|
| Amounts reclassified from accumulated other comprehensive income | | — |
| | 4.1 |
| | 0.3 |
| | — |
| | — |
| | 4.4 |
|
| Income taxes | | — |
| | (1.6 | ) | | (0.2 | ) | | — |
| | — |
| | (1.8 | ) |
| Net amounts reclassified from cumulative other comprehensive income | | — |
| | 2.5 |
| | 0.1 |
| | — |
| | — |
| | 2.6 |
|
| Total other comprehensive income (loss) | | 10.3 |
| | 1.9 |
| | 0.1 |
| | (0.7 | ) | | — |
| | 11.6 |
|
| Balance at September 30, 2016 | | $ | (44.8 | ) | | $ | (85.9 | ) | | $ | (5.4 | ) | | $ | 2.6 |
| | $ | (1.0 | ) | | $ | (134.5 | ) |
The amounts reclassified from accumulated other comprehensive income (loss) are included in the computation of net periodic pension cost; see Note 12 for additional details. The net periodic pension cost is included in Cost of sales and Selling and administrative expense in the Consolidated Statements of Income.
NOTE 15 - RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) 605, Revenue Recognition. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective on January 1, 2018. LP has elected to adopt the revenue recognition standard in the first quarter of 2018 using the modified retrospective transition method with a cumulative adjustment to its opening balance of retained earnings. LP does not anticipate the adoption of this standard to have a material impact on LP’s financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). The standard simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. LP does not expect the adoption of this new standard to have a material impact on its consolidated results of operations and financial position.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715). The standard amends the requirements in ASC 715 related to the income statement presentation of the components of net periodic benefit cost for an entity's sponsored defined benefit pension and other post-retirement plans. The new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. LP does not expect the adoption of this new standard to have a material impact on its consolidated results of operations and financial position as only the presentation of the income statement will be affected.
In May 2017, the FASB issued ASU 2017-09, Modification Accounting for Share-Based Payment Arrangements. The standard amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. LP does not expect the adoption of this new standard to have a material impact on its consolidated results of operations and financial position.
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
GENERAL
LP is a leading manufacturer of sustainable, quality engineered wood building materials including Oriented Strand Board (OSB), structural framing products, and exterior siding for use in residential, industrial and light commercial construction. Our products are used primarily in new home construction, repair and remodeling, and outdoor structures. We also market and sell our products in light industrial and commercial construction and we have a modest export business. Our manufacturing facilities are primarily located in the U.S. and Canada, but we also operate two facilities in Chile and one facility in Brazil.
To serve these markets, we operate in four segments: Siding; North America Oriented Strand Board (OSB); Engineered Wood Products (EWP); and South America.
Demand for our products correlates to a significant degree to the level of new home construction activity in North America, which historically has been characterized by significant cyclicality. For the third quarter and first nine months of 2017, the U.S. Department of Census reported that U.S. single and multi-family housing starts were 2% higher than for the same quarter of 2016 and 3% higher than the comparable nine month period. OSB is sold as a commodity for which sales prices fluctuate daily based on market factors over which we have little or no control. We cannot predict whether the prices of our OSB products will remain at current levels or increase or decrease in the future. OSB prices (NC 7/16"), as reported by Random Lengths, were 33% higher for the third quarter of 2017 and 30% for the first nine months of 2017 compared to the same periods in 2016.
For additional factors affecting our results, refer to the Management Discussion and Analysis of Financial Condition and Results of Operations overview contained in our Annual Report on Form 10-K for the year ended December 31, 2016 and to “About Forward-Looking Statements” and “Risk Factors” in this report.
EXECUTIVE SUMMARY
We recorded a 20% increase in sales to $718.3 million for2018. During the quarter ended September 30, 2017 from $596.4 million reported for the quarter ended September 30, 2016. We recorded income from operations of $158.9 million for the quarter ended September 30, 2017 compared to $76.9 million for the quarter ended September 30, 2016. We recorded net income of $109.8 million ($0.75 per diluted share) for the quarter ended September 30, 2017 compared to $65.6 million ($0.45 per diluted share) for the quarter ended September 30, 2016. We reported an increase of $81.3 million in Adjusted EBITDA from continuing operations for the thirdfirst quarter of 2017 as compared2019, certain timber operations where reclassified from other to EWP and we have reclassifed a significant portion of our unallocated expenses to the thirdbusiness segments effective during the first quarter of 2016. Improvements in OSB pricing in all North American operations had a positive impact on our operating results of $83.6 million for the quarter ended September 30, 2017 as compared to the quarter ended September 30, 2016.
We recorded a 20% increase in sales to $2.0 billion for the nine months ended September 30, 2017 from $1.7 billion reported for the six months ended September 30, 2016. We recorded income from operations of $364.4 million for the nine months ended September 30, 2017 compared to $148.0 million for the nine months ended September 30, 2016. We recorded net income of $259.2 million ($1.77 per diluted share) for the nine months ended September 30, 2017 compared to $107.6 million ($0.74 per diluted share) for the nine months ended September 30, 2016. We reported an increase of $206.2 million in Adjusted EBITDA from continuing operations for the nine months ended September 30, 2017 compared to the same period in 2016. Improvements in OSB pricing in all North American operations had a positive impact on our operating results of $211.3 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.
These changes are discussed further in "Our Operating Results" below.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Presented in Note 1 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2016 is a discussion of our significant accounting policies and significant accounting estimates and judgments. Throughout the preparation of the financial statements, we employ significant judgments in the application of accounting principles and methods. These judgments are primarily related to the assumptions used to arrive at various estimates. For 2017, these significant accounting estimates and judgments include:
Legal Contingencies. Our estimates of loss contingencies for legal proceedings are based on various judgments and assumptions regarding the potential resolution or disposition of the underlying claims and associated costs. In making judgments and assumptions regarding legal contingencies for ongoing class action settlements, we consider, among other things, discernible trends in the rate of claims asserted and related damage estimates and information obtained through consultation with statisticians and economists, including statistical analysis of potential outcomes based on experience to date and the experience of third parties who2019. All prior periods presented have been subject to product-related claims judged to be comparable. Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates significantly.
Environmental Contingencies. Our estimates of loss contingenciesadjusted for environmental matters are based on various judgments and assumptions. These estimates typically reflect judgments and assumptions relating to the probable nature, magnitude and timing of required investigation, remediation and/or monitoring activities and the probable cost of these activities, and in some cases reflect judgments and assumptions relating to the obligation or willingness and ability of third parties to bear a proportionate or allocated share of the cost of these activities, including third parties who purchased assets from us subject to environmental liabilities. We consider the ability of third parties to pay their apportioned cost when developing our estimates. In making these judgments and assumptions related to the development of our loss contingencies, we consider, among other things, the activity to date at particular sites, information obtained through consultation with applicable regulatory authorities and third-party consultants and contractors and our historical experience at other sites that are judged to be comparable. Due to the numerous variables associated with these judgments and assumptions, and the effects of changes in governmental regulation and environmental technologies, both the precision and reliability of the resulting estimates of the related contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to environmental loss contingencies and, as additional information becomes known, may change our estimates significantly. At September 30, 2017, we excluded from our estimates approximately $2.1 million of potential environmental liabilities that we estimate will be allocated to third parties pursuant to existing and anticipated future cost-sharing arrangements.
Impairment of Long-Lived Assets. We review the long-lived assets held and used by us (primarily property, plant and equipment and timber and timberlands) for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. We consider the necessity of undertaking such a review at least quarterly, and also when certain events or changes in circumstances occur. Events and changes in circumstances that may necessitate such a review include, but are not limited to: a significant decrease in the market price of a long-lived asset or group of long-lived assets; a significant adverse change in the extent or manner in which a long-lived asset or group of long-lived assets is being used or in its physical condition; a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or group of long-lived assets, including an adverse action or assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or group of long-lived assets; current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or group of long-lived assets; and current expectation that, more likely than not, a long-lived asset or group of long-lived assets will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Identifying these events and changes in circumstances, and assessing their impact on the appropriate valuation of the affected assets under accounting principles generally accepted in the U.S., requires us to make judgments, assumptions and estimates.
In general, for assets held and used in our operations, impairments are recognized when the carrying amount of the long-lived asset or groups of long-lived assets is not recoverable and exceeds the fair value of the asset or group of
assets. The carrying amount of a long-lived asset or groups of long-lived assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets or group of assets. The key assumptions in estimating these cash flows relate to future production volumes, pricing of commodity or specialty products and future estimates of expenses to be incurred as reflected in our long-range internal planning models. Our assumptions regarding pricing are based upon the average pricing over the commodity cycle (generally five years) due to the inherent volatility of commodity product pricing, and reflect our assessment of information gathered from industry research firms, research reports published by investment analysts and other published forecasts. Our assumptions regarding expenses reflect our expectation that we will continue to reduce production costs to offset inflationary impacts.
When impairment is indicated for assets held and used in our operations, the book values of the affected assets are written down to their estimated fair value, which is generally based upon discounted future cash flows associated with the affected assets. When impairment is indicated for assets to be disposed of, the book values of the affected assets are written down to their estimated fair value, less estimated selling costs. Consequently, a determination to dispose of particular assets can require us to estimate the net sales proceeds expected to be realized upon such disposition, which may be less than the estimated undiscounted future net cash flows associated with such assets prior to such determination, and thus require an impairment charge. In situations where we have experience in selling assets of a similar nature, we may estimate net sales proceeds on the basis of that experience. In other situations, we hire independent appraisers to estimate net sales proceeds.
Due to the numerous variables associated with our judgments and assumptions relating to the valuation of assets in these circumstances, and the effects of changes in circumstances affecting these valuations, both the precision and reliability of the resulting estimates of the related impairment charges are subject to substantial uncertainties and, as additional information becomes known, we may change our estimates significantly.
Income Taxes. The determination of the provision for income taxes, and the resulting current and deferred tax assets and liabilities, involves significant management judgment, and is based upon information and estimates available to management at the time of such determination. The final income tax liability to any taxing jurisdiction with respect to any calendar year will ultimately be determined long after our financial statements have been published for that year. We maintain reserves for known estimated tax exposures in federal, state and international jurisdictions; however, actual results may differ materially from our estimates.
Judgment is also applied in determining whether deferred tax assets will be realized in full or in part. When we consider it to be more likely than not that all or some portion of a deferred tax asset will not be realized, a valuation allowance is established for the amount of the deferred tax asset that is estimated not to be realizable. As of September 30, 2017, we had established valuation allowances against certain deferred tax assets, primarily related to foreign and state carryovers of net operating losses, credits and capital losses. We have not established valuation allowances against other deferred tax assets based upon positive evidence such as recent earnings history, generally improving economic conditions and deferred tax liabilities which we anticipate to reverse within the carry forward period. Accordingly, changes in facts or circumstances affecting the likelihood of realizing a deferred tax asset could result in the need to record additional valuation allowances.
Pension Plans. Most of our U.S. employees and many of our Canadian employees participate in defined benefit pension plans sponsored by LP. We account for the consequences of our sponsorship of these plans in accordance with accounting principles generally accepted in the U.S., which require us to make actuarial assumptions that are used to calculate the related assets, liabilities and expenses recorded in our financial statements. While we believe we have a reasonable basis for these assumptions, which include assumptions regarding long-term rates of return on plan assets, life expectancies, rates of increase in salary levels, rates at which future values should be discounted to determine present values and other matters, the amounts of our pension related assets, liabilities and expenses recorded in our financial statements would differ if we used other assumptions.
Warranty Obligations. Customers are provided with a limited warranty against certain defects associated with our products for periods of up to fifty years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the historical and anticipated rates of warranty claims and the cost of resolving such. We periodically assess the adequacy of our recorded warranty liability for each product and adjust the amounts as
necessary. While we believe we have a reasonable basis for these assumptions, actual warranty costs in the future could differ from our estimates.
NON-GAAP FINANCIAL MEASURES
In evaluating our business, we utilize several non-GAAP financial measures. A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so excluded or included under applicable GAAP guidance. We disclose earnings before interest expense, taxes, depreciation and amortization ("EBITDA from continuing operations") which is a non-GAAP financial measure. Additionally, we disclose "Adjusted EBITDA from continuing operations" which further adjusts EBITDA from continuing operations to exclude stock-based compensation expense, (gain) loss on sale or impairment of long-lived assets, other operating credits and charges and investment income. Neither EBITDA from continuing operations nor Adjusted EBITDA from continuing operations is a substitute for the GAAP measures of net income or operating cash flows or for any other GAAP measures of operating performance or liquidity.
We have included EBITDA from continuing operations and Adjusted EBITDA from continuing operations because we use them as important supplemental measures of our performance and believe that they are frequently used by securities analysts, investors and other interested persons in the evaluation of companies in our industry, some of which present EBITDA when reporting their results. We use EBITDA from continuing operations and Adjusted EBITDA from continuing operations to evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates. It should be noted that companies calculate EBITDA and Adjusted EBITDA differently and, therefore, our EBITDA and Adjusted EBITDA measures may not be comparable to EBITDA and Adjusted EBITDA reported by other companies. Our EBITDA and Adjusted EBITDA have material limitations as performance measures because they exclude interest expense, income tax (benefit) expense, and depreciation and amortization, which are necessary to operate our business or which we otherwise incur or experience in connection with the operation of our business.
The following table represents significant items by operating segment and reconciles income (loss) from continuing operations to EBITDA from continuing operations and Adjusted EBITDA from continuing operations:comparability.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, 2017 (Dollar amounts in millions) | Siding | | OSB | | EWP | | South America | | Other | | Corporate | | Total |
| Net Sales | $ | 226.2 |
| | $ | 350.9 |
| | $ | 98.1 |
| | $ | 38.3 |
| | $ | 6.5 |
| | $ | (1.7 | ) | | $ | 718.3 |
|
| Depreciation and amortization | 8.1 |
| | 15.2 |
| | 4.0 |
| | 2.4 |
| | 0.7 |
| | 0.7 |
| | 31.1 |
|
| Cost of sales and selling and administrative | 165.3 |
| | 209.3 |
| | 88.8 |
| | 30.1 |
| | 7.4 |
| | 27.6 |
| | 528.5 |
|
| Loss on sale or impairment of long lived assets, net | — |
| | — |
| | — |
| | — |
| | — |
| | 0.7 |
| | 0.7 |
|
| Other operating credits and charges, net | — |
| | — |
| | — |
| | — |
| | — |
| | (0.9 | ) | | (0.9 | ) |
| Total operating costs | 173.4 |
| | 224.5 |
| | 92.8 |
| | 32.5 |
| | 8.1 |
| | 28.1 |
| | 559.4 |
|
| Income (loss) from operations | 52.8 |
| | 126.4 |
| | 5.3 |
| | 5.8 |
| | (1.6 | ) | | (29.8 | ) | | 158.9 |
|
| Total non-operating expense | — |
| | — |
| | — |
| | — |
| | — |
| | (2.6 | ) | | (2.6 | ) |
| Income (loss) from continuing operations before taxes and equity in income of unconsolidated affiliates | 52.8 |
| | 126.4 |
| | 5.3 |
| | 5.8 |
| | (1.6 | ) | | (32.4 | ) | | 156.3 |
|
| Provision for income taxes | — |
| | — |
| | — |
| | — |
| | — |
| | 46.4 |
| | 46.4 |
|
| Equity in income of unconsolidated affiliates | — |
| | — |
| | (1.0 | ) | | — |
| | — |
| | — |
| | (1.0 | ) |
| Income (loss) from continuing operations | $ | 52.8 |
| | $ | 126.4 |
| | $ | 6.3 |
| | $ | 5.8 |
| | $ | (1.6 | ) | | $ | (78.8 | ) | | $ | 110.9 |
|
| Reconciliation of income (loss) from continuing operations to Adjusted EBITDA from continuing operations | | | | | | | | | | | | |
|
| Income (loss) from continuing operations | $ | 52.8 |
| | $ | 126.4 |
| | $ | 6.3 |
| | $ | 5.8 |
| | $ | (1.6 | ) | | $ | (78.8 | ) | | $ | 110.9 |
|
| Provision for income taxes | — |
| | — |
| | — |
| | — |
| | — |
| | 46.4 |
| | 46.4 |
|
| Interest expense, net of capitalized interest | — |
| | — |
| | — |
| | — |
| | — |
| | 4.9 |
| | 4.9 |
|
| Depreciation and amortization | 8.1 |
| | 15.2 |
| | 4.0 |
| | 2.4 |
| | 0.7 |
| | 0.7 |
| | 31.1 |
|
| EBITDA from continuing operations | 60.9 |
| | 141.6 |
| | 10.3 |
| | 8.2 |
| | (0.9 | ) | | (26.8 | ) | | 193.3 |
|
| Stock-based compensation expense | 0.2 |
| | 0.2 |
| | 0.1 |
| | — |
| | — |
| | 1.5 |
| | 2.0 |
|
| Loss on sale or impairment of long lived assets, net | — |
| | — |
| | — |
| | — |
| | — |
| | 0.7 |
| | 0.7 |
|
| Investment income | — |
| | — |
| | — |
| | — |
| | — |
| | (2.9 | ) | | (2.9 | ) |
| Other operating credits and charges, net | — |
| | — |
| | — |
| | — |
| | — |
| | (0.9 | ) | | (0.9 | ) |
| Adjusted EBITDA from continuing operations | $ | 61.1 |
| | $ | 141.8 |
| | $ | 10.4 |
| | $ | 8.2 |
| | $ | (0.9 | ) | | $ | (28.4 | ) | | $ | 192.2 |
|
| Adjusted EBITDA Margin | 27.0 | % | | 40.4 | % | | 10.6 | % | | 21.4 | % | | (13.8 | )% | | NA |
| | 26.8 | % |
|
| | | | | | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net sales | | | | | | | |
| Siding | $ | 238 |
| | $ | 262 |
| | $ | 474 |
| | $ | 489 |
|
| OSB | 199 |
| | 387 |
| | 407 |
| | 701 |
|
| EWP | 107 |
| | 113 |
| | 197 |
| | 219 |
|
| South America | 40 |
| | 45 |
| | 85 |
| | 88 |
|
| Other | 5 |
| | 3 |
| | 10 |
| | 6 |
|
| Intersegment sales | (2 | ) | | — |
| | (4 | ) | | — |
|
| | $ | 588 |
| | $ | 811 |
| | $ | 1,170 |
| | $ | 1,502 |
|
| Operating profit (loss): | | | | | | | |
| Siding | 37 |
| | $ | 53 |
| | $ | 70 |
| | $ | 89 |
|
| OSB | (18 | ) | | 149 |
| | (25 | ) | | 238 |
|
| EWP | 6 |
| | 6 |
| | 9 |
| | 6 |
|
| South America | 7 |
| | 10 |
| | 15 |
| | 19 |
|
| Other | (2 | ) | | (2 | ) | | (5 | ) | | (4 | ) |
| Other operating credits and charges, net | 3 |
| | 5 |
| | 1 |
| | 5 |
|
| Gain (loss) on sale or impairment of long-lived assets, net | — |
| | — |
| | (1 | ) | | 1 |
|
| General corporate and other expenses, net | (8 | ) | | (6 | ) | | (16 | ) | | (12 | ) |
| Interest expense, net | (2 | ) | | — |
| | (1 | ) | | (1 | ) |
| Other non-operating items | (2 | ) | | (1 | ) | | 9 |
| | (2 | ) |
| Income from continuing operations before taxes | 21 |
| | 214 |
| | 54 |
| | 339 |
|
| Provision for income taxes | 3 |
| | 51 |
| | 11 |
| | 81 |
|
| Income from continuing operations attributed to LP | $ | 17 |
| | $ | 163 |
| | $ | 44 |
| | $ | 258 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Quarter Ended September 30, 2016
(Dollar amounts in millions) | Siding | | OSB | | EWP | | South America | | Other | | Corporate | | Total |
| Net Sales | $ | 194.8 |
| | $ | 282.1 |
| | $ | 80.7 |
| | $ | 31.7 |
| | $ | 7.6 |
| | $ | (0.5 | ) | | $ | 596.4 |
|
| Depreciation and amortization | 6.3 |
| | 15.3 |
| | 3.8 |
| | 2.5 |
| | 0.9 |
| | 0.8 |
| | 29.6 |
|
| Cost of sales and selling and administrative | 153.3 |
| | 199.4 |
| | 78.3 |
| | 25.9 |
| | 7.1 |
| | 25.6 |
| | 489.6 |
|
| Loss on sale or impairment of long lived assets, net | — |
| | — |
| | — |
| | — |
| | — |
| | 0.3 |
| | 0.3 |
|
| Other operating credits and charges, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total operating costs | 159.6 |
| | 214.7 |
| | 82.1 |
| | 28.4 |
| | 8.0 |
| | 26.7 |
| | 519.5 |
|
| Income (loss) from operations | 35.2 |
| | 67.4 |
| | (1.4 | ) | | 3.3 |
| | (0.4 | ) | | (27.2 | ) | | 76.9 |
|
| Total non-operating expense | — |
| | — |
| | — |
| | — |
| | — |
| | (20.2 | ) | | (20.2 | ) |
| Income (loss) from continuing operations before taxes and equity in income of unconsolidated affiliates | 35.2 |
| | 67.4 |
| | (1.4 | ) | | 3.3 |
| | (0.4 | ) | | (47.4 | ) | | 56.7 |
|
| Benefit for income taxes | — |
| | — |
| | — |
| | — |
| | — |
| | (7.5 | ) | | (7.5 | ) |
| Equity in income of unconsolidated affiliates | — |
| | — |
| | (1.4 | ) | | — |
| | — |
| | — |
| | (1.4 | ) |
| Income (loss) from continuing operations | $ | 35.2 |
| | $ | 67.4 |
| | $ | — |
| | $ | 3.3 |
| | $ | (0.4 | ) | | $ | (39.9 | ) | | $ | 65.6 |
|
| Reconciliation of income (loss) from continuing operations to Adjusted EBITDA from continuing operations | | | | | | | | | | | | |
|
| Income (loss) from continuing operations | $ | 35.2 |
| | $ | 67.4 |
| | $ | — |
| | $ | 3.3 |
| | $ | (0.4 | ) | | $ | (39.9 | ) | | $ | 65.6 |
|
| Benefit for income taxes | — |
| | — |
| | — |
| | — |
| | — |
| | (7.5 | ) | | (7.5 | ) |
| Interest expense, net of capitalized interest | — |
| | — |
| | — |
| | — |
| | — |
| | 9.0 |
| | 9.0 |
|
| Depreciation and amortization | 6.3 |
| | 15.3 |
| | 3.8 |
| | 2.5 |
| | 0.9 |
| | 0.8 |
| | 29.6 |
|
| EBITDA from continuing operations | 41.5 |
| | 82.7 |
| | 3.8 |
| | 5.8 |
| | 0.5 |
| | (37.6 | ) | | 96.7 |
|
| Stock-based compensation expense | 0.2 |
| | 0.3 |
| | 0.2 |
| | — |
| | — |
| | 2.5 |
| | 3.2 |
|
| Loss on sale or impairment of long lived assets, net | — |
| | — |
| | — |
| | — |
| | — |
| | 0.3 |
| | 0.3 |
|
| Investment income | — |
| | — |
| | — |
| | — |
| | — |
| | (2.5 | ) | | (2.5 | ) |
| Loss on early debt extinguishment | — |
| | — |
| | — |
| | — |
| | — |
| | 13.2 |
| | 13.2 |
|
| Other operating credits and charges, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Adjusted EBITDA from continuing operations | $ | 41.7 |
| | $ | 83.0 |
| | $ | 4.0 |
| | $ | 5.8 |
| | $ | 0.5 |
| | $ | (24.1 | ) | | $ | 110.9 |
|
| Adjusted EBITDA Margin | 21.4 | % | | 29.4 | % | | 5.0 | % | | 18.3 | % | | 6.6 | % | | NA |
| | 18.6 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 (Dollar amounts in millions) | Siding | | OSB | | EWP | | South America | | Other | | Corporate | | Total |
| Net Sales | $ | 671.2 |
| | $ | 944.3 |
| | $ | 274.4 |
| | $ | 114.8 |
| | $ | 22.3 |
| | $ | (3.7 | ) | | $ | 2,023.3 |
|
| Depreciation and amortization | 23.7 |
| | 44.8 |
| | 11.6 |
| | 6.8 |
| | 2.1 |
| | 2.3 |
| | 91.3 |
|
| Cost of sales and selling and administrative | 506.0 |
| | 610.1 |
| | 254.6 |
| | 91.6 |
| | 22.9 |
| | 79.7 |
| | 1,564.9 |
|
| Gain on sale or impairment of long lived assets, net |
| |
| |
| | — |
| | — |
| | (1.8 | ) | | (1.8 | ) |
| Other operating credits and charges, net |
| | — |
| | — |
| | — |
| | — |
| | 4.5 |
| | 4.5 |
|
| Total operating costs | 529.7 |
| | 654.9 |
| | 266.2 |
| | 98.4 |
| | 25.0 |
| | 84.7 |
| | 1,658.9 |
|
| Income (loss) from operations | 141.5 |
| | 289.4 |
| | 8.2 |
| | 16.4 |
| | (2.7 | ) | | (88.4 | ) | | 364.4 |
|
| Total non-operating expense | — |
| | — |
| | — |
| | — |
| | — |
| | (10.0 | ) | | (10.0 | ) |
| Income (loss) from continuing operations before taxes and equity in income of unconsolidated affiliates | 141.5 |
| | 289.4 |
| | 8.2 |
| | 16.4 |
| | (2.7 | ) | | (98.4 | ) | | 354.4 |
|
| Provision for income taxes | — |
| | — |
| | — |
| | — |
| | — |
| | 97.9 |
| | 97.9 |
|
| Equity in income of unconsolidated affiliates | — |
| | — |
| | (3.8 | ) | | — |
| | — |
| |
| | (3.8 | ) |
| Income (loss) from continuing operations | $ | 141.5 |
| | $ | 289.4 |
| | $ | 12.0 |
| | $ | 16.4 |
| | $ | (2.7 | ) | | $ | (196.3 | ) | | $ | 260.3 |
|
| Reconciliation of income (loss) from continuing operations to Adjusted EBITDA from continuing operations | | | | | | | | | | | | | |
| Income (loss) from continuing operations | $ | 141.5 |
| | $ | 289.4 |
| | $ | 12.0 |
| | $ | 16.4 |
| | $ | (2.7 | ) | | $ | (196.3 | ) | | $ | 260.3 |
|
| Provision for income taxes | — |
| | — |
| | — |
| | — |
| | — |
| | 97.9 |
| | 97.9 |
|
| Interest expense, net of capitalized interest | — |
| | — |
| | — |
| | — |
| | — |
| | 14.8 |
| | 14.8 |
|
| Depreciation and amortization | 23.7 |
| | 44.8 |
| | 11.6 |
| | 6.8 |
| | 2.1 |
| | 2.3 |
| | 91.3 |
|
| EBITDA from continuing operations | 165.2 |
| | 334.2 |
| | 23.6 |
| | 23.2 |
| | (0.6 | ) | | (81.3 | ) | | 464.3 |
|
| Stock-based compensation expense | 0.6 |
| | 0.6 |
| | 0.2 |
| | — |
| | — |
| | 6.6 |
| | 8.0 |
|
| Gain on sale or impairment of long lived assets, net | — |
| | — |
| | — |
| | — |
| | — |
| | (1.8 | ) | | (1.8 | ) |
| Investment income | — |
| | — |
| | — |
| | — |
| | — |
| | (7.2 | ) | | (7.2 | ) |
| Other operating credits and charges, net | — |
| | — |
| | — |
| | — |
| | — |
| | 4.5 |
| | 4.5 |
|
| Adjusted EBITDA from continuing operations | $ | 165.8 |
| | $ | 334.8 |
| | $ | 23.8 |
| | $ | 23.2 |
| | $ | (0.6 | ) | | $ | (79.2 | ) | | $ | 467.8 |
|
| Adjusted EBITDA Margin | 24.7 | % | | 35.5 | % | | 8.7 | % | | 20.2 | % | | (2.7 | )% | | NA |
| | 23.1 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016
(Dollar amounts in millions) | Siding | | OSB | | EWP | | South America | | Other | | Corporate | | Total |
| Net Sales | $ | 583.3 |
| | $ | 751.9 |
| | $ | 230.5 |
| | $ | 103.2 |
| | $ | 20.3 |
| | $ | (5.8 | ) | | $ | 1,683.4 |
|
| Depreciation and amortization | 20.7 |
| | 44.6 |
| | 10.2 |
| | 6.6 |
| | 1.7 |
| | 2.2 |
| | 86.0 |
|
| Cost of sales and selling and administrative | 458.7 |
| | 580.6 |
| | 226.7 |
| | 81.3 |
| | 19.6 |
| | 70.1 |
| | 1,437.0 |
|
| Loss on sale or impairment of long lived assets, net | — |
| | — |
| | — |
| | — |
| | — |
| | 1.0 |
| | 1.0 |
|
| Other operating credits and charges, net | — |
| | — |
| | — |
| | — |
| | — |
| | 11.4 |
| | 11.4 |
|
| Total operating costs | 479.4 |
| | 625.2 |
| | 236.9 |
| | 87.9 |
| | 21.3 |
| | 84.7 |
| | 1,535.4 |
|
| Income (loss) from operations | 103.9 |
| | 126.7 |
| | (6.4 | ) | | 15.3 |
| | (1.0 | ) | | (90.5 | ) | | 148.0 |
|
| Total non-operating expense | — |
| | — |
| | — |
| | — |
| | — |
| | (31.7 | ) | | (31.7 | ) |
| Income (loss) from continuing operations before taxes and equity in income of unconsolidated affiliates | 103.9 |
| | 126.7 |
| | (6.4 | ) | | 15.3 |
| | (1.0 | ) | | (122.2 | ) | | 116.3 |
|
| Provision for income taxes | — |
| | — |
| | — |
| | — |
| | — |
| | 13.1 |
| | 13.1 |
|
| Equity in income of unconsolidated affiliates | — |
|
| — |
| | (4.4 | ) |
| — |
| | — |
|
| — |
| | (4.4 | ) |
| Income (loss) from continuing operations | $ | 103.9 |
| | $ | 126.7 |
| | $ | (2.0 | ) | | $ | 15.3 |
| | $ | (1.0 | ) | | $ | (135.3 | ) | | $ | 107.6 |
|
| Reconciliation of income (loss) from continuing operations to Adjusted EBITDA from continuing operations | | | | | | | | | | | | | |
| Income (loss) from continuing operations | $ | 103.9 |
| | $ | 126.7 |
| | $ | (2.0 | ) | | $ | 15.3 |
| | $ | (1.0 | ) | | $ | (135.3 | ) | | $ | 107.6 |
|
| Provision for income taxes | — |
| | — |
| | — |
| | — |
| | — |
| | 13.1 |
| | 13.1 |
|
| Interest expense, net of capitalized interest | — |
| | — |
| | — |
| | — |
| | — |
| | 26.3 |
| | 26.3 |
|
| Depreciation and amortization | 20.7 |
| | 44.6 |
| | 10.2 |
| | 6.6 |
| | 1.7 |
| | 2.2 |
| | 86.0 |
|
| EBITDA from continuing operations | 124.6 |
| | 171.3 |
| | 8.2 |
| | 21.9 |
| | 0.7 |
| | (93.7 | ) | | 233.0 |
|
| Stock-based compensation expense | 0.7 |
| | 0.7 |
| | 0.5 |
| | — |
| | — |
| | 7.5 |
| | 9.4 |
|
| Loss on sale or impairment of long lived assets, net | — |
| | — |
| | — |
| | — |
| | — |
| | 1.0 |
| | 1.0 |
|
| Investment income | — |
| | — |
| | — |
| | — |
| | — |
| | (6.4 | ) | | (6.4 | ) |
| Loss on early debt extinguishment | — |
| | — |
| | — |
| | — |
| | — |
| | 13.2 |
| | 13.2 |
|
| Other operating credits and charges, net | — |
| | — |
| | — |
| | — |
| | — |
| | 11.4 |
| | 11.4 |
|
| Adjusted EBITDA from continuing operations | $ | 125.3 |
| | $ | 172.0 |
| | $ | 8.7 |
| | $ | 21.9 |
| | $ | 0.7 |
| | $ | (67.0 | ) | | $ | 261.6 |
|
| Adjusted EBITDA Margin | 21.5 | % | | 22.9 | % | | 3.8 | % | | 21.2 | % | | 3.4 | % | | NA | | 15.5 | % |
OUR OPERATING RESULTS
Our results of operations for each of our segments are discussed below, as are results of operations for the “other” category, which comprises other products that are not individually significant. See Note 10 of the Notes to the consolidated financial statements included in item 1 of this report for further information regarding our segments.
SIDING
Our siding segment produces and markets wood-based siding and related accessories and commodity OSB product.
Segment sales, operating income and Adjusted EBITDA from continuing operations for this segment are as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Net sales | $ | 226.2 |
| | $ | 194.8 |
| | 16 | % | | $ | 671.2 |
| | $ | 583.3 |
| | 15 | % |
| Operating income | $ | 52.8 |
| | $ | 35.2 |
| | 50 | % | | $ | 141.5 |
| | $ | 103.9 |
| | 36 | % |
| Adjusted EBITDA from continuing operations | $ | 61.1 |
| | $ | 41.7 |
| | 47 | % | | $ | 165.8 |
| | $ | 125.3 |
| | 32 | % |
| Adjusted EBITDA margin | 27.0 | % | | 21.4 | % | |
|
| | 24.7 | % | | 21.5 | % | |
|
|
Sales in this segment by product line are as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| SmartSide siding | $ | 190.2 |
| | $ | 170.9 |
| | 11 | % | | $ | 568.4 |
| | $ | 507.2 |
| | 12 | % |
| CanExel siding | 12.9 |
| | $ | 10.8 |
| | 19 | % | | 41.6 |
| | 36.1 |
| | 15 | % |
| OSB | 20.2 |
| | $ | 11.1 |
| | 82 | % | | 53.6 |
| | 32.8 |
| | 63 | % |
| Other | 2.9 |
| | $ | 2.0 |
| | 45 | % | | 7.6 |
| | 7.2 |
| | 6 | % |
| Total | $ | 226.2 |
| | $ | 194.8 |
| | 16 | % | | $ | 671.2 |
| | $ | 583.3 |
| | 15 | % |
Percent changes in average sales prices and unit shipments for the quarter and nine months ended September 30, 2017 compared to the quarter and nine months ended September 30, 2016 are as follows:
|
| | | | | | | | | | | |
| | Quarter Ended September 30,
2017 versus 2016 | | Nine Months Ended September 30,
2017 versus 2016 |
| | Average Net Selling Price | | Unit Shipments | | Average Net Selling Price | | Unit Shipments |
| SmartSide siding | 5 | % | | 6 | % | | 4 | % | | 8 | % |
| CanExel siding | 8 | % | | 11 | % | | 2 | % | | 12 | % |
| OSB | 26 | % | | 40 | % | | 25 | % | | 27 | % |
For the quarter and nine months ended September 30, 2017 compared to the corresponding periods in 2016, sales volumes increased in our SmartSide siding line based upon increased demand in our key markets. Sales prices in our SmartSide siding product line for the quarter and nine months ended September 30, 2017 as compared to the corresponding periods in 2016 were due to changes in product mix as well as a price increase, which was implemented in the second quarter of 2017.
For CanExel, sales volumes increased in the third quarter and first nine months of 2017 as compared to the corresponding periods in 2016 due to increased demand in Canada as well as demand related to the introduction of several new colors. Sales prices were higher for the third quarter and first nine months of 2017 as compared to the corresponding period in 2016 due to changes in our product mix and the fluctuations in the U.S. to Canadian dollar as majority of these sales are denominated in Canadian dollars.
For our OSB produced in the siding segment for the quarter and nine months ended September 30, 2017 compared to the corresponding periods in 2016, sales prices increased as compared to the same periods in the prior year, as discussed in the OSB segment below. The increase in selling price favorably impacted operating results and Adjusted EBITDA from continuing operations by approximately $4.3 million for the quarter and $11.0 million for the nine months ended September 30, 2017 as compared to the corresponding periods of 2016.
Overall, the improvement in the siding segment for the third quarter of 2017 and the first nine months of 2017 compared to the same periods of 2016 was primarily due to increased siding sales volumes and price and higher OSB prices.
OSB
Our OSB segment manufactures and distributes OSB structural panel products in North America and certain export markets.
Segment sales, operating income and Adjusted EBITDA from continuing operations for this segment are as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Net sales | $ | 350.9 |
| | $ | 282.1 |
| | 24 | % | | $ | 944.3 |
| | $ | 751.9 |
| | 26 | % |
| Operating income | $ | 126.4 |
| | $ | 67.4 |
| | 88 | % | | $ | 289.4 |
| | $ | 126.7 |
| | 128 | % |
| Adjusted EBITDA from continuing operations | $ | 141.8 |
| | $ | 83.0 |
| | 71 | % | | $ | 334.8 |
| | $ | 172.0 |
| | 95 | % |
| Adjusted EBITDA Margin | 40.4 | % | | 29.4 | % | |
| | 35.5 | % | | 22.9 | % | |
|
Percent changes in average sales prices and unit shipments for the quarter and nine months ended September 30, 2017 compared to the quarter and nine months ended September 30, 2016 are as follows:
|
| | | | | | | | | | | |
| | Quarter Ended September 30,
2017 versus 2016 | | Nine Months Ended September 30,
2017 versus 2016 |
| | Average Net Selling Price | | Unit Shipments | | Average Net Selling Price | | Unit Shipments |
| OSB | 29 | % | | (3 | )% | | 27 | % | | (1 | )% |
For the quarter and nine months ended September 30, 2017, OSB prices increased compared to the corresponding periods in 2016. The increase in OSB prices was likely due to higher demand compared to the supply available in the market and the continued focus on higher value products which resulted in a higher average selling price. The increase in selling price favorably impacted operating results and Adjusted EBITDA from continuing operations by $79.1 million for the quarter and $200.4 million for the nine months ended September 30, 2017 as compared to the same periods in 2016. OSB sales volumes were essentially flat between periods.
Overall the improvements in our OSB segment results for the quarter and the nine month period ended September 30, 2017 as compared to the same periods in 2016 was due to increased sales prices offset by increases in raw material costs (primarily resin) and increases in manufacturing costs due to downtime related to capital and maintenance projects.
EWP
Our EWP segment manufactures and distributes laminated veneer lumber (LVL), I-Joists, laminated strand lumber (LSL) and other related products. This segment also includes the sale of I-Joist and LVL products produced by our joint venture with Resolute Forest Products and LVL sold under a sales and marketing arrangement with Murphy Plywood. A plywood mill associated with our LVL operations in British Columbia and minor amounts of commodity OSB are included in this segment.
Segment sales, operating results and Adjusted EBITDA from continuing operations for this segment are as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Net sales | $ | 98.1 |
| | $ | 80.7 |
| | 22 | % | | $ | 274.4 |
| | $ | 230.5 |
| | 19 | % |
| Operating income (loss) | $ | 6.3 |
| | $ | — |
| | NM |
| | $ | 12.0 |
| | $ | (2.0 | ) | | NM |
|
| Adjusted EBITDA from continuing operations | $ | 10.4 |
| | $ | 4.0 |
| | 160 | % | | $ | 23.8 |
| | $ | 8.7 |
| | 174 | % |
| Adjusted EBITDA margin | 10.6 | % | | 5.0 | % | |
|
| | 8.7 | % | | 3.8 | % | |
|
|
Sales in this segment by product line are as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| LVL/LSL | $ | 50.4 |
| | $ | 41.7 |
| | 21 | % | | $ | 143.2 |
| | $ | 124.8 |
| | 15 | % |
| I-Joist | 31.8 |
| | $ | 27.4 |
| | 16 | % | | 87.7 |
| | 76.9 |
| | 14 | % |
| OSB | 5.2 |
| | 2.8 |
| | 86 | % | | 16.6 |
| | 8.0 |
| | 108 | % |
| Plywood | 8.0 |
| | $ | 5.1 |
| | 57 | % | | 18.8 |
| | 12.0 |
| | 57 | % |
| Related products | 2.7 |
| | 3.7 |
| | (27 | )% | | 8.1 |
| | 8.8 |
| | (8 | )% |
| Total | $ | 98.1 |
| | $ | 80.7 |
| | 22 | % | | $ | 274.4 |
| | $ | 230.5 |
| | 19 | % |
Percent changes in average sales prices and unit shipments for the quarter and nine months ended September 30, 2017 compared to the quarter and nine months ended September 30, 2016 are as follows:
|
| | | | | | | | | | | |
| | Quarter Ended September 30,
2017 versus 2016 | | Nine Months Ended September 30,
2017 versus 2016 |
| | Average Net Selling Price | | Unit Shipments | | Average Net Selling Price | | Unit Shipments |
| LVL/LSL | 6 | % | | 12 | % | | 4 | % | | 9 | % |
| I-Joist | 9 | % | | 6 | % | | 4 | % | | 9 | % |
| OSB | 4 | % | | 69 | % | | (1 | )% | | 100 | % |
| Plywood | 28 | % | | 27 | % | | 16 | % | | 37 | % |
For the quarter and nine months ended September 30, 2017, compared to the same periods in 2016, sales volumes increased in LVL/LSL, I-joist and plywood due to improved market demand due to increased housing starts. Net average selling prices increased due to changes in product mix and price increases implemented across all product lines. OSB prices changed due to changes in product based on the decision to produce a higher percentage of commodity OSB in our Houlton, Maine facility. Plywood prices increased due to increase market demand. The increase in selling prices for plywood favorably impacted operating results and Adjusted EBITDA from continuing operations by $1.8 million for the quarter and $2.6 million for the nine months ended September 30, 2017 as compared to the same periods in 2016 whereas OSB had minimal impact due to the change in product mix.
For the quarter and nine months ended September 30, 2017, compared to the same periods in 2016, results of operations improved due to increased sales and pricing and reductions in manufacturing costs due to higher utilization across all EWP mills.
SOUTH AMERICA
Our South America segment manufactures and distributes OSB structural panel and siding products in South America and selected export markets. This segment operates in two countries, Chile and Brazil.
Segment sales, operating income and Adjusted EBITDA from continuing operations for this segment are as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Net sales | $ | 38.3 |
| | $ | 31.7 |
| | 21 | % | | $ | 114.8 |
| | $ | 103.2 |
| | 11 | % |
| Operating income | $ | 5.8 |
| | $ | 3.3 |
| | 76 | % | | $ | 16.4 |
| | $ | 15.3 |
| | 7 | % |
| Adjusted EBITDA from continuing operations | $ | 8.2 |
| | $ | 5.8 |
| | 41 | % | | $ | 23.2 |
| | $ | 21.9 |
| | 6 | % |
| Adjusted EBITDA margin | 21.4 | % | | 18.3 | % | |
|
| | 20.2 | % | | 21.2 | % | |
|
|
Sales in this segment by production location are as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Chile | $ | 26.4 |
| | $ | 21.3 |
| | 24 | % | | $ | 80.3 |
| | $ | 73.6 |
| | 9 | % |
| Brazil | 11.9 |
| | 10.4 |
| | 14 | % | | 34.5 |
| | 29.6 |
| | 17 | % |
| Total | $ | 38.3 |
| | $ | 31.7 |
| | 21 | % | | $ | 114.8 |
| | $ | 103.2 |
| | 11 | % |
Percent changes in average sales prices and unit shipments for the quarter and nine months ended September 30, 2017 compared to the quarter and nine months ended September 30, 2016 are as follows:
|
| | | | | | | | | | | |
| | Quarter Ended September 30,
2017 versus 2016 | | Nine Months Ended September 30,
2017 versus 2016 |
| | Average Net Selling Price | | Unit Shipments | | Average Net Selling Price | | Unit Shipments |
| Chile | 3 | % | | 12 | % | | 3 | % | | 3 | % |
| Brazil | 7 | % | | 9 | % | | 7 | % | | 12 | % |
Sales volumes in Chile and Brazil increased for the quarter and nine months ended September 30, 2017 due to increases in export sales with local sales country sales flat. Sales prices in Chile increased for the third quarter and nine months ended September 30, 2017 as compared to the corresponding periods in 2016 due to increases in prices translated into U.S. dollars. Local currency selling prices in Chile were flat for the quarter and 1% lower for the nine months ended September 30, 2017 as compared to the corresponding period in 2016. Sales prices in Brazil increased for the third quarter and nine months ended September 30, 2017 as compared to the corresponding periods in 2016 due to increases in prices translated into U.S. dollars. Local currency selling prices in Brazil were 4% higher the quarter and 5% lower for the nine months ended September 30, 2017 as compared to the corresponding periods in 2016 primarily due to mix.
For the quarter and nine months ended September 30, 2017, compared to the same periods in 2016, results of operations were higher driven by increases in sales volumes and prices offset by product costs primarily related to currency fluctuations.
OTHER PRODUCTS
Our other products segment includes our remaining timber and timberlands and other minor products, services and closed operations which are not classified as discontinued operations.
Segment sales, operating losses and Adjusted EBITDA from continuing operations for this category are as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Net sales | $ | 6.5 |
| | $ | 7.6 |
| | (14 | )% | | $ | 22.3 |
| | $ | 20.3 |
| | 10 | % |
| Operating losses | $ | (1.6 | ) | | $ | (0.4 | ) | | (300 | )% | | $ | (2.7 | ) | | $ | (1.0 | ) | | (170 | )% |
| Adjusted EBITDA from continuing operations | $ | (0.9 | ) | | $ | 0.5 |
| | NM |
| | $ | (0.6 | ) | | $ | 0.7 |
| | NM |
|
GENERAL CORPORATE AND OTHER EXPENSE, NET
For the quarter ended September 30, 2017 compared to the same period in 2016, general corporate expenses were 12% higher and 10% higher for the nine month period ended September 30, 2017 compared to the same period in 2016 primarily due to higher incentive compensation expense due to improved financial performance and increased costs associated with corporate initiatives related to sales and marketing activities. General corporate and other expenses primarily consist of corporate overhead such as wages and benefits, professional fees, insurance and other expenses for corporate functions including certain executive officers, public company costs, information technology, financial services, environmental and safety, legal, supply management, human resources and other corporate functions.
NON-OPERATING INCOME AND EXPENSE
Components of non-operating income and expense are as follows:
|
| | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| Dollar amounts in millions | 2017 | | 2016 | | 2017 | | 2016 |
| Interest income | $ | 2.6 |
| | $ | 2.2 |
| | $ | 6.4 |
| | $ | 6.1 |
|
| SERP market adjustments | 0.3 |
| | 0.3 |
| | 0.8 |
| | 0.3 |
|
| Investment income | 2.9 |
| | 2.5 |
| | 7.2 |
| | 6.4 |
|
| | | | | | | | |
| Interest expense | (5.2 | ) | | (9.3 | ) | | (15.5 | ) | | (27.0 | ) |
| Amortization of debt charges | (0.2 | ) | | (0.3 | ) | | (0.7 | ) | | (0.8 | ) |
| Capitalized interest | 0.5 |
| | 0.6 |
| | 1.4 |
| | 1.5 |
|
| Interest expense, net of capitalized interest | (4.9 | ) | | (9.0 | ) | | (14.8 | ) | | (26.3 | ) |
| | | | | | | | |
| Early debt extinguishment | — |
| | (13.2 | ) | | — |
| | (13.2 | ) |
| Foreign currency gain (loss) | (0.6 | ) | | (0.5 | ) | | (2.4 | ) | | 1.4 |
|
| Total non-operating expense | $ | (2.6 | ) | | $ | (20.2 | ) | | $ | (10.0 | ) | | $ | (31.7 | ) |
INCOME TAXES
For the first nine months of 2017, we recorded an income tax expense on continuing operations of 27% as compared to 11% in the comparable period of 2016. The primary differences between the U.S. statutory rate of 35% and the effective rate applied to continuing operations for the first nine months of 2017 relate to foreign tax rates, changes in Canadian valuation allowances and the deduction for U.S. domestic production activities. For the first nine months of 2016, the primary differences between the U.S. statutory rate of 35% and the effective rate applied to continuing operations relate to foreign tax rates, changes in Canadian and state valuation allowances, excess tax benefits in connection with LP's stock-based compensation plans, recognition of research and development tax credits from prior years and an increase in the reserve for unrecognized tax benefits associated with LP's South American operations.
Each quarter the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is recorded in the current quarter.
OTHER COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| Dollar amounts in millions | 2017 | | 2016 | | 2017 | | 2016 |
| Foreign currency translation adjustments | $ | 10.4 |
| | $ | 0.1 |
| | $ | 4.7 |
| | $ | 10.3 |
|
| Unrealized gain (loss) on marketable securities | 0.4 |
| | (0.5 | ) | | 0.8 |
| | (0.7 | ) |
| Defined benefit plans | 0.7 |
| | 1.0 |
| | 2.4 |
| | 2.0 |
|
| Other | (0.1 | ) | | — |
| | (0.1 | ) | | — |
|
| Comprehensive income (loss) | $ | 11.4 |
| | $ | 0.6 |
| | $ | 7.8 |
| | $ | 11.6 |
|
LEGAL AND ENVIRONMENTAL MATTERS
For a discussion of legal and environmental matters involving us and the potential impact thereof on our financial position, results of operations and cash flows, see Items 3, 7 and 8 in our Annual Report on Form 10-K for the year ended December 31, 2016 and Note 9 to the Notes to the financial statements contained herein.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our principal sources of liquidity are existing cash and investment balances, cash generated by our operations and our ability to borrow under such credit facilities as we may have in effect from time to time. We may also from time to time issue and sell equity, debt or hybrid securities or engage in other capital market transactions.
Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness and making capital expenditures. We may also from time to time prepay or repurchase outstanding indebtedness, pay dividends or acquire assets or businesses that are complementary to our operations. Any such repurchases may be commenced, suspended, discontinued or resumed, and the method or methods of effecting any such repurchases may be changed, at any time or from time to time without prior notice.
OPERATING ACTIVITIES
During the first nine months of 2017, operating activities provided $305.0 million of cash compared to $240.3 million during the first nine months of 2016. This change was primarily related to improvements in operating results (higher OSB pricing and increased siding sales) and increases in accounts payable and accrued liabilities which were partially offset by increases in accounts receivable.
INVESTING ACTIVITIES
During the first nine months of 2017, cash used in investing activities was approximately $109.3 million. Capital expenditures in the first nine months of 2017 were $80.7 million. We used $32.0 million to deposit cash with the U.S. I.R.S. to suspend the running of interest on potential underpayments of disputable income tax amounts for the year 2016. Included in “Accounts payable” is $8.2 million related to capital expenditures that had not yet been paid as of September 30, 2017.
During the first nine months of 2016, cash used in investing activities was approximately $172.4 million. Capital expenditures in the first nine months of 2016 were $78.7 million. Included in “Accounts payable” was $11.5 million related to capital expenditures that had not yet been paid as of September 30, 2016.
Capital expenditures in 2017 are expected to be approximately $155 million to $165 million related to productivity improvements, growth and maintenance projects and our South American expansion.
FINANCING ACTIVITIES
During the first nine months of 2017, cash used in financing activities was $8.2 million. We used $2.5 million to repay outstanding debt in the first nine months of 2017 and $5.3 million to repurchase stock from employees in connection with income tax withholding requirements associated with our employee equity plans.
During the first nine months of 2016, cash provided by financing activities was $53.3 million. In the third quarter of 2016, we issued $350.0 million aggregate principle amount of 4.875% Senior Notes due 2024, and used approximately $262.4 million of the proceeds of this issuance to repurchase a portion of our Senior Notes due 2020. Additionally, we used $20.3 million to repay other outstanding debt in the first nine months of 2016 and $8.9 million to repurchase stock from employees in connection with income tax withholding requirements associated with our employee equity plans.
NOTE 16 – POTENTIAL IMPAIRMENTS
We continue to review several millsasset groupings and investments for potential impairments. Management currently believes we have adequate support for the carrying value of each of these assets based upon the anticipated cash flows that result from our estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures. As of SeptemberJune 30, 2017,2019, there were no indications of impairment for the fair value of facilitiesasset grouping that have not beenincluded our indefinitely curtailed was in excess of their carrying valuefacilities and supports the conclusion that no impairment is necessary for those facilities.
We also review from time to time possible dispositions of various assets in light of current and anticipated economic and industry conditions, our strategic plan and other relevant factors. Because a determination to dispose of particular assets can require management to make assumptions regarding the transaction structure of the disposition and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, we may be required to record impairment charges in connection with decisions to dispose of assets.
NOTE 17 – PRODUCT WARRANTY
We provide warranties on the sale of most of our products and record an accrual for estimated future claims. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The activity in warranty reserves for the quarter and six months ended June 30, 2019 and 2018 are summarized in the following table:
|
| | | | | | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Beginning balance | $ | 13 |
| | $ | 29 |
| | $ | 14 |
| | $ | 25 |
|
| Accrued to expense | 1 |
| | — |
| | 1 |
| | 1 |
|
| Reduced to other operating credits and charges | (4 | ) | | — |
| | (4 | ) | | — |
|
| Accrued to discontinued operations | — |
| | — |
| | — |
| | 5 |
|
| Foreign currency translation | — |
| | (1 | ) | | — |
| | — |
|
| Payments made | — |
| | (6 | ) | | (1 | ) | | (7 | ) |
| Total warranty reserves | 9 |
| | 23 |
| | 9 |
| | 23 |
|
| Current portion of warranty reserves | (2 | ) | | (4 | ) | | (2 | ) | | (4 | ) |
| Long-term portion of warranty reserves | $ | 7 |
| | $ | 19 |
| | $ | 7 |
| | $ | 19 |
|
We continue to monitor warranty and other claims associated with these products and believe as of June 30, 2019 that the reserves associated with these matters are adequate. However, it is possible that additional changes may be required in the future.
The current portion of the warranty reserve is included in the caption “Accounts payable and accrued liabilities” and the long-term portion is included in Other long-term liabilities on our Consolidated Balance Sheets.
NOTE 18 - DISCONTINUED OPERATIONS
LP has adopted and implemented plans to sell selected businesses and assets in order to improve its operating results. For all periods presented, these operations include residual losses of mills divested in past years and associated warranty and other liabilities associated with these operations.
Included in the operating losses of discontinued operations for the six months ended June 30, 2018 was an increase in warranty reserves associated with our discontinued composite decking products of $5 million.
NOTE 19 – DEFINED BENEFIT PENSION PLANS
The following table sets forth the net periodic pension cost for our defined benefit pension and postretirement plans during the six months ended June 30, 2019 and 2018: |
| | | | | | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Service cost | $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | 2 |
|
Other components of net periodic pension cost1: | | | | | | | |
| Interest cost | 3 |
| | 3 |
| | 6 |
| | 6 |
|
| Expected return on plan assets | (4 | ) | | (3 | ) | | (7 | ) | | (7 | ) |
| Amortization of prior service cost | — |
| | — |
| | — |
| | — |
|
| Amortization of net loss | 1 |
| | 2 |
| | 2 |
| | 3 |
|
| Net periodic pension cost | $ | 2 |
| | $ | 2 |
| | $ | 3 |
| | $ | 5 |
|
| | | | | | | | |
| Net periodic pension cost included in cost of sales | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| Net periodic pension cost included in selling, general and administrative | — |
| | 1 |
| | 1 |
| | 1 |
|
| Net periodic pension costs included in other non-operating items | 1 |
| | 1 |
| | 1 |
| | 2 |
|
1Other components of net periodic pension cost are included in Other non-operating items on our Consolidated Statements of Income.
For the six months ended June 30, 2019, $1 million of net periodic pension cost was included in Cost of sales and $1 million included in Selling, general and administrative expenses. For the six months ended June 30, 2018, $1 million of net periodic pension cost was included in Cost of sales and $1 million included in Selling, general and administrative expenses.
During the six months ended June 30, 2019, we made $4 million in pension contributions to our defined benefit pension plans. We expect to contribute about $1 million to our defined benefit pension plans in the remaining months of 2019.
NOTE 20 - ACCUMULATED COMPREHENSIVE INCOME (LOSS)
Other comprehensive income activity, net of tax, is provided in the following table for the quarter and six months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension Adjustments | | | | | | |
| | | Foreign currency translation adjustments | | Actuarial losses | | Prior service costs | | Unrealized gain (loss) on investments | | Other | | Total |
| Balance at March 31, 2019 | | $ | (55 | ) | | $ | (87 | ) | | $ | (4 | ) | | $ | 4 |
| | $ | (1 | ) | | $ | (144 | ) |
| Other comprehensive income (loss) before reclassifications | | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Income taxes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net other comprehensive income (loss) before reclassifications | | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Amounts reclassified from accumulated comprehensive income (loss) | | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Income taxes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net amounts reclassified from cumulative other comprehensive income (loss) | | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Total other comprehensive income (loss) | | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | 2 |
|
| Balance at June 30, 2019 | | $ | (54 | ) | | $ | (87 | ) | | $ | (4 | ) | | $ | 4 |
| | $ | (1 | ) | | $ | (143 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension Adjustments | | | | | | |
| | | Foreign currency translation adjustments | | Actuarial losses | | Prior service costs | | Unrealized gain (loss) on investments | | Other | | Total |
| Balance at December 31, 2018 | | $ | (57 | ) | | $ | (88 | ) | | $ | (5 | ) | | $ | 4 |
| | $ | (1 | ) | | $ | (146 | ) |
| Other comprehensive income (loss) before reclassifications | | 3 |
| | — |
| | — |
| | (1 | ) | | — |
| | 2 |
|
| Income taxes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net other comprehensive income (loss) before reclassifications | | 3 |
| | — |
| | — |
| | (1 | ) | | — |
| | 2 |
|
| Amounts reclassified from accumulated comprehensive income (loss) | | — |
| | 2 |
| | — |
| | — |
| | — |
| | 3 |
|
| Income taxes | | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Net amounts reclassified from cumulative other comprehensive income (loss) | | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| Total other comprehensive income (loss) | | 3 |
| | 2 |
| | — |
| | (1 | ) | | — |
| | 4 |
|
| Balance at June 30, 2019 | | $ | (54 | ) | | $ | (87 | ) | | $ | (4 | ) | | $ | 4 |
| | $ | (1 | ) | | $ | (143 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension Adjustments | | | | | | |
| | | Foreign currency translation adjustments | | Actuarial losses | | Prior service costs | | Unrealized gain (loss) on investments | | Other | | Total |
| Balance at March 31, 2018 | | $ | (37 | ) | | $ | (96 | ) | | $ | (5 | ) | | $ | 4 |
| | $ | (2 | ) | | $ | (135 | ) |
| Other comprehensive income (loss) before reclassifications | | (14 | ) | | — |
| | — |
| | — |
| | — |
| | (14 | ) |
| Income taxes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net other comprehensive income (loss) before reclassifications | | (14 | ) | | — |
| | — |
| | — |
| | — |
| | (14 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| Income taxes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net amounts reclassified from cumulative other comprehensive income (loss) | | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Total other comprehensive income (loss) | | (14 | ) | | 1 |
| | — |
| | — |
| | — |
| | (12 | ) |
| Balance at June 30, 2018 | | $ | (51 | ) | | $ | (94 | ) | | $ | (5 | ) | | $ | 4 |
| | $ | (1 | ) | | $ | (147 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension Adjustments | | | | | | |
| | | Foreign currency translation adjustments | | Actuarial losses | | Prior service costs | | Unrealized gain (loss) on investments | | Other | | Total |
| Balance at December 31, 2017 | | $ | (40 | ) | | $ | (80 | ) | | $ | (5 | ) | | $ | 4 |
| | $ | (2 | ) | | $ | (122 | ) |
| Effect of adoption of ASU 2018-02 | |
| | (17 | ) | |
| | 1 |
| |
| | (17 | ) |
| Other comprehensive income (loss) before reclassifications | | (12 | ) | | — |
| | — |
| | — |
| | — |
| | (11 | ) |
| Income taxes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net other comprehensive income (loss) before reclassifications | | (12 | ) | | — |
| | — |
| | — |
| | — |
| | (11 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
| Income taxes | | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Net amounts reclassified from cumulative other comprehensive income (loss) | | — |
| | 2 |
| | — |
| | — |
| | — |
| | 3 |
|
| Total other comprehensive income (loss) | | (12 | ) | | 3 |
| | — |
| | — |
| | — |
| | (9 | ) |
| Balance at June 30, 2018 | | $ | (51 | ) | | $ | (94 | ) | | $ | (5 | ) | | $ | 4 |
| | $ | (1 | ) | | $ | (147 | ) |
The amounts reclassified from accumulated other comprehensive income (loss) are included in the computation of net periodic pension cost; see Note 19 for additional details. The net periodic pension cost is included in Cost of sales, Selling, general and administrative expenses and Other non-operating items in the Consolidated Statements of Income.
NOTE 21 - NON-OPERATING INCOME (EXPENSE)
Components of non-operating income and expense are as follows:
|
| | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| Dollar amounts in millions | 2019 | | 2018 | | 2019 | | 2018 |
| Interest income | $ | 2 |
| | $ | 5 |
| | $ | 6 |
| | $ | 8 |
|
| SERP market adjustments | — |
| | — |
| | 1 |
| | — |
|
| Interest expense | (5 | ) | | (5 | ) | | (9 | ) | | (10 | ) |
| Amortization of debt charges | (1 | ) | | — |
| | (1 | ) | | — |
|
| Capitalized interest | 1 |
| | 1 |
| | 2 |
| | 2 |
|
| Interest expense, net | (2 | ) | | — |
| | (1 | ) | | (1 | ) |
| | | | | | | | |
| Net periodic pension cost, excluding service cost | (1 | ) | | (1 | ) | | (1 | ) | | (2 | ) |
| Gain on acquisition of controlling interest | — |
| | — |
| | 14 |
| | — |
|
| Foreign currency gain (loss) | (1 | ) | | 1 |
| | (4 | ) | | — |
|
| Other non-operating items | (2 | ) | | (1 | ) | | 9 |
| | (2 | ) |
| | | | | | | | |
| Total non-operating expense | $ | (4 | ) | | $ | — |
| | $ | 8 |
| | $ | (3 | ) |
| |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
GENERAL
We are a leading provider of high-performing building solutions. We design, manufacture and market a broad range of products for the new home construction, repair and remodeling and outdoor structures markets. We also market and sell our products in light industrial and commercial construction and we have a modest export business. Our manufacturing facilities are primarily located in the U.S. and Canada, and we also operate two facilities in Chile and one facility in Brazil.
To serve these markets, we operate in four segments: Siding; North America Oriented Strand Board (OSB); Engineered Wood Products (EWP); and South America.
Demand for our products correlates to a significant degree to the level of new home construction activity in North America, which historically has been characterized by significant cyclicality. The U.S. Department of Census reported that U.S. single housing starts were 6% lower for the second quarter of 2019 and 5% lower for the first six months of 2019 as compared to the same periods of 2018.
OSB is sold as a commodity for which sales prices fluctuate daily based on market factors over which we have little or no control. We cannot predict whether the prices of our OSB products will remain at current levels or increase or decrease in the future. OSB prices (NC 7/16"), as reported by Random Lengths, were 56% lower for the second quarter and 49% lower for the first six months of 2019 as compared to the same periods in 2018.
For additional factors affecting our results, refer to the Management Discussion and Analysis of Financial Condition and Results of Operations overview contained in our Annual Report on Form 10-K for the year ended December 31, 2018 and to “About Forward-Looking Statements” and “Risk Factors” in this report.
EXECUTIVE SUMMARY
We recorded a 27% decrease in sales to $588 million for the quarter ended June 30, 2019 from $811 million reported for the quarter ended June 30, 2018. We recorded income from operations of $23 million for the quarter ended June 30, 2019 compared to $215 million for the quarter ended June 30, 2018. We recorded net income attributed to LP of $17 million ($0.14 per diluted share) for the quarter ended June 30, 2019 compared to $163 million ($1.11 per diluted share) for the quarter ended June 30, 2018. We reported a decrease of $189 million in Adjusted EBITDA from continuing operations for the second quarter of 2019 as compared to the second quarter of 2018. Declines in OSB pricing in all North American operations had a negative impact on our operating results of $166 million for the quarter ended June 30, 2019 as compared to the quarter ended June 30, 2018.
We recorded a 22% decrease in sales to $1.2 billion for the six months ended June 30, 2019 from $1.5 billion reported for the six months ended June 30, 2018. We recorded income from operations of $45 million for the six months ended June 30, 2019 compared to $342 million for the six months ended June 30, 2018. We recorded net income attributed to LP of $44 million ($0.34 per diluted share) for the six months ended June 30, 2019 compared to $254 million ($1.73 per diluted share) for the six months ended June 30, 2018. We reported a decrease of $290 million in Adjusted EBITDA from continuing operations for the six months ended June 30, 2019 as compared to the first six months of 2018. Declines in OSB pricing in all North American operations had a negative impact on our operating results of $264 million for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.
These changes are discussed further in "Our Operating Results" below.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Presented in Note 1 of the Notes to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 is a discussion of our significant accounting policies and significant accounting
estimates and judgments. Throughout the preparation of the financial statements, we employ significant judgments in the application of accounting principles and methods. These judgments are primarily related to the assumptions used to arrive at various estimates. For 2019, these significant accounting estimates and judgments include:
Long-lived Assets
Long-lived assets (including amortizable identifiable intangible assets) or asset group held for use is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows are based on our best estimate of future cash flows derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is calculated based on fair value. Fair value is estimated primarily using discounted expected future cash flows on a market-participant basis.
Defined Benefit Plans
We have a number of pension plans in the U.S. and Canada, covering many of the Company’s employees. Benefit accruals under our defined benefit pension plan in the U.S. were frozen as of January 1, 2010.
We account for the consequences of our sponsorship of these plans based upon assumptions that are used to calculate the related assets, liabilities and expenses recorded in our financial statements. Net actuarial gains and losses occur when actual experience differs from any of the assumptions used to value defined benefit plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value obligations as of the measurement date and the differences between expected and actual returns on pension plan assets. This accounting method results in the potential for volatile and difficult to forecast gains and losses.
We record amounts relating to these defined benefit plans based on various actuarial assumptions, including discount rates, assumed rates of return, compensation increases and life expectancy. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current economic conditions and trends. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on our experience and on advice from our independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect our financial condition or results of operations.
A 50 basis point change in our discount rate assumption would lead to an increase or decrease in our pension liability of approximately $15 million. A 50 basis point change in the long-term rate of return on plan assets used in accounting for our pension plans would have a $1 million impact on pension expense and a 50 basis point change in the discount rate would have a $0 million impact on pension expense. It is not possible to forecast or predict whether there will be actuarial gains and losses in future periods, and if required, the magnitude of any such adjustment. These gains and losses are driven by differences in actual experience or changes in the assumptions that are beyond our control, such as changes in interest rates and the actual return on pension plan assets.
Income Taxes
We establish deferred tax liabilities or assets for temporary differences between financial and tax reporting bases and subsequently adjust them to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance reducing deferred tax assets when it is more likely than not that such assets will not be realized.
We record liabilities for uncertain income tax positions based on a two-step process. The first step is recognition, where we evaluate whether an individual tax position has a likelihood of greater than 50% of being sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation processes. For tax positions that are currently estimated to have a less than 50% likelihood of being sustained, no tax
benefit is recorded. For tax positions that have met the recognition threshold in the first step, we perform the second step of measuring the benefit (expense) to be recorded. The actual benefits (expense) ultimately realized may differ from our estimates. In future periods, changes in facts, circumstances, and new information may require us to change the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recorded in the consolidated statement of income and consolidated balance sheet in the period in which such changes occur. As of June 30, 2019 and December 31, 2018, we had liabilities for unrecognized tax benefits (including interest) pertaining to uncertain tax positions totaling $38 million and $41 million.
Customer Program Costs
Customer programs and incentives are a common practice in our businesses. Our businesses incur customer program costs to obtain favorable product placement, to promote sales of products and to maintain competitive pricing. Customer program costs and incentives, including rebates and promotion and volume allowances, are accounted for in either sales or the category selling and administrative expenses at the time the program is initiated and/or the revenue is recognized. The costs are predominantly recognized in sales and include, but are not limited to, volume allowances and rebates, promotional allowances, and cooperative advertising programs. These costs are recorded at the later of the time of sale or the implementation of the program based on management’s best estimates. Estimates are based on historical and projected experience for each type of program or customer. Volume allowances are accrued based on management’s estimates of customer volume achievement and other factors incorporated into customer agreements, such as new products, store sell-through, merchandising support and customer training. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in volume expectations). As of June 30, 2019 and December 31, 2018, we had $22 million and $30 million accrued as customer rebates.
Inventory valuation
We record inventories at the lower of cost or estimated net realizable value. Inventory cost includes an overhead component that can be affected by levels of production and actual costs incurred. We evaluate the need to record adjustments for impairment of inventory at least quarterly. If in our judgment persuasive evidence exists that the net realizable value of inventory is lower than its cost, the inventory value is written-down to its estimated net realizable value. Significant judgments regarding future events and market conditions must be made when estimating net realizable value.
NON-GAAP FINANCIAL MEASURES
In evaluating our business, we utilize several non-GAAP financial measures. A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so excluded or included under applicable GAAP guidance. In this report on Form 10-Q, we disclose segment earnings (loss) from continuing operations before interest expense, taxes, depreciation and amortization and exclude stock-based compensation expense, (gain) loss on sales or impairment of long-lived assets, other operating credits and charges, net, investment income and other non-operating items as Adjusted EBITDA from continuing operations (Adjusted EBITDA) which is a non-GAAP financial measure. We also disclose Adjusted income from continuing operations which excludes (gain) loss on sale or impairment of long-lived assets, gain on acquisition, interest outside of normal operations, other operating credits and charges, net, early debt extinguishment and adjusts for a normalized tax rate. Neither Adjusted EBITDA nor Adjusted income from continuing operations is a substitute for the GAAP measure of net income or for any other GAAP measures of operating performance.
We have included Adjusted EBITDA in this report because we use it as important supplemental measures of our performance and believe that it is frequently used by securities analysts, investors and other interested persons in the evaluation of companies in our industry, some of which present Adjusted EBITDA when reporting their results. We use Adjusted EBITDA to evaluate our performance as compared to other companies in our industry that have different financing and capital structures. It should be noted that companies calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA measures may not be comparable to Adjusted EBITDA reported by other
companies. Our Adjusted EBITDA measures have material limitations as performance measures because they exclude interest expense, income tax (benefit) expense and depreciation and amortization which are necessary to operate our business or which we otherwise incur or experience in connection with the operation of our business.
We believe that Adjusted income from continuing operations, which excludes (gain) loss on sale or impairment of long-lived assets, interest outside of normal operations, and other operating credits and charges, net, adjusted for a normalized tax rate is a useful measure for evaluating our ability to generate earnings and that providing this measure will allow investors to more readily compare the earnings for past and future periods. It should be noted that other companies may present similarly-titled measures differently and, therefore, as presented by us may not be comparable to similarly-titled measures reported by other companies. In addition, Adjusted income from continuing operations has material limitations as a performance measure because it excludes items that are actually incurred or experienced in connection with the operations of our business.
|
| | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net income | $ | 16 |
| | $ | 163 |
| | $ | 42 |
| | $ | 254 |
|
| Add (deduct): | | | | |
| | |
| Loss from noncontrolling interest | 2 |
| | — |
| | 2 |
| | — |
|
| Loss from discontinued operations | — |
| | — |
| | — |
| | 4 |
|
| Income from continuing operations attributable to LP | 17 |
| | 163 |
| | 44 |
| | 258 |
|
| Provision for income taxes | 3 |
| | 51 |
| | 11 |
| | 81 |
|
| Depreciation and amortization | 29 |
| | 30 |
| | 60 |
| | 61 |
|
| Stock-based compensation | 3 |
| | 2 |
| | 5 |
| | 4 |
|
| Loss on sale or impairment of long-lived assets, net | — |
| | — |
| | 1 |
| | (1 | ) |
| Other operating credits and charges, net | (3 | ) | | (5 | ) | | (1 | ) | | (5 | ) |
| Interest expense, net | 2 |
| | — |
| | 1 |
| | 1 |
|
| Non-operating items | 2 |
| | 1 |
| | (9 | ) | | 2 |
|
| Adjusted EBITDA | $ | 53 |
| | $ | 242 |
| | $ | 111 |
| | $ | 401 |
|
| | | | | | | | |
| Siding | $ | 46 |
| | $ | 63 |
| | $ | 88 |
| | $ | 108 |
|
| OSB | (3 | ) | | 163 |
| | 5 |
| | 268 |
|
| EWP | 10 |
| | 11 |
| | 17 |
| | 16 |
|
| South America | 9 |
| | 12 |
| | 19 |
| | 23 |
|
| Other | (2 | ) | | (2 | ) | | (5 | ) | | (4 | ) |
| Corporate | (7 | ) | | (5 | ) | | (14 | ) | | (10 | ) |
| Adjusted EBITDA | $ | 53 |
| | $ | 242 |
| | $ | 111 |
| | $ | 401 |
|
The following table provides the reconciliation of net income to Adjusted income from continuing operations:
|
| | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net income | $ | 16 |
| | $ | 163 |
| | $ | 42 |
| | $ | 254 |
|
| Add (deduct): | | | | | | | |
| Loss from noncontrolling interest | 2 |
| | — |
| | 2 |
| | — |
|
| Loss from discontinued operations | — |
| | — |
| | — |
| | 4 |
|
| (Gain) loss on sale or impairment of long-lived assets, net | — |
| | — |
| | 1 |
| | (1 | ) |
| Other operating credits and charges, net | (3 | ) | | (5 | ) | | (1 | ) | | (5 | ) |
| Gain on acquisition of controlling interest | — |
| | — |
| | (14 | ) | | — |
|
| Reported tax provision | 3 |
| | 51 |
| | 11 |
| | 81 |
|
| Adjusted income from continuing operations before tax | 18 |
| | 210 |
| | 40 |
| | 333 |
|
| Normalized tax provision at 25% | 4 |
| | 52 |
| | 9.9 |
| | 83 |
|
| Adjusted income from continuing operations | $ | 13 |
| | $ | 157 |
| | $ | 30 |
| | $ | 250 |
|
| Diluted shares outstanding | 124.3 |
| | 146.2 |
| | 127.9 |
| | 146.4 |
|
| Adjusted income from continuing operations per diluted share | $ | 0.11 |
| | $ | 1.08 |
| | $ | 0.23 |
| | $ | 1.71 |
|
OUR OPERATING RESULTS
Our results of operations for each of our segments are discussed below, as are results of operations for the “other” category which comprises other products that are not individually significant. See Note 15 of the Notes to the consolidated financial statements included in item 1 of this report for further information regarding our segments.
SIDING
Our siding segment manufactures and markets wood-based siding and related accessories and OSB products.
Segment sales, operating income and Adjusted EBITDA for this segment were as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| Net sales | $ | 238 |
| | $ | 262 |
| | (9 | )% | | $ | 474 |
| | $ | 489 |
| | (3 | )% |
| Operating income | 37 |
| | $ | 53 |
| | (31 | )% | | 70 |
| | 89 |
| | (22 | )% |
| Adjusted EBITDA | 46 |
| | 63 |
| | (27 | )% | | 88 |
| | 108 |
| | (18 | )% |
| Adjusted EBITDA margin | 19 | % | | 24 | % | |
|
| | 19 | % | | 22 | % | |
|
|
Sales in this segment by product line were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
SmartSide® strand siding | $ | 200 |
| | $ | 194 |
| | 3 | % | | $ | 387 |
| | $ | 359 |
| | 8 | % |
SmartSide® fiber siding | 25 |
| | 28 |
| | (11 | )% | | 51 |
| | 54 |
| | (6 | )% |
| CanExel siding | 7 |
| | 13 |
| | (46 | )% | | 24 |
| | 26 |
| | (11 | )% |
| OSB - commodity | 5 |
| | 12 |
| | (61 | )% | | 8 |
| | 21 |
| | (63 | )% |
| OSB - value-add | — |
| | 12 |
| | (100 | )% | | — |
| | 22 |
| | (100 | )% |
| Other | 2 |
| | 3 |
| | (17 | )% | | 5 |
| | 7 |
| | (25 | )% |
| Total | $ | 238 |
| | $ | 262 |
| | (9 | )% | | $ | 474 |
| | $ | 489 |
| | (3 | )% |
Percent changes in average gross sales prices and unit shipments for the quarter and six months ended June 30, 2019 compared to the quarter and six months ended June 30, 2018 are as follows: |
| | | | | | | | | | | |
| | Quarter Ended June 30,
2019 versus 2018 | | Six Months Ended June 30,
2019 versus 2018 |
| | Average Selling Price | | Unit Shipments | | Average Net Selling Price | | Unit Shipments |
SmartSide® strand siding | 2 | % | | — | % | | 4 | % | | 4 | % |
SmartSide® fiber siding | 3 | % | | (12 | )% | | 5 | % | | (8 | )% |
| CanExel siding | (1 | )% | | (46 | )% | | 1 | % | | (12 | )% |
| OSB | (54 | )% | | (59 | )% | | (51 | )% | | (63 | )% |
For the quarter ended June 30, 2019 compared to the corresponding period in 2018, sales volumes were flat in our SmartSide strand product line with an increase for the six month period ended June 30, 2019 due to increased market penetration in key markets and introduction of new products. Sales prices in our SmartSide strand product line for the quarter and six months ended June 30, 2019 as compared to the corresponding periods in 2018 were higher due to price increases which were implemented in the first quarter of 2019 and 2018.
For the quarter and six months ended June 30, 2019 compared to the corresponding periods in 2018, sales volumes declined in our SmartSide fiber product line due to our decision to raise prices which slowed demand. Sales prices in our SmartSide fiber product line for the quarter and six month period ended June 30, 2019 as compared to the corresponding periods in 2018 were higher due to a price increase implemented in 2018.
For CanExel, sales volumes decreased in the second quarter and first six months of 2019 as compared to the corresponding period in 2018 due to decreased demand in Canada as customers re-balance their inventories. Sales prices changed for the second quarter and first six months of 2019 as compared to the corresponding periods in 2018 due to changes in our product mix and the fluctuations in the U.S. to Canadian dollar as a majority of these sales are denominated in Canadian dollars.
For our OSB produced in the siding segment for the quarter ended June 30, 2019 compared to the corresponding period in 2018, sales prices changed as discussed in the OSB segment below. Sales volumes were lower for the quarter and six months ended June 30, 2019 compared to the corresponding periods in 2018 due to the conversion of our Dawson Creek OSB mill to siding which occurred during the later portion of 2018. We estimate Adjusted EBITDA from continuing operations associated with OSB produced and sold in the siding segment for the quarter and six months ended June 30, 2019 was negative $1 million in both periods as compared to the comparable periods in 2018 of positive $10 million and positive $15 million.
Overall, the decline in the siding segment for the second quarter of 2019 compared to the same period of 2018 was due to expenses associated with the Dawson Creek conversion project ($6 million for the quarter ended June 30, 2019 and $15 million for the six months ended June 30, 2019), lower OSB sales prices and volume and increases in sales and marketing expenses which were partially offset by higher pricing on our SmartSide strand products.
OSB
Our OSB segment manufactures and distributes OSB structural panel products in North America and certain export markets.
Segment sales, operating income and Adjusted EBITDA for this segment were as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| Net sales | $ | 199 |
| | $ | 387 |
| | (49 | )% | | $ | 407 |
| | $ | 701 |
| | (42 | )% |
| Operating income | (18 | ) | | 149 |
| | (112 | )% | | (25 | ) | | 238 |
| | (111 | )% |
| Adjusted EBITDA | (3 | ) | | 163 |
| | (102 | )% | | 5 |
| | 268 |
| | (98 | )% |
| Adjusted EBITDA Margin | (2 | )% | | 42 | % | | | | 1 | % | | 38 | % | | |
Sales in this segment by product line were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| OSB - commodity | $ | 97 |
| | $ | 231 |
| | (58 | )% | | $ | 204 |
| | $ | 413 |
| | (51 | )% |
| OSB - value-add | 100 |
| | 155 |
| | (35 | )% | | 199 |
| | 284 |
| | (30 | )% |
| Other | 1 |
| | 1 |
| | 18 | % | | 5 |
| | 4 |
| | 7 | % |
| Total | $ | 199 |
| | $ | 387 |
| | (49 | )% | | $ | 407 |
| | $ | 701 |
| | (42 | )% |
Percent changes in average gross sales prices and unit shipments for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 are as follows: |
| | | | | | | | | | | |
| | Quarter Ended June 30,
2019 versus 2018 | | Six Months Ended June 30,
2019 versus 2018 |
| | Average Selling Price | | Unit Shipments | | Average Net Selling Price | | Unit Shipments |
| OSB - commodity | (49 | )% | | (17 | )% | | (43 | )% | | (12 | )% |
| OSB - value-add | (38 | )% | | 5 | % | | (32 | )% | | 3 | % |
For the quarter and six months ended June 30, 2019, OSB prices decreased compared to the corresponding periods in 2018 likely due to the overall demand compared to the supply available in the market. Sales volumes for the quarter and six months ended ended June 30, 2019 are higher in value-add and lower in commodity compared to the corresponding periods of 2018.The decrease in selling price negatively impacted operating results and Adjusted EBITDA by $159 million for the quarter and by $253 million for the six months ended June 30, 2019 as compared to the same periods in 2018.
Overall the decline in our OSB segment results for the quarter ended June 30, 2019 as compared to the same period in 2018 was due to decreased sales prices and volume, offset by improved operating efficiencies.
EWP
Our EWP segment manufactures and distributes laminated veneer lumber (LVL), I-Joists, laminated strand lumber (LSL) and other related products. This segment also includes the sale of I-Joist and LVL products produced by our joint venture with Resolute Forest Products and LVL sold under a contract manufacturing relationship. Included in this segment is a plywood mill, which primarily produces plywood as a by-product from the LVL production process. OSB is also produced by our LSL facility.
Segment sales, operating results and Adjusted EBITDA for this segment were as follows: |
| | | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| Net sales | 107 |
| | 113 |
| | (6 | )% | | 197 |
| | 219 |
| | (10 | )% |
| Operating income | 6 |
| | 6 |
| | 3 | % | | 9 |
| | 6 |
| | 38 | % |
| Adjusted EBITDA | 10 |
| | 11 |
| | (10 | )% | | 17 |
| | 16 |
| | 2 | % |
| Adjusted EBITDA margin | 9 | % | | 10 | % | |
|
| | 8 | % | | 7 | % | |
|
|
Sales in this segment by product line were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| LVL | $ | 40 |
| | $ | 40 |
| | — | % | | $ | 71 |
| | $ | 77 |
| | (8 | )% |
| LSL | 14 |
| | 17 |
| | (17 | )% | | 28 |
| | 31 |
| | (10 | )% |
| I-Joist | 38 |
| | 32 |
| | 19 | % | | 64 |
| | 64 |
| | 1 | % |
| OSB - commodity | 1 |
| | 5 |
| | (77 | )% | | 3 |
| | 8 |
| | (64 | )% |
| OSB - value-add | 2 |
| | 4 |
| | (39 | )% | | 4 |
| | 8 |
| | (44 | )% |
| Plywood | 6 |
| | 8 |
| | (30 | )% | | 12 |
| | 16 |
| | (21 | )% |
| Other | 5 |
| | 7 |
| | (23 | )% | | 15 |
| | 16 |
| | (9 | )% |
| Total | $ | 107 |
| | $ | 113 |
| | (5 | )% | | $ | 197 |
| | $ | 219 |
| | (10 | )% |
Percent changes in average gross sales prices and unit shipments for the quarter ended June 30, 2019 compared to the quarter ended June 30, 2018 are as follows:
|
| | | | | | | | | | | |
| | Quarter Ended June 30,
2019 versus 2018 | | Six Months Ended June 30,
2019 versus 2018 |
| | Average Selling Price | | Unit Shipments | | Average Net Selling Price | | Unit Shipments |
| LVL | — | % | | — | % | | 3 | % | | (10 | )% |
| LSL | 5 | % | | (20 | )% | | 7 | % | | (15 | )% |
| I-Joist | (1 | )% | | 21 | % | | 2 | % | | (2 | )% |
| OSB | (25 | )% | | (50 | )% | | (22 | )% | | (41 | )% |
| Plywood | (30 | )% | | (3 | )% | | (19 | )% | | (2 | )% |
For the quarter and six months ended June 30, 2019 compared to the same periods in 2018, sales volumes decreased due to market weakness. Average selling prices increased due to price increases implemented across all product lines, except plywood and OSB. The decrease in selling prices for OSB and plywood negatively impacted operating results and Adjusted EBITDA from continuing operations by $1 million for OSB and $2 million for plywood for the quarter and by $2 million and $3 million for the six months ended June 30, 2019 as compared to the same periods in 2018. For the quarter and six months ended June 30, 2019, compared to the same periods in 2018, results of operations improved due to increased sales prices partially offset by higher manufacturing costs due to lower volumes and lower OSB and plywood pricing.
SOUTH AMERICA
Our South America segment manufactures and distributes OSB structural panel and siding products in South America and selected export markets. This segment has manufacturing operations in two countries, Chile and Brazil and operates sales offices in Chile, Brazil, Peru, Colombia and Argentina.
Segment sales, operating income and Adjusted EBITDA for this segment were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| Net sales | $ | 40 |
| | $ | 45 |
| | (11 | )% | | $ | 85 |
| | $ | 88 |
| | (3 | )% |
| Operating income | 7 |
| | 10 |
| | (32 | )% | | 15 |
| | 19 |
| | (22 | )% |
| Adjusted EBITDA | 9 |
| | 12 |
| | (23 | )% | | 19 |
| | 23 |
| | (16 | )% |
| Adjusted EBITDA margin | 23 | % | | 26 | % | |
|
| | 23 | % | | 26 | % | |
|
|
Sales in this segment by product line were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| OSB - value-add | $ | 35 |
| | $ | 37 |
| | (6 | )% | | $ | 73 |
| | $ | 72 |
| | 1 | % |
| Siding | 4 |
| | 7 |
| | (42 | )% | | 10 |
| | 14 |
| | (25 | )% |
| Other | 1 |
| | 1 |
| | 8 | % | | 2 |
| | 2 |
| | (16 | )% |
| Total | $ | 40 |
| | $ | 45 |
| | (11 | )% | | $ | 85 |
| | $ | 88 |
| | (3 | )% |
Percent changes in average gross sales prices and unit shipments for the quarter ended June 30, 2019 compared to the quarter ended June 30, 2018 are as follows:
|
| | | | | | | | | | | |
| | Quarter Ended June 30,
2019 versus 2018 | | Six Months Ended June 30,
2019 versus 2018 |
| | Average Selling Price | | Unit Shipments | | Average Net Selling Price | | Unit Shipments |
| OSB | (12 | )% | | 8 | % | | (15 | )% | | 15 | % |
| Siding | — | % | | (42 | )% | | (2 | )% | | (23 | )% |
OSB sales volumes increased for the quarter and six months ended June 30, 2019 as compared to the corresponding periods in 2018 due to increased demand across South America due to improved economic conditions. Sales prices for OSB and siding decreased for the quarter ended June 30, 2019 as compared to the corresponding period in 2018 due to increased imports at a lower price, which created downward pricing pressure and the impact of the change of foreign currency rates on local sales prices.
For the quarter and six months ended June 30, 2019, compared to the same periods in 2018, results of operations are lower due to reduced sales prices and increased operating costs associated with start up of the third mill in Chile.
OTHER PRODUCTS
Our other products segment includes our off-site framing operation, remaining timber and timberlands and other minor products, services and closed operations which are not classified as discontinued operations.
Segment sales, operating losses and Adjusted EBITDA for this category were as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| Net sales | $ | 5 |
| | $ | 3 |
| | 69 | % | | $ | 10 |
| | $ | 6 |
| | 63 | % |
| Operating losses | (2 | ) | | (2 | ) | | 10 | % | | (5 | ) | | (4 | ) | | (23 | )% |
| Adjusted EBITDA | (2 | ) | | (2 | ) | | (6 | )% | | (5 | ) | | (4 | ) | | (21 | )% |
NON-OPERATING INCOME AND EXPENSE
Components of non-operating income and expense are as follows:
|
| | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
| Dollar amounts in millions | 2019 | | 2018 | | 2019 | | 2018 |
| Interest income | $ | 2 |
| | $ | 5 |
| | $ | 6 |
| | $ | 8 |
|
| SERP market adjustments | — |
| | — |
| | 1 |
| | — |
|
| Interest expense | (5 | ) | | (5 | ) | | (9 | ) | | (10 | ) |
| Amortization of debt charges | (1 | ) | | — |
| | (1 | ) | | — |
|
| Capitalized interest | 1 |
| | 1 |
| | 2 |
| | 2 |
|
| Interest expense, net | (2 | ) | | — |
| | (1 | ) | | (1 | ) |
| | | | | | | | |
| Net periodic pension cost, excluding service cost | (1 | ) | | (1 | ) | | (1 | ) | | (2 | ) |
| Gain on acquisition of controlling interest | — |
| | — |
| | 14 |
| | — |
|
| Foreign currency gain (loss) | (1 | ) | | 1 |
| | (4 | ) | | — |
|
| Other non-operating items | (2 | ) | | (1 | ) | | 9 |
| | (2 | ) |
| | | | | | | | |
| Total non-operating expense | $ | (4 | ) | | $ | — |
| | $ | 8 |
| | $ | (3 | ) |
INCOME TAXES
For the first six months of 2019, our income tax expense on continuing operations reflects a rate of 20% as compared to 24% in the comparable period of 2018. For the first six months of 2019, the primary differences between the U.S. statutory rate of 21% and the effective rate of 20% relates to increases in tax deductions related to stock-based compensation and the effects of foreign and state tax rates. For the first six months of 2018, the primary differences between the U.S. statutory rate of 21% and the effective rate of 24% relates to state income tax, discretionary pension payments, foreign tax rates and tax deductions related to stock-based compensation.
Each quarter the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is recorded in the current quarter.
LEGAL AND ENVIRONMENTAL MATTERS
For a discussion of legal and environmental matters involving us and the potential impact thereof on our financial position, results of operations and cash flows, see Items 3, 7 and 8 in our Annual Report on Form 10-K for the year ended December 31, 2018 and Note 14 to the Notes to the financial statements contained herein.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our principal sources of liquidity are existing cash and investment balances, cash generated by our operations and our ability to borrow under such credit facilities as we may have in effect from time to time. We may also from time to time issue and sell equity, debt or hybrid securities or engage in other capital market transactions.
Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness, dividends and making capital expenditures. We may also from time to time prepay or repurchase outstanding indebtedness or shares or acquire assets or businesses that are complementary to our operations. Any such repurchases may be commenced, suspended, discontinued or resumed, and the method or methods of effecting any such repurchases may be changed at any time or from time to time without prior notice.
OPERATING ACTIVITIES
During the first six months of 2019, we used $0 million in operating activities compared to $268 million provided during the first six months of 2018. This change was primarily related to declines in operating results (lower OSB pricing) offset by reductions in working capital changes.
INVESTING ACTIVITIES
During the first six months of 2019, cash used in investing activities was approximately $50 million. Capital expenditures in the first six months of 2019 were $81 million and cash acquired in connection with the consolidation of Entekra was $33 million net of other acquisitions. Included in “Accounts payable” is $15 million related to capital expenditures that had not yet been paid as of June 30, 2019.
During the first six months of 2018, cash used in investing activities was approximately $110 million. Capital expenditures in the first six months of 2018 were $88 million. Included in “Accounts payable” was $17 million related to capital expenditures that had not yet been paid as of June 30, 2018.
Capital expenditures in 2019 are expected to be approximately $160 million to $170 million related to expansions in our siding business, growth and maintenance projects and our South American expansion.
FINANCING ACTIVITIES
During the first six months of 2019, cash used in financing activities was $481 million. We used $3 million to pay long-term debt, $33 million to pay cash dividends, $438 million to repurchase stock though our share repurchase program and $4 million to repurchase stock from employees in connection with income tax withholding requirements associated with our employee stock-based compensation plans.
During the first six months of 2018, cash used in financing activities was $81 million. We used $38 million to pay a cash dividend and $8 million to repurchase stock from employees in connection with income tax withholding requirements associated with our employee stock-based compensation plans. Additionally, during the first six months of 2018, we received a grant from the Investments in Forest Industry Transformation program in Canada for $3 million in connection with our conversion of the Dawson Creek OSB mill.
POTENTIAL IMPAIRMENTS
We continue to review asset groupings and investments for potential impairments. Management currently believes we have adequate support for the carrying value of each of these assets based upon the anticipated cash flows that result from our estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures. As of June 30, 2019, there were no indications of impairment for the asset grouping that included our indefinitely curtailed facilities and supports the conclusion that no impairment is necessary for those facilities.
We also review from time to time possible dispositions of various assets in light of current and anticipated economic and industry conditions, our strategic plan and other relevant factors. Because a determination to dispose of particular assets can require management to make assumptions regarding the transaction structure of the disposition and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, we may be required to record impairment charges in connection with decisions to dispose of assets.
| |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in the Canadian dollar, Brazilian real and the Chilean peso. Although we have in the past entered into foreign exchange contracts associated with certain of our indebtedness and may continue to enter into foreign exchange contracts associated with major equipment purchases to manage a portion of the foreign currency rate risk, we historically have not entered into material currency rate hedges with respect to our exposure from operations, although we may do so in the future.
Some of our products are sold as commodities and therefore sales prices fluctuate daily based on market factors over which we have little or no control. The most significant commodity product we sell is OSB. Based upon an assumed annual production capacity of 4.9 billion square feet (3/8" basis) or 4.2 billion square feet (7/16" basis), a $1 change in the annual average price per thousand square footfeet on 7/16" basis would change annual pre-tax profits by approximately $4.2$4 million.
We historically have not entered into material commodity futures and swaps, although we may do so in the future.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 20172019, our Chief Executive Officer and Chief Financial Officer have carried out, with the participation of the Company's Disclosure Practices Committee and the Company's management, an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Act). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that LP’s disclosure controls and procedures are effective to provide reasonable assurance that material information required to be disclosed by us in reports we file under the Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that information required to be disclosed by us in the reports we file or submit under the Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
We had no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20172019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
SUMMARY OF PRODUCTION VOLUMESKEY STATISTICS
|
| | | | | | | | | | |
| | Quarter Ended June 30, | Six Months Ended June 30, |
| | 2019 | | 2018 | 2019 | | 2018 |
Housing starts1: | | | | | | |
| Single Family | 241 |
| | 258 |
| 430 |
| | 453 |
|
| Multi-Family | 111 |
| | 95 |
| 188 |
| | 189 |
|
| | 352 |
|
| 353 |
| 618 |
| | 641 |
|
|
|
1 Actual U.S. Housing starts data reported by U.S. Census Bureau |
The following table setstables set forth production volumesNorth American sales volume for the quarter ended June 30, 2019 and nine months ended September 30, 2017 and 2016.
2018:
|
| | | | | | | | | | | |
| | Quarter Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Oriented strand board, million square feet 3/8" basis | 1,116 |
| | 1,116 |
| | 3,269 |
| | 3,262 |
|
| Oriented strand board, million square feet 3/8" basis (produced by North America non-OSB segment mills) | 83 |
| | 63 |
| | 245 |
| | 189 |
|
| Wood-based siding, million square feet 3/8" basis | 353 |
| | 316 |
| | 1,038 |
| | 1,001 |
|
| Engineered I-Joist, million lineal feet (1) | 22 |
| | 21 |
| | 66 |
| | 61 |
|
| Laminated veneer lumber (LVL) and laminated strand lumber (LSL), million cubic feet (1) (2) | 2.8 |
| | 2.4 |
| | 8.6 |
| | 7.5 |
|
(1) Includes purchases of products from joint ventures or purchased under contract manufacturing arrangements.
(2) Includes LVL and LSL production which is used in the production of I-Joist as well as sold as end products. |
| | | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, 2019 | | Quarter Ended June 30, 2018 |
| Sales Volume | Siding | OSB | EWP | Total | | Siding | OSB | EWP | Total |
| SmartSide® Strand siding (MMSF) | 309 |
| — |
| — |
| 309 |
| | 309 |
| — |
| — |
| 309 |
|
| SmartSide® fiber siding (MMSF) | 51 |
| — |
| — |
| 51 |
| | 58 |
| — |
| — |
| 58 |
|
| CanExel® siding (MMSF) | 7 |
| — |
| — |
| 7 |
| | 12 |
| — |
| — |
| 12 |
|
| OSB - commodity (MMSF) | 26 |
| 549 |
| 7 |
| 582 |
| | 34 |
| 663 |
| 14 |
| 711 |
|
| OSB - value added (MMSF) | 1 |
| 420 |
| 5 |
| 427 |
| | 31 |
| 400 |
| 11 |
| 442 |
|
| LVL (MCF) | — |
| — |
| 1,953 |
| 1,953 |
| | — |
| — |
| 1,949 |
| 1,949 |
|
| LSL (MCF) | — |
| — |
| 869 |
| 869 |
| | — |
| — |
| 1,088 |
| 1,088 |
|
| I-joist (MMLF) | — |
| — |
| 26 |
| 26 |
| | — |
| — |
| 22 |
| 22 |
|
| | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
| Sales Volume | Siding | OSB | EWP | Total | | Siding | OSB | EWP | Total |
| SmartSide® Strand siding (MMSF) | 593 |
| — |
| — |
| 593 |
| | 571 |
| — |
| — |
| 571 |
|
| SmartSide® fiber siding (MMSF) | 104 |
| — |
| — |
| 104 |
| | 113 |
| — |
| — |
| 113 |
|
| CanExel® siding (MMSF) | 22 |
| — |
| — |
| 22 |
| | 25 |
| — |
| — |
| 25 |
|
| OSB - commodity (MMSF) | 43 |
| 1,120 |
| 16 |
| 1,180 |
| | 65 |
| 1,279 |
| 25 |
| 1,369 |
|
| OSB - value added (MMSF) | 2 |
| 810 |
| 11 |
| 823 |
| | 58 |
| 783 |
| 21 |
| 862 |
|
| LVL (MCF) | — |
| | 3,457 |
| 3,457 |
| | — |
| — |
| 3,849 |
| 3,849 |
|
| LSL (MCF) | — |
| | 1,666 |
| 1,666 |
| | — |
| — |
| 1,964 |
| 1,964 |
|
| I-joist (MMLF) | — |
|
| 45 |
| 45 |
| | — |
| — |
| 46 |
| 46 |
|
INDUSTRY PRODUCT TRENDS
The following table sets forth the average wholesale price of OSB in the United States for the periods specified in dollars per 1,000 square feet.
|
| | | | | | | | | |
| | OSB Western Canada 7/16" Basis | OSB Southwest 7/16" Basis | OSB N. Central 7/16" Basis |
| Average | | | |
| 2016 1st Qtr. Avg. | $ | 191 |
| $ | 230 |
| $ | 226 |
|
| 2016 2nd Qtr. Avg. | $ | 242 |
| $ | 256 |
| $ | 264 |
|
| 2016 3rd Qtr. Avg. | $ | 265 |
| $ | 269 |
| $ | 301 |
|
| 2017 1st Qtr. Avg. | $ | 263 |
| $ | 308 |
| $ | 292 |
|
| 2017 2nd Qtr. Avg. | $ | 318 |
| $ | 328 |
| $ | 327 |
|
| 2017 3rd Qtr. Avg. | $ | 382 |
| $ | 348 |
| $ | 401 |
|
|
| | | |
| | OSB Western Canada 7/16" Basis | OSB Southwest 7/16" Basis | OSB N. Central 7/16" Basis |
| Average | | | |
| 2018 1st Qtr. Avg. | $356 | $346 | $367 |
| 2018 2nd Qtr. Avg. | $408 | $435 | $423 |
| 2019 1st Qtr. Avg. | $161 | $194 | $213 |
| 2019 2nd Qtr. Avg. | $149 | $174 | $187 |
PART II -OTHEROTHER INFORMATION
| |
| Item 1. | Legal Proceedings. |
The description of certain legal and environmental matters involving LP set forth in Part I of this report under “Note 914 – Legal and Environmental Matters” to the Notes to the financial statements contained herein is incorporated herein by reference.
You should be aware that the occurrence of any of the events described in this Risk Factors section and elsewhere in this report or in any other of our filings with the SEC could have a material adverse effect on our business, financial position, results of operations and cash flows. In evaluating us, you should consider carefully, among other things, the risks described below and the matters described in “About Forward-Looking Statements.”
Cyclical industry conditions have and may continue to adversely affect our financial condition and results of operations. Our operating results reflect the general cyclical pattern of the building products industry. Demand for our products correlates to a significant degree to the level of residential construction activity in North America, which historically has been characterized by significant cyclicality. This cyclicality is influenced by a number of factors, including the supply of new and existing homes on the market, the level of unemployment, longer-term interest rates, and mortgage foreclosure rates. The cyclicality is also influenced by the availability of mortgage financing, which is currently more restrictive than historical periods and which could be adversely affected by the implementation of one or more proposals to eliminate or reduce the mortgage market roles of or levels of support for government-sponsored enterprises such as Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. A significant increase in longer-term interest rates, a prolonged decline in the availability of mortgage financing, or the occurrence of other events that reduce levels of residential construction activity could have a material adverse effect on our financial condition, results of operations and cash flows. We are not able to predict with certainty market conditions for our products. A prolonged and severe weakness in the markets for one or more of our principal products could seriously harm our financial condition and results of operations and our ability to satisfy our cash requirements, including the payment of interest and principal on our debt.
We have a high degree of product concentration. OSB accounted for about 51% of our North American sales in 2016 compared to 47% in 2015 and we expect OSB sales to continue to account for a substantial portion of our revenues and profits in the future. Concentration of our business in the OSB market further increases our sensitivity to commodity pricing and price volatility. Historical prices for our commodity productsThere have been volatile, and we, like other participants in the building products industry, have limited influence over the timing and extent of priceno material changes for our products. Commodity product pricing is significantly affected by the relationship between supply and demand in the building products industry. Product supply is influenced primarily by fluctuations in available manufacturing capacity. Demand is affected by the state of the economy in general and a variety of other factors, including the level of new residential construction activity and home repair and remodeling activity, changes in the availability and cost of mortgage financing. In this competitive environment with so many variables for which we do not control, we cannot assure you that pricing for OSB will not decline from current levels.
Intense competition in the building products industry could prevent us from increasing or sustaining our net sales and profitability. The markets for our products are highly competitive. Our competitors range from very large, fully integrated forest and building products firms to smaller firms that may manufacture only one or a few types of products. We also compete less directly with firms that manufacture substitutes for wood building products. Many of our competitors have greater financial and other resources than we do, and certain of the mills operated by our competitors may be lower-cost producers than the mills operated by us.
Our results of operations may be harmed by potential shortages of raw materials and increases in raw material costs. The most significant raw material used in our operations is wood fiber. Wood fiber is subject to commodity pricing, which fluctuates on the basis of market factors over which we have no control. In addition, the cost of various types of wood fiber that we purchase in the market has at times fluctuated greatly because of governmental, economic or industry conditions, and may be affected by increased demand resulting from initiatives to increase the use of biomass materials in the production of heat, power, biobased products and biofuels. In addition to wood fiber,
we also use a significant quantity of various resins in our manufacturing processes. Resin product costs are influenced by changes in the prices or availability of raw materials used to produce resins, primarily petroleum products, as well as demand for and availability of resin products. Selling prices of our products have not always increased in response to raw material cost increases. We are unable to determine to what extent, if any, we will be able to pass any future raw material cost increases through to our customers through product price increases. Our inability to pass increased costs through to our customers could have a material adverse effect on our financial condition, results of operations and cash flows.
Many of the Canadian forestlands from which we obtain wood fiber also are subject to the constitutionally protected treaty or common-law rights of the aboriginal peoples of Canada. Most of British Columbia is not covered by treaties and, as a result, the claims of British Columbia’s aboriginal peoples relating to forest resources are largely unresolved, although many aboriginal groups are actively engaged in treaty discussions with the governments of British Columbia and Canada. Final or interim resolution of claims brought by aboriginal groups are expected to result in additional restrictions on the sale or harvest of timber and may increase operating costs and affect timber supply and prices in Canada.
Our operations require substantial capital. Capital expenditures for expansion or replacement of existing facilities or equipment or to comply with future changes in environmental laws and regulations may be substantial. Although we maintain our production equipment with regular periodic and scheduled maintenance, we cannot assure you that key pieces of equipment in our various production processes will not need to be repaired or replaced or that we will not incur significant additional costs associated with environmental compliance. The costs of repairing or replacing such equipment and the associated downtime of the affected production line could have a material adverse effect on our financial condition, results of operations and cash flow. If for any reason we are unable to provide for our operating needs, capital expenditures and other cash requirements on economic terms, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.
Adverse weather conditions can have a significant impact on our operating results. Our business is sensitive to national and regional weather conditions and natural disasters. Inclement weather affects both our ability to produce and distribute our products. In past years, extreme weather conditions, including snow and ice storms, flood and wind damage, hurricanes, tornadoes, extreme rain and droughts, have caused delays and closures of varying lengths at our manufacturing plants located across the country. In addition, severe weather conditions can cause disruptions in deliveries of raw materials from our suppliers. Our customers sell our products in the repair and remodeling and new home construction markets. Construction activity, which drives demand for our products, decreases substantially during periods of cold weather, when it snows or when heavy or sustained rains fall. Such weather conditions can materially and adversely affect our operating results if they occur with unusual intensity, during abnormal periods, or last longer than usual, especially during peak construction periods.
Our pension and health care costs are subject to numerous factors which could cause these costs to change. We have defined benefit pension plans covering substantially all U.S. and Canadian employees. We provide retiree health care benefits to certain of our U.S. salaried and certain hourly employees. Our pension costs are dependent upon numerous pension plan provisions that are subject to interpretations and factors resulting from actual plan experience and assumptions of future experience. Pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns; changes in general interest rates and changes in the number of retirees may result in increased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could also change pension and health care costs. We are subject to market risk on pension plan assets as well as discount rates on long-term obligations. Significant adverse changes in the factors affecting our pension and health care costs could adversely affect our cash flows, financial condition and results of operations.
Our pension plans are currently underfunded, and over time we will be required to make cash payments to the plans, reducing the cash available for our business. We record a liability associated with our pension plans equal to the excess of the benefit obligation over the fair value of plan assets. The benefit liability recorded under the provisions of Accounting Standards Codification (ASC) 715, “Compensation—Retirement Benefits,” at December 31, 2016 was $92.0 million. Although we expect to contribute approximately $10.0 million to $12.0 million to our plans in
2017, we continually reassess the amount and timing of any discretionary contributions. Over the next several years we may make significant contributions to the plans. The amount of such contributions will depend upon a number of factors, principally the actual earnings and changes in values of plan assets and changes in interest rates.
We mostly depend on third parties for transportation services and increases in costs and the availability of transportation could materially and adversely affect our business and operations. Our business depends on the transportation of a large number of products, both domestically and internationally. We rely primarily on third parties for transportation of the products we manufacture and/or distribute as well as for delivery of our raw materials. In particular, a significant portion of the goods we manufacture and raw materials we use are transported by railroad or trucks, which are highly regulated. If any of our third-party transportation providers were to fail to deliver the goods we manufacture or distribute in a timely manner, we may be unable to sell those products at full value or at all. Similarly, if any of these providers were to fail to deliver raw materials to us in a timely manner, we may be unable to manufacture our products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with us, we may be unable to replace them at reasonable cost. Any failure of a third-party transportation provider to deliver raw materials or finished products in a timely manner could harm our reputation, negatively affect our customer relationships and have a material adverse effect on our financial condition and results of operations. In addition, an increase in transportation rates or fuel surcharges could materially and adversely affect our sales and profitability.
We are subject to significant environmental regulation and environmental compliance expenditures and liabilities. Our businesses are subject to many environmental laws and regulations, particularly with respect to discharges of pollutants and other emissions on or into land, water and air, and the disposal and remediation of hazardous substances or other contaminants and the restoration and reforestation of timberlands. Compliance with these laws and regulations is a significant factor in our business. We have incurred and expect to continue to incur significant expenditures to comply with applicable environmental laws and regulations. Moreover, some or all of the environmental laws and regulations to which we are subject could become more stringent in the future. Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions.
Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities. Consequently, we cannot assure you that existing or future circumstances or developments with respect to contamination will not require significant expenditures by us.
We are involved in various environmental matters, product liability and other legal proceedings. The outcome of these matters and proceedings and the magnitude of related costs and liabilities are subject to uncertainties. The conduct of our business involves the use of hazardous substances and the generation of contaminants and pollutants. In addition, the end-users of many of our products are members of the general public. We currently are or from time to time in the future may be involved in a number of environmental matters and legal proceedings, including legal proceedings involving anti-trust, warranty or non-warranty product liability claims, negligence and other claims, including claims for wrongful death, personal injury and property damage alleged to have arisen out of the use by others of our or our predecessors’ products or the release by us or our predecessors of hazardous substances. Environmental matters and legal matters and proceedings, including class action settlements relating to certain of our products, have in the past caused and in the future may cause us to incur substantial costs. We have established contingency reserves in our consolidated financial statements with respect to the estimated costs of existing environmental matters and legal proceedings to the extent thatrisk factors disclosed in our management has determined that such costs are both probable and reasonably estimable as to amount. However, such reserves are based upon various estimates and assumptions relating to future events and circumstances, all of which are subject to inherent uncertainties. We regularly monitor our estimated exposure to environmental and litigation loss contingencies and, as additional information becomes known, may change our estimates significantly. However, no estimate of the range of any such
change can be made at this time. We may incur costs in respect of existing and future environmental matters and legal proceedings as to which no contingency reserves have been established. We cannot assure you that we will have sufficient resources available to satisfy the related costs and expenses associated with these matters and proceedings.
Fluctuations in foreign currency exchange rates could result in currency exchange losses and reductions in stockholders' equity. A significant portion of our operations are conducted through foreign subsidiaries. The functional currency for our Canadian subsidiary is the U.S. dollar. The financial statements of this foreign subsidiary are remeasured into U.S. dollars using the historical exchange rate for property, plant and equipment, timber and timberlands, equity and certain other non-monetary assets and liabilities and related depreciation and amortizationAnnual Report on these assets and liabilities. These transaction and translation gains or losses are recorded in foreign exchange gains (losses) in the income statement. The functional currency of our Chilean subsidiary is the Chilean peso and the functional currency of our Brazilian subsidiary is the Brazilian real. Translation adjustments, which are based upon the exchange rate at the balance sheet date for assets and liabilities and the weighted average rateForm 10-K for the income statement, are recorded in the Accumulated Comprehensive Income (Loss) section of Stockholders’ Equity. Therefore, changes in the Canadian dollar, the Chilean peso or the Brazilian real relative to the U.S. dollar may have a material adverse effect on our financial condition and results of operations.year ended December 31, 2018.
Our ability to service our indebtedness, to refinance our indebtedness or to fund our other liquidity needs is subject to various risks. Our ability to make scheduled payments on and to refinance our indebtedness depends on and is subject to our financial and operating performance, which in turn is affected by general and regional economic, financial, competitive, business and other factors, including the availability of financing in the banking and capital markets as well as the other risks described herein. In particular, demand for our products correlates to a significant degree to the level of residential construction activity in North America, which historically has been characterized by significant cyclicality. Over the last several years, housing starts remained below “normal” levels. There can be no assurance as to when, or if the housing market, will rebound to “normal levels”. Accordingly, we cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our debt, to refinance our debt or to fund our other liquidity needs. If we are unable to service our debt obligations or to fund our other liquidity needs, we could be forced to curtail our operations, reorganize our capital structure or liquidate some or all of our assets in a manner that could cause the holders of our securities to experience a partial or total loss of their investment in us.
We have not independently verified the results of third-party research or confirmed assumptions or judgments upon which it may be based, and the forecasted and other forward-looking information contained therein is subject to inherent uncertainties. We refer in this report and other documents that we file with the SEC to historical, forecasted and other forward-looking information published by sources such as FEA (Forest Economic Advisors, LLC), Random Lengths and the U.S. Census Bureau that we believe to be reliable. However, we have not independently verified this information and, with respect to the forecasted and forward-looking information, have not independently confirmed the assumptions and judgments upon which it is based. Forecasted and other forward looking information is necessarily based on assumptions regarding future occurrences, events, conditions and circumstances and subjective judgments relating to various matters, and is subject to inherent uncertainties. Actual results may differ materially from the results expressed or implied by, or based upon, such forecasted and forward-looking information.
Initiatives to upgrade our information technology infrastructure involve many risks. We regularly implement business process improvement initiatives to optimize our performance. Our current initiatives include plans to further standardize the business processes and technology that support our strategies through implementation of further upgrades to our software solution over the next few years. We may experience difficulties as we transition to these new or upgraded systems and processes, including loss of data and decreases in productivity as our personnel become familiar with new systems. In addition, transitioning to these new or upgraded systems requires significant capital investments and personnel resources. Difficulties in implementing new or upgraded information systems or significant system failures could disrupt our operations and have a material adverse effect on our business, financial condition, results of operations or cash flows. If we are unable to manage these changes successfully, our ability to timely and accurately process transactions and report our results of operations could be adversely affected.
Cyber security risks related to the technology used in our operations and other business processes, as well as security breaches of company, customer, employee, and vendor information, could adversely affect our business. We rely on various information technology systems to capture, process, store, and report data and interact with customers, vendors, and employees. Despite careful security and controls design, implementation, updating, and internal and independent third-party assessments, our information technology systems, and those of our third-party providers, could become subject to cyber attacks. Network, system, and data breaches could result in misappropriation of sensitive data or operational disruptions, including interruption to systems availability and denial of access to and misuse of applications required by our customers to conduct business with us. In addition, hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of the systems. Misuse of internal applications; theft of intellectual property, trade secrets, or other corporate assets; and inappropriate disclosure of confidential information could stem from such incidents. A security failure of that technology could impact our ability to operate our businesses effectively, adversely affect our reported financial results, impact our reputation and expose us to potential liability or litigation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following amount of our common stock was repurchased during the quarter ended June 30, 2019: |
| | | | | | | | | | | | |
| Period | Total Number of Shares Repurchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as part of Publicly Announced Purchase Plan or Program | | Maximum Dollar Value of Shares That May Yet be Purchased under the Plans or Programs |
| April 1, 2019 - April 30, 2019 | — |
| | — |
| | — |
| | $ | 280 |
|
| May 1, 2019 - May 31, 2019 | — |
| | — |
| | — |
| | $ | 280 |
|
| June 1, 2019 - June 30, 2019 | — |
| | — |
| | — |
| | $ | 280 |
|
| | — |
| | — |
| | — |
| | |
On October 31, 2014, LP’sFebruary 13, 2019, we announced that our Board of Directors authorized LPan additional $600 million share repurchase program. On February 19, 2019, we entered an accelerated share repurchase (ASR) agreement with Goldman Sachs & Co. LLC to repurchase up to $100$400 million of our common stock. Under the ASR agreement, LP received an initial delivery of 11,944,756 million shares on February 21, 2019, representing approximately 80 percent of the number of shares of common stock initially underlying the ASR agreement, based on the closing price of LP’s common stock. LP may initiate, discontinue or resume purchasesstock of its$26.79 on February 15, 2019. The final number of shares to be repurchased under the ASR will be based on LP’s volume-weighted average price of LP’s common stock under this authorization induring the term of the ASR, less a discount, and will be completed no later than the end of the third quarter of 2019.
Additional repurchases of common stock may be made through open market, block and privately-negotiated transactions, including Rule 10b5-1 plans, at times and in privately negotiated transactions or otherwise at any time or from timesuch amounts as management deems appropriate, subject to time without prior notice. As of November 6, 2017, no purchases have occurred under this authorization.
market and business conditions, regulatory requirements and other factors.
| |
| Item 3. | Defaults Upon Senior Securities. |
None.
| |
| Item 4. | Mine Safety Disclosures. |
Not applicable.
| |
| Item 5. | Other Information. |
None.
|
| |
| |
| 10.1 | Amended and Restated Credit Agreement, dated June 27, 2019, among Louisiana-Pacific Corporation, as borrower, certain subsidiaries of the borrower from time to time party thereto, as guarantors, American AgCredit, PCA, as administrative agent and sole lead arranger, CoBank, ACB, as L/C Issuer, and lenders party thereto. Incorporated herein by reference to Exhibit 10.1 on LP Current Report on Form 8-K filed on June 27, 2019. |
| |
| 10.2 | Amended and Restated Security Agreement, dated June 27, 2019, among Louisiana-Pacific Corporation and American AgCredit, PCA. Incorporated herein by reference to Form 8K filed on June 27, 2019. Incorporated herein by reference to Exhibit 10.1 on LP Current Report on Form 8-K filed on June 27, 2019. |
| |
| 31.1 | |
| | |
| 31.2 | |
| | |
| 32.1 | |
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*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | | LOUISIANA-PACIFIC CORPORATION |
| | | | |
| Date: | NovemberAugust 6, 20172019 | BY: | /S/ W. BRADLEY SOUTHERN |
| | | | W. Bradley Southern |
| | | | Chief Executive Officer |
| | | | |
| Date: | NovemberAugust 6, 20172019 | BY: | /S/ SALLIE B. BAILEY/S/ ALAN J.M. HAUGHIE |
| | | | Sallie B. BaileyAlan J.M. Haughie |
| | | | Executive Vice President and Chief Financial Officer |
| | | | (PrincipalChief Financial Officer)Officer |