UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

 

For Quarterly Period Ended September 30, 2007
Commission File Number 1-7107

 

LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)

 

DELAWARE
(State or other jurisdiction of
incorporation or organization)

 

93-0609074
(IRS Employer Identification No.)

 

414 Union Street, Nashville, TN 37219
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (615) 986-5600

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   x

Accelerated filer   o

Non-accelerated filer   o 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o    No   x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 103,462,582 shares of Common Stock, $1 par value, outstanding as of November 2, 2007.

 

Except as otherwise specified and unless the context otherwise requires, references to “LP”, the “Company”, “we”, “us”, and “our” refer to Louisiana-Pacific Corporation and its subsidiaries.

 

 

 

 



 

 ABOUT FORWARD-LOOKING STATEMENTS

Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their businesses and other matters as long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. This report contains, and other reports and documents filed by us with the Securities and Exchange Commission may contain, forward-looking statements. These statements are or will be based upon the beliefs and assumptions of, and on information available to, our management.

The following statements are or may constitute forward-looking statements: (1) statements preceded by, followed by or that include words like “may,” “will,” “could,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “potential,” “continue” or “future” or the negative or other variations thereof and (2) other statements regarding matters that are not historical facts, including without limitation, plans for product development, forecasts of future costs and expenditures, possible outcomes of legal proceedings, completion of anticipated asset sales and the adequacy of reserves for loss contingencies.

Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to the following:

                  changes in general economic conditions;

                  changes in the cost and availability of capital;

                  changes in the level of home construction activity;

                  changes in competitive conditions and prices for our products;

                  changes in the relationship between supply of and demand for building products, including the effects of industry-wide increases in manufacturing capacity;

                  changes in the relationship between supply of and demand for raw materials, including wood fiber and resins, used in manufacturing our products;

                  changes in the cost of and availability of energy, primarily natural gas, electricity and diesel fuel;

                  changes in other significant operating expenses;

                  changes in exchange rates between the U.S. dollar and other currencies, particularly the Canadian dollar, EURO and the Chilean peso;

                  changes in general and industry-specific environmental laws and regulations;

                  changes in tax laws, and interpretations thereof;

                  changes in circumstances giving rise to environmental liabilities or expenditures;

                  the resolution of product-related litigation and other legal proceedings; and

                  acts of God or public authorities, war, civil unrest, fire, floods, earthquakes and other matters beyond our control.

In addition to the foregoing and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in the reports and other documents filed by us with the Commission that warn of risks or uncertainties associated with future results, events or circumstances identify important factors that could cause actual results, events and circumstances to differ materially from those reflected in the forward-looking statements.

ABOUT THIRD PARTY INFORMATION

In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industry publications, U.S. government sources and other third parties. Although we believe the information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.

 

2



 

Item 1.   Financial Statements.

 

CONSOLIDATED STATEMENTS OF INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)

 

 

 

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

472.5

 

$

527.0

 

$

1,328.3

 

$

1,819.2

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales

 

446.6

 

460.8

 

1,275.9

 

1,417.4

 

Depreciation, amortization and cost of timber harvested

 

27.2

 

30.8

 

83.1

 

94.8

 

Selling and administrative

 

36.7

 

38.3

 

115.2

 

118.0

 

(Gain) loss on sale or impairment of long-lived assets

 

48.4

 

0.9

 

53.6

 

0.9

 

Other operating credits and charges, net

 

(0.7

)

(2.9

)

(19.9

)

(2.8

)

Total operating costs and expenses

 

558.2

 

527.9

 

1,507.9

 

1,628.3

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(85.7

)

(0.9

)

(179.6

)

190.9

 

 

 

 

 

 

 

 

 

 

 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

Foreign currency exchange loss

 

(15.0

)

(0.2

)

(30.5

)

(8.7

)

Interest expense, net of capitalized interest

 

(7.7

)

(11.2

)

(27.7

)

(38.9

)

Investment income

 

20.4

 

24.9

 

64.2

 

72.2

 

Total non-operating income (expense)

 

(2.3

)

13.5

 

6.0

 

24.6

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes and equity in earnings of unconsolidated affiliates

 

(88.0

)

12.6

 

(173.6

)

215.5

 

Provision (benefit) for income taxes

 

(37.5

)

(3.6

)

(79.7

)

59.7

 

Equity in loss of unconsolidated affiliates

 

4.1

 

3.9

 

12.3

 

2.4

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

(54.6

)

12.3

 

(106.2

)

153.4

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

(21.4

)

(4.5

)

(36.2

)

(8.3

)

Income tax benefit

 

(8.2

)

(1.7

)

(14.0

)

(3.2

)

Loss from discontinued operations

 

(13.2

)

(2.8

)

(22.2

)

(5.1

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(67.8

)

$

9.5

 

$

(128.4

)

$

148.3

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share of common stock (basic):

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.52

)

$

0.12

 

$

(1.02

)

$

1.45

 

Loss from discontinued operations

 

(0.13

)

(0.03

)

(0.21

)

(0.04

)

Net income (loss) per share - basic

 

$

(0.65

)

$

0.09

 

$

(1.23

)

$

1.41

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share of common stock (diluted):

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.52

)

$

0.12

 

$

(1.02

)

$

1.45

 

Loss from discontinued operations

 

(0.13

)

(0.03

)

(0.21

)

(0.05

)

Net income (loss) per share - diluted

 

$

(0.65

)

$

0.09

 

$

(1.23

)

$

1.40

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

 

$

0.15

 

$

0.15

 

$

0.45

 

$

0.45

 

 

 

 

 

 

 

 

 

 

 

Average shares of stock outstanding — basic

 

103.6

 

104.9

 

104.0

 

105.5

 

Average shares of stock outstanding — diluted

 

103.6

 

105.2

 

104.0

 

106.0

 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

3



 

CONDENSED CONSOLIDATED BALANCE SHEETS

LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES

(AMOUNTS IN MILLIONS) (UNAUDITED)

 

 

 

September 30, 2007

 

December 31, 2006

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

345.1

 

$

265.7

 

Short-term investments

 

444.4

 

797.0

 

Receivables, net of allowance for doubtful accounts of $1.2 million at September 30, 2007 and $1.4 million at December 31, 2006

 

219.2

 

157.4

 

Inventories

 

222.5

 

221.6

 

Prepaid expenses and other current assets

 

11.4

 

9.3

 

Deferred income taxes

 

8.8

 

28.5

 

Current portion of notes receivable from asset sales

 

54.4

 

 

Current assets of discontinued operations

 

10.1

 

24.5

 

Total current assets

 

1,315.9

 

1,504.0

 

 

 

 

 

 

 

Timber and timberlands

 

63.8

 

98.7

 

 

 

 

 

 

 

Property, plant and equipment

 

2,152.1

 

1,986.1

 

Accumulated depreciation

 

(1,182.1

)

(1,135.7

)

Net property, plant and equipment

 

970.0

 

850.4

 

 

 

 

 

 

 

Goodwill, net of amortization

 

273.5

 

273.5

 

Notes receivable from asset sales

 

278.6

 

333.0

 

Long-term investments

 

70.8

 

40.4

 

Restricted cash

 

56.5

 

51.8

 

Investments in and advances to affiliates

 

205.5

 

212.9

 

Other assets

 

31.2

 

27.1

 

Long-term assets of discontinued operations

 

25.0

 

44.6

 

Total assets

 

$

3,290.8

 

$

3,436.4

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current portion of long-term debt

 

$

0.2

 

$

0.4

 

Current portion of limited recourse notes payable

 

53.5

 

 

Short-term notes payable

 

40.2

 

3.0

 

Accounts payable and accrued liabilities

 

233.8

 

237.9

 

Current portion of deferred tax liabilities

 

14.6

 

14.6

 

Current portion of contingency reserves

 

9.0

 

9.0

 

Total current liabilities

 

351.3

 

264.9

 

 

 

 

 

 

 

Long-term debt, excluding current portion:

 

 

 

 

 

Limited recourse notes payable

 

273.3

 

326.8

 

Other long-term debt

 

353.2

 

317.8

 

Total long-term debt, excluding current portion

 

626.5

 

644.6

 

 

 

 

 

 

 

Contingency reserves, excluding current portion

 

18.1

 

25.6

 

Other long-term liabilities

 

83.3

 

70.0

 

Deferred income taxes

 

326.4

 

363.9

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

116.9

 

116.9

 

Additional paid-in capital

 

437.5

 

435.8

 

Retained earnings

 

1,697.0

 

1,870.2

 

Treasury stock

 

(296.7

)

(284.0

)

Accumulated comprehensive loss

 

(69.5

)

(71.5

)

Total stockholders’ equity

 

1,885.2

 

2,067.4

 

Total liabilities and equity

 

$

3,290.8

 

$

3,436.4

 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

4



 

CONSOLIDATED STATEMENTS OF CASH FLOWS

LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

(128.4

)

$

148.3

 

Adjustments to reconcile net income (loss) to net cash provided by

 

 

 

 

 

(used in) operating activities:

 

 

 

 

 

Depreciation, amortization and cost of timber harvested

 

84.9

 

99.7

 

Loss from unconsolidated affiliates

 

12.3

 

2.4

 

(Gain) loss on sale or impairment of long-lived assets

 

72.5

 

0.4

 

Other operating charges and credits, net

 

(2.0

)

(2.6

)

Net accretion on available for sale securities

 

(8.1

)

(10.4

)

Stock-based compensation expense related to stock plans

 

5.2

 

4.8

 

Excess tax benefits from stock-based compensation

 

 

(3.3

)

Exchange loss on remeasurement

 

37.2

 

17.0

 

Cash settlement of contingencies

 

(10.0

)

(10.8

)

Other adjustments

 

(0.1

)

(0.8

)

(Increase) decrease in receivables

 

(76.6

)

24.0

 

Decrease in inventories

 

21.6

 

8.0

 

Increase in prepaid expenses

 

(2.0

)

(1.6

)

Decrease in accounts payable and accrued liabilities

 

(12.2

)

(35.0

)

Increase (decrease) in deferred income taxes

 

1.0

 

(46.8

)

Net cash provided by (used in) operating activities

 

(4.7

)

193.3

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Property, plant, and equipment additions

 

(221.3

)

(122.5

)

Proceeds from asset sales

 

2.7

 

2.6

 

Investments in and advances to joint ventures

 

(4.7

)

(6.6

)

Receipt of proceeds from notes receivable

 

 

70.8

 

Cash paid for purchase of investments

 

(2,187.1

)

(4,627.1

)

Proceeds from sales of investments

 

2,517.0

 

4,436.8

 

(Increase) decrease in restricted cash under letter of credit requirements

 

(14.5

)

16.2

 

Net cash provided by (used in) investing activities

 

92.1

 

(229.8

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Borrowings of long-term debt

 

17.0

 

 

Repayment of debt

 

(0.3

)

(190.7

)

Net borrowings under revolving credit agreements

 

37.2

 

 

Sale of common stock under equity plans

 

2.8

 

5.5

 

Purchase of treasury stock

 

(18.2

)

(41.1

)

Payment of cash dividends

 

(46.9

)

(47.5

)

Excess tax benefits from stock-based compensation

 

 

3.3

 

Net cash used in financing activities

 

(8.4

)

(270.5

)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

0.4

 

(4.9

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

79.4

 

(311.9

)

Cash and cash equivalents at beginning of period

 

265.7

 

607.6

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

345.1

 

$

295.7

 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

5



 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Accumulated

 

Total

 

 

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2006

 

116.9

 

$

116.9

 

12.7

 

$

(284.0

)

$

435.8

 

$

1,870.2

 

$

(71.5

)

$

2,067.4

 

Cumulative effect of adoption of accounting principle on prior years (see Notes 1 and 7)

 

 

 

 

 

 

2.1

 

 

2.1

 

Balance, December 31, 2006 (as adjusted)

 

116.9

 

116.9

 

12.7

 

(284.0

)

435.8

 

1,872.3

 

(71.5

)

2,069.5

 

Net income (loss)

 

 

 

 

 

 

(128.4

)

 

(128.4

)

Issuance of shares for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

employee stock plans and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other purposes and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

transactions

 

 

 

(0.2

)

5.5

 

(2.5

)

 

 

3.0

 

Purchase of shares for treasury

 

 

 

1.0

 

(18.2

)

 

 

 

(18.2

)

Amortization of restricted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stock and other grants

 

 

 

 

 

4.2

 

 

 

4.2

 

Cash dividends

 

 

 

 

 

 

(46.9

)

 

(46.9

)

Other comprehensive income

 

 

 

 

 

 

 

2.0

 

2.0

 

Balance, September 30, 2007

 

116.9

 

$

116.9

 

13.5

 

$

(296.7

)

$

437.5

 

$

1,697.0

 

$

(69.5

)

$

1,885.2

 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

6



 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)

 

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(67.8

)

$

9.5

 

$

(128.4

)

$

148.3

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

0.8

 

3.3

 

(1.2

)

(3.7

)

Unrealized gain on derivative instruments

 

0.1

 

 

 

0.5

 

Unrealized gain (loss) on marketable securities

 

(0.1

)

0.3

 

(0.1

)

0.1

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

0.2

 

 

0.6

 

 

Amortization of net loss

 

0.9

 

 

2.7

 

 

Other comprehensive income (loss), net of tax

 

1.9

 

3.6

 

2.0

 

(3.1

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss), net of tax

 

$

(65.9

)

$

13.1

 

$

(126.4

)

$

145.2

 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

7



 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS FOR PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of LP and its subsidiaries for the interim periods presented. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in LP’s Annual Report on Form 10-K for the year ended December 31, 2006.

Adoption of New Accounting Standards

LP adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. See Note 7 below for additional information, including the effects of adoption on LP’s Condensed Consolidated Balance Sheets and Consolidated Statement of Stockholders’ Equity.

LP adopted FASB Staff Position AUG AIR-1, “Accounting for Planned Major Maintenance Activities” (FSP AUG AIR-1) on January 1, 2007.  FSP AUG AIR-1 prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim reporting periods.  Permitted methods include direct expensing, built-in overhaul and deferral. LP will follow the deferral method in future periods. As a result of this adoption, LP recorded an increase to the beginning balance of retained earnings of $5.2 million or $3.3 million after tax. The impact of the adoption of this standard was immaterial to prior years.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in Accumulated Comprehensive Loss, net of tax effects, until they are amortized as a component of net periodic benefit cost. In addition, the measurement date (the date at which plan assets and the benefit obligation are measured) is required to be the Company’s fiscal year end. Presently, LP uses an October 31 measurement date for a majority of its pension and postretirement benefit plans. LP adopted the recognition and disclosure provisions of SFAS 158 effective December 31, 2006, except for the measurement date provisions, which are not required until fiscal years ending after December 15, 2008.

Reclassifications

LP has announced its intent to divest its decking operations. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” LP is required to account for the businesses anticipated to be sold within one year as discontinued operations. Accordingly, commencing with the quarter ended June 30, 2007, LP is classifying its decking operations as discontinued operations and has reclassified all periods presented in the same manner.

NOTE 2 — STOCK-BASED COMPENSATION

For the quarters ended September 30, 2007 and 2006, the total compensation expense related to LP’s stock-based compensation plans was $1.9 and $1.6 million. For the nine month periods ended September 30, 2007 and 2006, the total compensation expense related to all of LP’s stock-based compensation plans was $5.2 and $4.8 million. At September 30, 2007, 5,450,257 shares were available under the current stock award plans for stock-based awards. For the nine month period ended September 30, 2007, the fair value of the options granted was estimated using the

 

8



 

Black-Scholes option-pricing model with the following weighted-average assumptions: a risk free interest rate of 4.8%; an expected volatility factor for the market price of the Company’s common stock of 29.8% (based upon historical volatility over the expected life); a dividend yield of 2.6%; and an expected life of 4 years (based upon historical experience). For the nine month period ended September 30, 2006, the fair value of the options granted was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: a risk free interest rate of 4.5%; an expected volatility factor for the market price of the Company’s common stock of 45.2% (based upon historical volatility over the expected life); a dividend yield of 1.9%; and an expected life of 4 years (based upon historical experience). The weighted-average fair value of each option or stock settled stock appreciation right (SSARs) granted during the nine month period ended September 30, 2007 and September 30, 2006 was $5.55 and $10.25.

NOTE 3 — CASH EQUIVALENTS AND INVESTMENTS

LP’s short-term and long-term investments are classified as available-for-sale as defined by Statement of Financial Accounting Standards (SFAS) No. 115 “Accounting for Certain Investments in Debt and Equity Securities” and are reported at estimated fair value using the specific identification method. LP’s investments include U.S. treasury notes, bank obligations, corporate obligations, auction rate securities and commercial paper. Under LP’s current investment policy, all investments must maintain an A-1 (short term) or A (long term) or equivalent credit rating from one or more rating agencies. The following table summarizes components and unrealized gains and losses related to these investments as of September 30, 2007 and December 31, 2006:

Dollar amounts in millions

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

September 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agency securities

 

$

37.7

 

$

 

$

 

$

37.7

 

Commercial paper

 

115.4

 

0.1

 

 

115.5

 

Corporate obligations

 

210.7

 

 

0.3

 

210.4

 

Auction rate securities

 

151.8

 

 

0.2

 

151.6

 

Total marketable securities

 

$

515.6

 

$

0.1

 

$

0.5

 

$

515.2

 

 

 

 

 

 

 

 

 

 

 

December 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agency securities

 

$

54.7

 

$

 

$

 

$

54.7

 

Commercial paper

 

375.5

 

0.1

 

 

375.6

 

Corporate obligations

 

220.8

 

 

0.1

 

220.7

 

Auction rate securities

 

186.4

 

 

 

186.4

 

Total marketable securities

 

$

837.4

 

$

0.1

 

$

0.1

 

$

837.4

 

 

NOTE 4 — EARNINGS PER SHARE

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of employee stock options, SSARs, restricted stock units and restricted common stock.

Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share,” requires that employee equity share options, non-vested shares and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options, which is calculated based on the average share price for each fiscal period using the

 

9



 

treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

 

Dollar and share amounts in millions, except per

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

share amounts

 

2007

 

2006

 

2007

 

2006

 

Numerator:

 

 

 

 

 

 

 

 

 

Income (loss) attributed to common shares:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(54.6

)

$

12.3

 

$

(106.2

)

$

153.4

 

Loss from discontinued operations

 

(13.2

)

(2.8

)

(22.2

)

(5.1

)

Net income (loss)

 

$

(67.8

)

$

9.5

 

$

(128.4

)

$

148.3

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic — weighted average common shares outstanding

 

103.6

 

104.9

 

104.0

 

105.5

 

Dilutive effect of stock plans

 

 

0.3

 

 

0.5

 

Diluted shares outstanding

 

103.6

 

105.2

 

104.0

 

106.0

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.52

)

$

0.12

 

$

(1.02

)

$

1.45

 

Loss from discontinued operations

 

(0.13

)

(0.03

)

(0.21

)

(0.04

)

Net income (loss) per share

 

$

(0.65

)

$

0.09

 

$

(1.23

)

$

1.41

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.52

)

$

0.12

 

$

(1.02

)

$

1.45

 

Loss from discontinued operations

 

(0.13

)

(0.03

)

(0.21

)

(0.05

)

Net income (loss) per share

 

$

(0.65

)

$

0.09

 

$

(1.23

)

$

1.40

 

Stock options and SSARs to purchase approximately 2.8 million shares for the quarter and 2.4 million shares for the nine month period ended September 30, 2007 were not included in the computation of diluted earnings (loss) per share due to LP’s net loss position in continuing operations.  Stock options and SSARs to purchase approximately 1.3 million shares for the quarter and nine month period ended September 30, 2006 were considered anti-dilutive for purposes of LP’s earnings per share calculation due to the exercise price being greater than the average fair market price.

NOTE 5 — INVENTORIES

Inventories are valued at the lower of cost or market. Inventory cost includes materials, labor and operating overhead. The LIFO (last-in, first-out) method is used for certain log inventories with remaining inventories valued at FIFO (first-in, first-out) or average cost. The major types of inventories are as follows (work in process is not material):

 

10


 


 

Dollar amounts in millions

 

 

 

 

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

 

 

Logs

 

$

38.6

 

$

54.9

 

Other raw materials

 

27.4

 

28.9

 

Finished products

 

151.2

 

133.6

 

Supplies

 

7.6

 

7.0

 

LIFO reserve

 

(2.3

)

(2.8

)

Total

 

$

222.5

 

$

221.6

 

 

 

 

 

 

 

Inventory included in current assets of discontinued operations

 

 

 

 

 

Logs

 

$

 

$

 

Other raw materials

 

1.5

 

4.3

 

Finished products

 

8.3

 

19.7

 

Supplies

 

0.3

 

0.5

 

Total

 

$

10.1

 

$

24.5

 

 

NOTE 6 — BUSINESSES HELD FOR SALE AND DIVESTITURES

At September 30, 2007 and 2006 and for the first nine months of 2007 and 2006, LP’s discontinued operations included its decking operations and residual charges from previously discontinued operations.

Sales and losses for these businesses are as follows:

Dollar amounts in millions

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

4.8

 

$

7.5

 

$

28.0

 

$

46.0

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

$

(13.2

)

$

(2.8

)

$

(22.2

)

$

(5.1

)

 

In the second quarter of 2007, LP recorded a loss of $9.5 million associated with impairment charges on assets held for sale to reduce the carrying value of these assets to their estimated sales price, which approximates the estimated fair market value of such assets, net of related selling expenses.

In the third quarter of 2007, LP recorded an additional loss of $7.5 million associated with impairment charges on assets held for sale to reduce the carrying value of these assets to their estimated sales price, which approximates the estimated fair market value of such assets, net of related selling expenses. Also, LP recorded a $3.5 million loss on an executed take or pay contract associated with this business. LP recorded a $1 million charge associated with the anticipated settlement of an environmental issue on a previously closed site.

The assets of the discontinued operations included in the accompanying condensed consolidated balance sheets as of September 30, 2007 and December 31, 2006 are as follows:

 

11



 

Dollar amounts in millions

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

 

 

Inventories

 

$

10.1

 

$

24.5

 

 

 

 

 

 

 

Property, plant and equipment

 

44.6

 

59.4

 

Accumulated depreciation

 

(19.6

)

(18.1

)

Net, property, plant and equipment

 

25.0

 

41.3

 

 

 

 

 

 

 

Other long-term assets

 

 

3.3

 

 

 

 

 

 

 

Total long-term assets of discontinued operations

 

25.0

 

44.6

 

 

 

 

 

 

 

Total assets of discontinued operations

 

$

35.1

 

$

69.1

 

 

NOTE 7 — INCOME TAXES

Accounting standards require that income tax expense be determined by applying the estimated annual effective tax rate (based upon estimated annual amounts of taxable income and expense) by income component for the year to year-to-date income or loss at the end of each quarter, further adjusted by any changes in reserve requirements or the impact of statutory tax rate changes, if any.  Each quarter the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted in the current quarter. 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Continuing operations

 

$

(92.1

)

$

8.7

 

$

(185.9

)

$

213.1

 

Discontinued operations

 

(21.4

)

(4.5

)

(36.2

)

(8.3

)

 

 

(113.5

)

4.2

 

(222.1

)

204.8

 

Total tax provision (benefit)

 

(45.7

)

(5.3

)

(93.7

)

56.5

 

Net income (loss)

 

$

(67.8

)

$

9.5

 

$

(128.4

)

$

148.3

 

For the nine months ended September 30, 2007, the primary differences between the U.S. statutory rate of 35% and the effective rate on continuing operations relates to the Company’s foreign debt structure, state income taxes and the favorable resolution of an outstanding state tax contingency. For the nine months ended September 30, 2006, the primary differences between the U.S. statutory rate of 35% and the effective rate on continuing operations relates to the Company’s foreign debt structure, state income taxes, and a second quarter reduction in LP’s Canadian deferred tax liabilities due to an enacted decrease in the statutory income tax rate.

The components and associated estimated effective income tax rates applied to the nine month periods ended September 30, 2007 and 2006 are as follows:

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

Tax Benefit

 

Tax Rate

 

Tax Provision (Benefit)

 

Tax Rate

 

Continuing operations

 

$

(79.7

)

43

%

$

59.7

 

28

%

Discontinued operations

 

(14.0

)

39

%

(3.2

)

39

%

 

 

$

(93.7

)

42

%

$

56.5

 

28

%

 

LP adopted FIN 48 on January 1, 2007. As a result of the implementation, LP recorded $12.9 million as a FIN 48 liability for unrecognized tax positions of which $0.3 million (net of federal benefit on state issues) would impact

 

12



 

LP’s effective tax rate if recognized.  This FIN 48 liability is recorded in “Other long-term liabilities” in the Condensed Consolidated Balance Sheets as of September 30, 2007. The implementation also resulted in a $1.2 million decrease to LP’s January 1, 2007 balance of retained earnings. LP does not expect to recognize any decrease in unrecognized tax benefits in the ensuing twelve months.

LP and its domestic subsidiaries are subject to U.S. federal income tax as well as income taxes of multiple state jurisdictions.  Its foreign subsidiaries are subject to income tax in Canada and Chile. U.S. federal income tax examinations for the years through 2004 have been effectively settled. LP has been advised that a U.S. federal audit for 2005 and 2006 will begin in the fourth quarter of 2007. LP is subject to state and local income tax examinations for the tax years 2000 through 2006. Canadian returns have been audited through 1999 and Revenue Canada began an examination of the years 2002 through 2004 during the second quarter of 2007.

LP’s policy is to record interest paid or received with respect to income taxes as interest expense or interest income, respectively, in the Consolidated Statements of Income. Penalties related to unrecognized tax benefits or assessments are charged to income tax expense. Upon the adoption of FIN 48, LP recorded $0.9 million of interest expense (net of tax benefit) as a reduction to retained earnings and no penalties.  During the first nine months of 2007, an additional $0.9 million was accrued as interest expense.

NOTE 8 — OTHER OPERATING CREDITS AND CHARGES, NET

The major components of  “Other operating credits and charges, net” in the Consolidated Statements of Income for the quarter and nine month periods ended September 30, 2007 and 2006 are reflected in the table below and are described in the paragraphs following the table:

 

 

 

 

 

 

 

 

 

 

Dollar amounts in millions

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Timber recovery

 

$

 

$

 

$

1.5

 

$

 

Insurance settlement / recovery

 

0.6

 

2.8

 

18.3

 

2.8

 

Other

 

0.1

 

0.1

 

0.1

 

 

 

 

$

0.7

 

$

2.9

 

$

19.9

 

$

2.8

 

In the second quarter of 2007, LP recorded a gain of $17.7 million associated with a favorable verdict on a legal suit associated with our insurance on hardboard siding and a gain of $1.5 million associated with a settlement with the Canadian government on the reduction of certain of LP’s timber licenses in British Columbia.

In the third quarter of 2007, LP recorded a further gain of $0.6 million associated with a favorable verdict on a legal suit associated with our insurance on hardboard siding.

In the third quarter of 2006, LP recorded a gain of $2.8 million from an insurance recovery related to the hurricanes which occurred in the third and fourth quarter of 2005. LP received an additional $1.9 million in insurance recoveries related to these hurricanes in the fourth quarter of 2006.

NOTE 9 — GAIN (LOSS) ON SALE OR IMPAIRMENT OF LONG-LIVED ASSETS

The major components on “Gain (loss) on sale or impairment of long-lived assets” in the Consolidated Statements of Income for the quarter and nine month periods ended September 30, 2007 and 2006 are reflected in the following table:

 

13



 

Dollar amounts in millions

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on sale of long-lived assets

 

$

0.5

 

$

 

$

0.3

 

$

 

Impairment charges on long-term assets

 

(48.9

)

(0.9

)

(53.9

)

(0.9

)

 

 

$

(48.4

)

$

(0.9

)

$

(53.6

)

$

(0.9

)

In the first quarter of 2007, LP recorded an impairment charge of $5.0 million on a sawmill located in Quebec that is held for sale to reduce its carrying value to its estimated sales price, which approximates the estimated fair market value, net of related selling expenses.

In the third quarter of 2007, LP recorded a charge of $1.5 million to reduce the carrying value of a LVL mill located in Hines, Oregon to the estimated sales prices less selling costs and a charge of $47.3 million to reduce the carrying value of an Eastern Canadian OSB mill and associated timber assets to their net realizable value.

In the third quarter of 2006, LP recorded an impairment charge of $0.9 million on manufacturing equipment that is held for sale to reduce the carrying value of this equipment to its estimated sales price, net of related selling expenses.

NOTE 10 — INVESTMENTS IN AND ADVANCES TO AFFILIATES

LP has investments in affiliates that are either accounted for under the equity method or the cost method based upon the specific terms of the agreement as well as advances to affiliates. The significant components of these investments and advances are as follows:

Dollar amounts in millions

 

 

 

 

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

 

 

Investments accounted for under the equity method

 

$

161.0

 

$

168.4

 

Investments accounted for under the cost method

 

44.5

 

44.5

 

Total

 

$

205.5

 

$

212.9

 

 

At September 30, 2007, LP’s significant equity method investees and its ownership interest and principal business activity in each investee, were as follows:

 

 

Ownership %

 

U.S. GreenFiber

50%

Established to manufacture and sell cellulose insulation products

Abitibi — LP

50%

Established to construct and operate I-Joist facilities in Quebec, Canada

Canfor — LP

50%

Established to construct and operate an OSB facility in British Columbia, Canada

These investments do not meet the Regulation S-X significance test requiring the inclusion of the separate investee financial statements or summarized financial information.

LP sells products and raw materials to the Abitibi-LP entity and purchases products for resale from the Abitibi-LP and Canfor-LP entities. LP eliminates profits on these sales and purchases, to the extent the inventory has not been sold through to third parties, on the basis of its 50% interest.  For the quarters ended September 30, 2007 and 2006, LP sold $3.7 million and $3.4 million of products to Abitibi-LP and purchased $18.0 million and $16.0 million of I-joist from Abitibi-LP.  LP also purchased $23.7 million and $19.7 million of OSB from Canfor-LP during the quarters ended September 30, 2007 and 2006.   For the nine months ended September 30, 2007 and 2006, LP sold

 

14



 

$11.0 million and $21.0 million of products to Abitibi-LP and purchased $54.9 million and $69.7 million of I-joist from Abitibi-LP.  LP also purchased $60.5 million and $64.5 million of OSB from Canfor-LP during the nine months ended September 30, 2007 and 2006.

NOTE 11 — SELECTED SEGMENT DATA

LP operates in three segments: Oriented Strand Board (OSB); Siding; and Engineered Wood Products (EWP). LP’s business units have been aggregated into these three segments based upon the similarity of economic characteristics, customers and distribution methods. LP’s results of operations 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, 2006.

 

Dollar amounts in millions

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

% change

 

2007

 

2006

 

% change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

OSB

 

$

228.0

 

$

275.7

 

(17

)

$

640.1

 

$

1,028.0

 

(38

)

Siding

 

122.2

 

137.1

 

(11

)

357.2

 

406.6

 

(12

)

Engineered Wood Products

 

92.5

 

92.7

 

 

258.4

 

315.0

 

(18

)

Other

 

32.2

 

21.5

 

50

 

80.0

 

69.6

 

15

 

Less: Intersegment sales

 

(2.4

)

 

 

 

(7.4

)

 

 

 

 

 

$

472.5

 

$

527.0

 

(10

)

$

1,328.3

 

$

1,819.2

 

(27

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

OSB

 

$

(31.7

)

$

(9.3

)

(241

)

$

(140.8

)

$

164.0

 

(186

)

Siding

 

11.3

 

19.0

 

(41

)

37.9

 

60.7

 

(38

)

Engineered Wood Products

 

3.3

 

8.3

 

(60

)

13.6

 

28.6

 

(52

)

Other

 

(3.5

)

(1.1

)

(218

)

(4.3

)

8.5

 

(151

)

Other operating credits and charges, net

 

0.7

 

2.9

 

(76

)

19.9

 

2.8

 

611

 

Gain (loss) on sales of and impairment of long-lived assets

 

(48.4

)

(0.9

)

(5278

)

(53.6

)

(0.9

)

(5856

)

General corporate and other expenses, net

 

(21.5

)

(23.7

)

9

 

(64.6

)

(75.2

)

14

 

Foreign currency losses

 

(15.0

)

(0.2

)

(7400

)

(30.5

)

(8.7

)

(251

)

Investment income

 

20.4

 

24.9

 

(18

)

64.2

 

72.2

 

(11

)

Interest expense, net of capitalized interest

 

(7.7

)

(11.2

)

31

 

(27.7

)

(38.9

)

29

 

Income (loss) from operations before taxes

 

(92.1

)

8.7

 

(1159

)

(185.9

)

213.1

 

(187

)

Provision (benefit) for income taxes

 

(37.5

)

(3.6

)

 

 

(79.7

)

59.7

 

 

 

Income (loss) from continuing operations

 

$

(54.6

)

$

12.3

 

(544

)

$

(106.2

)

$

153.4

 

(169

 

NOTE 12 — 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 assets based upon the anticipated cash flows that result from estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures. However, should the markets for the relevant products continue to remain at levels significantly below cycle average pricing or should LP decide to invest capital in alternative projects, it is possible that impairment charges will be required.

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.

 

15


 


 

NOTE 13 — CONTINGENCY RESERVES

LP is involved in various legal proceedings incidental to LP’s business and is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates. LP maintains reserves for these various contingencies as follows:

 

Dollar amounts in millions

 

September 30, 2007

 

December 31, 2006

 

Environmental reserves

 

$

9.5

 

$

7.7

 

Hardboard siding reserves

 

16.1

 

25.3

 

Other reserves

 

1.5

 

1.6

 

Total contingency reserves

 

27.1

 

34.6

 

Current portion of contingency reserves

 

(9.0

)

(9.0

)

Long-term portion of contingency reserves

 

$

18.1

 

$

25.6

 

 

Hardboard Siding Reserves

LP has established reserves relating to certain liabilities associated with products manufactured that were the subject of a nationwide class action lawsuit. This settlement agreement relates to a nationwide class action suit involving hardboard siding manufactured or sold by corporations acquired by LP in 1999 and installed prior to May 15, 2000 and was approved by the applicable courts in 2000. This settlement is discussed in greater detail in the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2006.

Additional Siding Matters

On October 15, 2002, a jury returned a verdict of $29.6 million against LP in a Minnesota State Court action entitled Lester Building Systems, a division of Butler Manufacturing Company, and Lester’s of Minnesota, Inc., v. Louisiana-Pacific Corporation and Canton Lumber Company. On December 13, 2002, the District of Oregon, which maintains jurisdiction over a previously settled nationwide class action suit involving OSB siding manufactured by us and installed prior to January 1, 1996, permanently enjoined the Minnesota state trial court from entering judgment against us with respect to $11.2 million of the verdict that related to siding that was subject to the nationwide OSB siding settlement.  LP satisfied this verdict, less the enjoined amount, during the second quarter of 2004. Lester’s appealed the District Court’s injunction to the Ninth Circuit Court of Appeals and, on October 24, 2005, the Court of Appeals decided in a 2 to 1 decision to vacate the District Court’s injunction.   As a result of this decision, the injunction was lifted and the state court judgment of $11.2 million was entered on December 22, 2006.  On January 19, 2007, LP filed its notice of appeal to the Minnesota State Court of Appeals. Based upon the information currently available, LP believes that any further liability related to this case is remote and, accordingly, has not recorded any accrual with respect to its potential exposure.

Lockhart Wood Treatment Facility

During the third quarter of 2004, LP received a pre-litigation settlement demand letter from a law firm purporting to represent more than 1,400 potential plaintiffs who allegedly experienced various personal injuries and property damages as a result of the alleged release of chemical substances from LP’s wood treatment facility in Lockhart, Alabama during the period from 1953 to 1998.  The letter was also addressed to Pactiv Corporation (“Pactiv”), from whom LP acquired the facility in 1983. LP, Pactiv, and the potential plaintiffs agreed to exchange information and enter into non-binding mediation, which failed in December 2005.  In the months following the failed mediation, plaintiffs’ attorneys filed 19 separate lawsuits purporting to represent a total of 1,429 plaintiffs. Each of these cases was filed in, or removed to, the Federal District Court of Alabama which court has designated a lead case under the caption Melanie Chambers v. Pactiv Corp et al, CV 2:06-CV-00083-LES-CSC.  Due to the numerous uncertainties associated with the matters alleged in the letter and subsequent lawsuits, including uncertainties regarding the existence, nature, magnitude and causation of the alleged wrongful death, injuries and property damage, responsibility therefore and defenses thereto, LP is not presently able to quantify LP’s financial exposure, if any, relating to such matters.  LP intends to defend these suits vigorously.

 

16



 

Antitrust Litigation

LP has been named as one of a number of defendants in multiple class action complaints filed on or after February 26, 2006 in the United States District Court for the Eastern District of Pennsylvania.  These complaints have been dismissed or consolidated into two complaints under one caption:  In Re OSB Anti-Trust Litigation, Master File No. 06-CV-00826 (PD). The first complaint is a consolidated amended class action complaint filed on March 31, 2006 on behalf of plaintiffs who directly purchased OSB from the defendants from May 1, 2002 through the date the complaint was filed (the direct purchaser complaint).  The second complaint is a consolidated amended class action complaint, filed on June 15, 2006, on behalf of plaintiffs who indirectly purchased OSB from the defendants from May 1, 2002 through the date the complaint was filed (the indirect purchaser complaint).

The plaintiffs, in both amended and consolidated complaints described above, moved for and received class certification and seek treble damages in unspecified amounts alleged to have resulted from a conspiracy among the defendants to fix, raise, maintain and stabilize the prices at which OSB is sold in the United States, in violation of Section 1 of the Sherman Act, 15 U.S.C. §1.  The plaintiffs in the indirect purchaser complaint also seek similar remedies under individual state anti-trust and competition laws as well as consumer protection laws.  LP believes that the claims asserted are without merit, and intends to defend this matter vigorously.  LP is unable to predict the potential financial impact of these actions.

Other Proceedings

LP and its 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 the financial position, results of operations, cash flows or liquidity of LP.

NOTE 14 — 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 month periods ended September 30, 2007 and 2006. The net periodic pension cost included the following components:

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

Dollar amounts in millions

 

2007

 

2006

 

2007

 

2006

 

Service cost

 

$

2.6

 

$

2.5

 

$

7.5

 

$

7.5

 

Interest cost

 

4.0

 

3.9

 

11.9

 

11.7

 

Expected return on plan assets

 

(4.8

)

(4.6

)

(14.3

)

(13.8

)

Amortization of prior service cost

 

0.3

 

0.3

 

0.9

 

0.9

 

Amortization of net loss

 

1.5

 

1.9

 

4.5

 

5.7

 

Net periodic pension cost

 

$

3.6

 

$

4.0

 

$

10.5

 

$

12.0

 

 

Through September 30, 2007, LP recognized $10.5 million of pension expense for all of LP’s defined benefit plans. LP presently anticipates recognizing, assuming no curtailment or settlement expenses are required, an additional $3.6 million of pension expense in the remainder of 2007 for a total of $14.1 million.

Through September 30, 2007, LP made $9.5 million of pension contributions for all of LP’s defined benefit plans. LP presently anticipates making up to $0.5 million of additional pension contributions for the plans during the remainder of 2007.

NOTE 15 — GUARANTEES AND INDEMNIFICATIONS

LP is a party to contracts in which LP agrees to indemnify third parties for certain liabilities that arise out of or relate to the subject matter of the contract. In some cases, this indemnity extends to liabilities arising out of the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct of the indemnified parties. LP cannot estimate the potential amount of future payments under these agreements until events arise that would trigger the liability. See Note 20 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2006 for further discussion of LP’s guarantees and indemnifications.

 

17



 

Additionally, 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 first nine months of 2007 and 2006 are summarized in the following table: 

 

 

 

 

 

 

Dollar amounts in millions

 

September 30, 2007

 

September 30, 2006

 

Beginning balance, December 31,

 

$

28.8

 

$

32.3

 

Accrued to expense

 

2.6

 

3.7

 

Payments made

 

(3.8

)

(5.3

)

Total warranty reserves

 

27.6

 

30.7

 

Current portion of warranty reserves

 

(7.0

)

(7.0

)

Long-term portion of warranty reserves

 

$

20.6

 

$

23.7

 

 

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 Condensed Consolidated Balance Sheets.

NOTE 16 — RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB finalized SFAS 157, “Fair Value Measurements” (SFAS 157) which will become effective in 2008. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of SFAS 157 will be applied prospectively to fair value measurements and disclosures beginning in the first quarter of 2008 and is not expected to have a material effect on LP’s Consolidated Financial Statements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115,” (SFAS 159) which will become effective in 2008. SFAS 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings.  LP will adopt this Statement in fiscal year 2008 and is currently evaluating if it will elect the fair value option for any of its eligible financial instruments and other items.

 

18



 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

Our products are used primarily in new home construction, repair and remodeling, and manufactured housing.  We also market and sell our products in light industrial and commercial construction and we have a modest export business for some of our building products. Our manufacturing facilities are primarily located in the U.S. and Canada, but we also operate a facility in Chile and are in the process of completing construction of a second facility in Chile.

To serve these markets, we operate in three segments:  Oriented Strand Board (OSB), Siding, and Engineered Wood Products (EWP). OSB is the most significant segment, accounting for more than 48% of sales during the nine month period ended September 30, 2007 and for 56% of sales in the nine month period ended September 30, 2006.

Our most significant product, 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 products will remain at current levels or increase or decrease in the future.  However, industry analysts have predicted that the expectation of new capacity coupled with lower new housing activity will likely lead to continued low pricing for at least the next twelve months. During the first nine months of 2007, commodity OSB prices were significantly lower as compared to the same period in the prior year.

For additional factors affecting our results, refer to the Management Discussion and Analysis overview contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

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, 2006 is a discussion of our significant accounting policies and significant accounting estimates and judgments.  The discussion of each of the policies and estimates outlines the specific accounting treatment related to each of these accounting areas.

Accounting Policies

There are several policies that we have adopted and implemented from among acceptable alternatives that could lead to different financial results had another policy been chosen:

Inventory valuation.  We use the LIFO (last-in, first-out) method for some of our log inventories with the remaining inventories valued at FIFO (first-in, first-out) or average cost. Our inventories would have been approximately $2.3 million higher if the LIFO inventories were valued at average cost as of September 30, 2007.

Property, plant and equipment.  We principally use the units of production method of depreciation for machinery and equipment. This method amortizes the cost of machinery and equipment over the estimated units that will be produced during its estimated useful life.

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 2007, 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 analyses of potential outcomes

 

19



 

based on experience to date and the experience of third parties who 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 contingencies 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, 2007, we excluded from our estimates approximately $0.6 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. 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, impairments are recognized when the book values exceed our estimate of the undiscounted future net cash flows associated with the affected assets. The key assumptions in estimating these cash flows include future production volumes and pricing of commodity or specialty products and future estimates of expenses to be incurred. 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. These prices are estimated from information gathered from industry research firms, research reports published by investment analysts and other published forecasts. Our estimates of expenses are based upon our long-range internal planning models and our expectation that we will continue to reduce product costs that will partially offset inflationary impacts.

When impairment is indicated, the book values of the assets to be held and used are written down to their estimated fair value, which is generally based upon discounted future cash flows. Assets to be disposed of 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

 

 

20



 

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, 2007, we had established valuation allowances against certain deferred tax assets, primarily related to foreign tax credit carryovers and credit carryovers and foreign capital loss carryovers. We have not established valuation allowances against other deferred tax assets based upon expected future taxable income and/or tax strategies planned to mitigate the risk of impairment of these assets. 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.

Goodwill. Goodwill and other intangible assets that are deemed to have an indefinite life are no longer amortized. However, these indefinite life assets are tested for impairment on an annual basis, and otherwise when indicators of impairment are determined to exist, by applying a fair value based test.  The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgments at many points during the analysis.  In testing for potential impairment, the estimated fair value of the reporting unit, as determined based upon cash flow forecasts, is compared to the book value of the reporting unit. The key assumptions in estimating these cash flows include future production volumes and pricing of commodity products and future estimates of expenses to be incurred. 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. These prices are estimated from information gathered from industry research firms, research reports published by investment analysts and other published forecasts. Our estimates of expenses are based upon our long-range internal planning models and our expectation that we will reduce product costs that will offset inflationary impacts. 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, if any, are subject to substantial uncertainties. Consequently, as additional information becomes known, we may change our estimates significantly.

Pension Plans.  Most of our U.S. employees and some 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. See further discussion related to pension plans below under the heading “Defined Benefit Pension Plans” and in Note 13 of the Notes to the financial statements included in item 8 of our Annual Report on Form 10-K for the year ended December 31, 2006.

Workers’ Compensation. We are self-insured for workers’ compensation in most U.S. states.  We account for 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 rates at which future values should be discounted to determine present values, expected future health care costs and other matters.  The amounts of our liabilities and related expenses recorded in our financial statements would differ if we used other assumptions.

 

 

21



 

RESULTS OF OPERATIONS

(Dollar amounts in tables in millions)

Our net loss for the third quarter of 2007 was $68 million, or $0.65 per diluted share, on sales of $473 million, compared to net income for the third quarter of 2006 of $9.5 million, or $0.09 per diluted share, on sales of $527 million. For the third quarter of 2007, loss from continuing operations was $55 million, or $0.52 per diluted share, compared to income from continuing operations of $12.3 million, or $0.12 per diluted share, for the third quarter of 2006.

Our net loss for the nine months ended September 30, 2007 was $128 million, or $1.23 per diluted share, on sales of $1.3 billion, compared to net income for the nine months ended September 30, 2006 of $148 million, or $1.40 per diluted share, on sales of $1.8 billion. For the nine months ended September 30, 2007, loss from continuing operations was $106 million, or $1.02 per diluted share, compared to income from continuing operations of $153 million, or $1.45 per diluted share, for the nine months ended September 30, 2006.

Our results of operations for each of our segments are discussed below as well as for the “other” category, which comprises products that are not individually significant.

OSB

Our OSB segment manufactures and distributes commodity and value-added OSB structural panels.

Segment sales, profits and depreciation, amortization and cost of timber harvested for this segment are as follows:

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

Net sales

 

$

228

 

$

276

 

(17

)%

$

640

 

$

1,028

 

(38

)%

Operating profits (losses)

 

$

(32

)

$

(9

)

(241

)%

$

(141

)

$

164

 

(186

)%

Depreciation, amortization and cost of timber harvested

 

$

16

 

$

20

 

 

 

$

50

 

$

62

 

 

 

Percent changes in average sales prices and unit shipments for the quarter and nine months ended September 30, 2007 compared to the quarter and nine months ended September 30, 2006 are as follows:

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007 versus 2006

 

2007 versus 2006

 

 

 

Average Net

 

Unit

 

Average Net

 

Unit

 

 

 

Selling Price

 

Shipments

 

Selling Price

 

Shipments

 

Commodity OSB

 

(4

)%

(9

)%

(32

)%

(8

)%

 

OSB prices declined for the third quarter and first nine months of 2007 as compared to the corresponding periods of 2006 due to weakening of housing demand coupled with increased industry capacity. The impact of the reduction in selling price accounted for a decrease in net sales and operating profits of approximately $8 million for the quarter and $269 million for the nine month period.  For the quarter and nine month periods ended September 30, 2007 as compared to the corresponding periods of 2006, the decline in sales volume is due to three factors: our St. Michel, Quebec OSB mill was curtailed throughout the first nine months of 2007 (with permanent closure announced in October 2007), production outages caused by wood shortages and maintenance aberrations, the effect of the CN Railroad strike (primarily in the first quarter) and planned capital outtages. These declines were partially offset by higher production from our Peace Valley joint venture mill.

Compared to the third quarter and first nine months of 2006, the primary factor, along with the reduced sales price, for decreased operating profits was the increase in our Canadian dollar denominated manufacturing costs; curtailed operations and increases in the petroleum based raw materials. The Canadian dollar has strengthened significantly since the first nine months of 2006, which causes our Canadian production costs stated in U.S. dollars to increase.

 

 

22



 

SIDING

Our siding segment produces and markets wood-based siding and related accessories and interior hardboard products, together with commodity OSB products from one mill which can produce both OSB and OSB-based exterior products.

Segment sales, profits and depreciation, amortization and cost of timber harvested for this segment are as follows:

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

Net sales

 

$

122

 

$

137

 

(11

)%

$

357

 

$

407

 

(12

)%

Operating profits

 

$

11

 

$

19

 

(41

)%

$

38

 

$

61

 

(38

)%