LPX-2011.6.30-10Q


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 June 30, 2011
Commission File Number 1-7107
 
 LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
93-0609074
(State or other jurisdiction of
incorporation or organization)
 
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filers” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
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: 132,151,000 shares of Common Stock, $1 par value, outstanding as of July 27, 2011.
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, capacity expansion and other growth initiatives 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;
•
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, Australian dollar, EURO, Brazilian real 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 existing and future product related litigation and other legal proceedings; and
•
acts of public authorities, war, civil unrest, natural disasters, fire, floods, earthquakes, inclement weather 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 June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
Net sales
$
362.4

 
$
447.5

 
$
694.1

 
$
744.5

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
336.3

 
346.3

 
631.3

 
614.3

Depreciation and amortization
20.2

 
22.4

 
41.6

 
42.8

Selling and administrative
27.6

 
29.4

 
56.4

 
59.5

(Gain) loss on sale or impairment of long-lived assets, net
2.5

 
(0.1
)
 
8.0

 
1.2

Other operating credits and charges, net
(0.6
)
 
0.6

 
(1.4
)
 
0.5

Total operating costs and expenses
386.0

 
398.6

 
735.9

 
718.3

Income (loss) from operations
(23.6
)
 
48.9

 
(41.8
)
 
26.2

Non-operating income (expense):
 
 
 
 
 
 
 
Interest expense, net of capitalized interest
(14.4
)
 
(17.7
)
 
(28.4
)
 
(34.5
)
Investment income
3.5

 
4.3

 
7.5

 
10.2

Other non-operating items
0.6

 
(0.1
)
 
2.4

 
1.4

Total non-operating expense
(10.3
)
 
(13.5
)
 
(18.5
)
 
(22.9
)
Income (loss) from continuing operations before taxes and equity in losses of unconsolidated affiliates
(33.9
)
 
35.4

 
(60.3
)
 
3.3

Provision (benefit) for income taxes
(8.4
)
 
12.7

 
(15.2
)
 
2.4

Equity in loss (income) of unconsolidated affiliates
7.4

 
(0.9
)
 
10.7

 
(0.2
)
Income (loss) from continuing operations
(32.9
)
 
23.6

 
(55.8
)
 
1.1

Loss from discontinued operations before taxes
(4.1
)
 
(2.0
)
 
(4.1
)
 
(2.3
)
Benefit for income taxes
(1.6
)
 
(0.8
)
 
(1.6
)
 
(0.9
)
Loss from discontinued operations
(2.5
)
 
(1.2
)
 
(2.5
)
 
(1.4
)
Net income (loss)
(35.4
)
 
22.4

 
(58.3
)
 
(0.3
)
Less: Net income (loss) attributed to non-controlling interest
0.1

 
0.1

 
0.2

 
(0.1
)
Net income (loss) attributed to Louisiana-Pacific Corporation
$
(35.5
)
 
$
22.3

 
$
(58.5
)
 
$
(0.2
)
Net income (loss) per share of common stock (basic):
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.25
)
 
$
0.18

 
$
(0.43
)
 
$
0.01

Loss from discontinued operations
(0.02
)
 
(0.01
)
 
(0.02
)
 
(0.01
)
Net income (loss) per share
$
(0.27
)
 
$
0.17

 
$
(0.45
)
 
$
—

Net income (loss) per share of common stock (diluted):
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.25
)
 
$
0.17

 
$
(0.43
)
 
$
0.01

Loss from discontinued operations
(0.02
)
 
(0.01
)
 
(0.02
)
 
(0.01
)
Net income (loss) per share
$
(0.27
)
 
$
0.16

 
$
(0.45
)
 
$
—

Average shares of stock outstanding - basic
131.4

 
128.5

 
131.3

 
127.2

Average shares of stock outstanding - diluted
131.4

 
139.8

 
131.3

 
138.2

Amounts attributed to LP Corporation common shareholders
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
(33.0
)
 
$
23.5

 
$
(56.0
)
 
$
1.2

Loss from discontinued operations, net of tax
(2.5
)
 
(1.2
)
 
(2.5
)
 
(1.4
)
 
$
(35.5
)
 
$
22.3

 
$
(58.5
)
 
$
(0.2
)
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)
 
 
June 30, 2011
 
December 31, 2010
ASSETS
 
 
 
Cash and cash equivalents
$
334.0

 
$
389.3

Receivables, net of allowance for doubtful accounts of $1.4 million at June 30, 2011 and $1.3 million at December 31, 2010
93.0

 
66.8

Income tax receivable
14.0

 
18.7

Inventories
173.9

 
151.9

Prepaid expenses and other current assets
8.6

 
5.6

Deferred income taxes
16.4

 
23.4

Assets held for sale
51.5

 
57.9

Total current assets
691.4

 
713.6

Timber and timberlands
44.9

 
46.8

Property, plant and equipment, at cost
2,124.9

 
2,112.5

Accumulated depreciation
(1,237.9
)
 
(1,195.4
)
Net property, plant and equipment
887.0

 
917.1

Notes receivable from asset sales
533.5

 
533.5

Long-term investments
19.6

 
15.4

Restricted cash
14.7

 
31.1

Investments in and advances to affiliates
103.4

 
110.0

Intangible assets, net of amortization
1.8

 
2.2

Deferred debt costs
9.6

 
10.1

Other assets
25.9

 
24.9

Long-term deferred tax asset
4.6

 
5.9

Total assets
$
2,336.4

 
$
2,410.6

LIABILITIES AND EQUITY
 
 
 
Current portion of long-term debt
$
2.9

 
$
0.2

Short-term notes payable
4.5

 
—

Accounts payable and accrued liabilities
127.3

 
127.8

Current portion of contingency reserves
7.0

 
7.0

Total current liabilities
141.7

 
135.0

Long-term debt, excluding current portion
716.8

 
714.5

Contingency reserves, excluding current portion
25.1

 
25.9

Other long-term liabilities
130.6

 
129.8

Deferred income taxes
151.1

 
164.8

Redeemable non-controlling interest
—

 
22.8

Stockholders’ equity:
 
 
 
Common stock
145.0

 
144.8

Additional paid-in capital
557.8

 
559.4

Retained earnings
804.6

 
863.1

Treasury stock
(279.8
)
 
(279.9
)
Accumulated comprehensive loss
(56.5
)
 
(69.6
)
Total stockholders’ equity
1,171.1

 
1,217.8

Total liabilities and stockholders’ equity
$
2,336.4

 
$
2,410.6

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)
 
 
Quarter Ended June 30,

Six Months Ended June 30,
 
2011

2010

2011

2010
CASH FLOWS FROM OPERATING ACTIVITIES:







Net income (loss)
$
(35.4
)

$
22.4


$
(58.3
)

$
(0.3
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:







Depreciation and amortization
20.2


22.4


41.6


42.8

(Gain) loss from unconsolidated affiliates
7.4


(0.9
)

10.7


(0.2
)
(Gain) loss on sale or impairment of long-lived assets
2.5


(0.1
)

8.0


1.2

Other operating credits and charges, net
(1.5
)

2.8


(1.5
)

2.7

Exchange loss on remeasurement
0.2


(0.3
)

2.7


0.2

Cash settlement of contingencies
(0.4
)
 
(1.0
)
 
(0.9
)
 
(3.4
)
Pension (payments) expense, net
0.4


1.4


0.4


3.4

Stock-based compensation expense
1.3


2.2


4.8


5.4

Other adjustments, net
7.2


1.6


7.6


3.5

Decrease (increase) in receivables
5.8


(14.3
)

(24.7
)

(50.7
)
Decrease (increase) in income tax receivable
13.4


(9.7
)

4.7


37.4

Decrease (increase) in inventories
29.2


19.4


(20.6
)

(24.2
)
Decrease (increase) in prepaid expenses
(5.3
)

(5.8
)

(2.9
)

(1.6
)
Increase (decrease) in accounts payable and accrued liabilities
(4.0
)

7.6


(2.3
)

8.6

Increase (decrease) in deferred income taxes
(11.6
)

20.0


(8.3
)

10.8

Net cash provided by (used in) operating activities
29.4


67.7


(39.0
)

35.6

CASH FLOWS FROM INVESTING ACTIVITIES:







Property, plant and equipment additions
(5.6
)

(3.5
)

(8.0
)

(5.4
)
Investments and advances to joint ventures
(1.1
)

8.2


(3.1
)

6.1

Proceeds from sales of assets
0.3


1.2


0.3


1.2

Receipt of proceeds from notes receivable
—


115.1


—


115.1

Decrease in restricted cash under letters of credit/credit facility requirements
8.1


5.3


16.4


5.2

Other investing activities, net
—


(0.4
)

—


—

Net cash provided by investing activities
1.7


125.9


5.6


122.2

CASH FLOWS FROM FINANCING ACTIVITIES:











Repayment of long term debt
(0.1
)

(113.8
)

(0.1
)

(113.8
)
Short term borrowings
4.5


—


4.5


—

Redemption of non-controlling interest
(24.0
)

—


(24.0
)

—

Payment of debt issuance fees
(1.0
)

—


(1.0
)

—

Net cash used in financing activities
(20.6
)

(113.8
)

(20.6
)

(113.8
)
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
2.3


(0.1
)

(1.3
)

(1.0
)
Net increase (decrease) in cash and cash equivalents
12.8


79.7


(55.3
)

43.0

Cash and cash equivalents at beginning of period
321.2


357.4


389.3


394.1

Cash and cash equivalents at end of period
$
334.0


$
437.1


$
334.0


$
437.1

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)
 
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Comprehensive
Loss
 
Total
Stockholders'
Equity
 
Redeemable
Non  Controlling
Interest
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, December 31, 2010
144.8

 
$
144.8

 
12.9

 
$
(279.9
)
 
$
559.4

 
$
863.1

 
$
(69.6
)
 
$
1,217.8

 
$
22.8

Net income (loss)
—

 
—

 
—

 
—

 
—

 
(58.5
)
 
—

 
(58.5
)
 
0.2

Issuance of shares for employee stock plans and other purposes and other transactions
—

 
—

 
(0.2
)
 
0.1

 
(0.6
)
 
—

 
—

 
(0.5
)
 
—

Compensation expense associated with stock awards
—

 
—

 
—

 
—

 
4.4

 
—

 
—

 
4.4

 
—

Warrants exercised
0.2

 
0.2

 
—

 
—

 
(0.2
)
 
—

 
—

 
—

 
—

Redemption of redeemable non-controlling interest
—

 
—

 
—

 
—

 
(5.2
)
 
—

 
5.6

 
0.4

 
(24.0
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
7.5

 
7.5

 
1.0

Balance, June 30, 2011
145.0

 
$
145.0

 
12.7

 
$
(279.8
)
 
$
557.8

 
$
804.6

 
$
(56.5
)
 
$
1,171.1

 
$
—

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 June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
Net income (loss)
$
(35.4
)
 
$
22.4

 
$
(58.3
)
 
$
(0.3
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
4.9

 
(2.3
)
 
4.3

 
(4.7
)
Unrealized gain (loss) on derivative instruments
0.8

 
0.2

 
0.6

 
0.1

Unrealized gain (loss) on marketable securities
0.4

 
(1.3
)
 
2.6

 
4.8

Defined benefit pension plans:
 
 
 
 
 
 
 
Amortization of prior service cost
0.7

 
—

 
1.0

 
—

Amortization of net loss
—

 
0.9

 
—

 
1.5

Other comprehensive income (loss), net of tax
6.8

 
(2.5
)
 
8.5

 
1.7

Net (income) loss attributable to noncontrolling interest
(0.1
)
 
(0.1
)
 
(0.2
)
 
0.1

Foreign currency translation adjustments attributed to non-controlling interest
(0.6
)
 
—

 
(1.0
)
 
0.4

Comprehensive income (loss)
$
(29.3
)
 
$
19.8

 
$
(51.0
)
 
$
1.9

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

7


NOTES TO UNAUDITED CONDENSED 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, except for other operating credits and charges, net referred to in Note 10) 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. For those consolidated subsidiaries in which LP’s ownership interest is less than 100%, the outside shareholders’ interests are shown as non-controlling interest. 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, 2010.
NOTE 2 – STOCK-BASED COMPENSATION
At June 30, 2011, LP had stock-based employee compensation plans as described below. The total compensation expense related to all of LP’s stock-based compensation plans was $1.3 million for the quarter ended June 30, 2011 as compared to $2.2 million for the quarter ended June 30, 2010 and $4.8 million for the six months ended June 30, 2011 as compared to $5.4 million for the six months ended June 30, 2010.
Stock Compensation Plans
LP grants options and stock settled stock appreciation rights (SSARs) to key employees and directors to purchase LP common stock. On exercise or issuance, LP generally issues these shares from treasury. The options and SSARs are granted at market price at the date of grant. For employees, SSARs become exercisable ratably over a three year period and expire ten years after the date of grant. For directors, these options become exercisable in 10% increments every three months, starting three months after the date of grant, and expire ten years after the date of grant. At June 30, 2011, 4,715,177 shares were available under the current stock award plans for stock-based awards.
The following table sets out the weighted average assumptions used to estimate the fair value of the options and SSARs granted using the Black-Scholes option-pricing model in the first six months of the respective years noted:
 
 
2011
 
2010
Expected stock price volatility
63.9
%
 
59.5
%
Expected dividend yield
—

 
—

Risk-free interest rate
2.1
%
 
2.4
%
Expected life of options
5.16

 
5.13

Weighted average fair value of options and SSARs granted
$
5.62

 
$
3.73


The following table summarizes stock options and SSARs outstanding as of June 30, 2011 as well as activity during the six month period then ended.
 
Share amounts in thousands
Options and
SSARs
 
Weighted Average
Exercise Price
 
Weighted
Average
Contractual
Term (in years)
 
Aggregate Intrinsic
Value (in millions)
Options / SSARs outstanding at January 1, 2011
7,580

 
$
13.10

 
 
 
 
SSARs granted
813

 
10.12

 
 
 
 
Options / SSARs exercised
(18
)
 
4.93

 
 
 
 
Options /SSARs cancelled
(47
)
 
14.14

 
 
 
 
Options / SSARs outstanding at June 30, 2011
8,328

 
$
12.82

 
6.8

 
$
12.0

Vested and expected to vest at June 30, 2011
7,912

 
—

 
—

 
$
11.4

Options / SSARs exercisable at June 30, 2011
6,136

 
$
14.96

 
—

 
$
7.5

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between LP's closing stock price on the last trading day of the second quarter of 2011 and the exercise price, multiplied by the number of in-the-money options and SSARs) that would have been received by the holders had all holders exercised their awards on June 30,

8


2011. This amount changes based on the market value of LP's stock as reported by the New York Stock Exchange.
As of June 30, 2011, there was $1.5 million of total unrecognized compensation costs related to stock options and SSARs. These costs are expected to be recognized over a weighted-average period of 1.7 years. LP recorded compensation expense related to these awards in the first six months of 2011 of $2.7 million.
Incentive Share Awards
LP has granted incentive share stock awards (restricted stock units) to certain key employees as allowed under the current stock award plans. The awards entitle the participant to receive a specified number of shares of LP common stock at no cost to the participant. The market value of these grants approximates the fair value. LP recorded compensation expense related to these awards in the first six months of 2011 of $1.4 million. As of June 30, 2011, there was $3.4 million of total unrecognized compensation cost related to unvested incentive share awards. This expense will be recognized over a weighted-average period of 1.5 years.
The following table summarizes incentive share awards outstanding as of June 30, 2011 as well as activity during the six months then ended.
 
 
Shares
 
Weighted
Average
Contractual Term
(in years)
 
Aggregate
Intrinsic Value
(in millions)
Incentive share awards outstanding at January 1, 2011
955,936

 
 
 
 
Incentive share awards granted
300,816

 
 
 
 
Incentive share awards vested
(121,500
)
 
 
 
 
Incentive share awards cancelled
(32,117
)
 
 
 
 
Incentive share awards outstanding at June 30, 2011
1,103,135

 
1.50

 
$
9.0

Vested and expected to vest at June 30, 2011
1,047,978

 
1.50

 
$
8.6

Incentive share awards exercisable at June 30, 2011
—

 
—

 
—


Restricted Stock
LP grants restricted stock to certain senior employees. The shares vest three years from the date of grant. During the vesting period, the participants have voting rights and receive dividends, but the shares may not be sold, assigned, transferred, pledged or otherwise encumbered. Additionally, granted but unvested shares are generally forfeited upon termination of employment. The fair value of the restricted shares on the date of the grant is amortized ratably over the vesting period which is generally three years. As of June 30, 2011, there was $2.6 million of total unrecognized compensation costs related to restricted stock. This expense will be recognized over the next 1.3 years.
The following table summarizes the restricted stock outstanding as of June 30, 2011 as well as activity during the six months then ended.
 
 
Six Months Ended June 30, 2011
 
Number of Shares
 
Weighted Average
Grant Date
Fair Value
Restricted stock awards outstanding at January 1, 2011
783,289

 
$
6.31

Restricted stock awards granted
139,239

 
10.30

Restrictions lapsing
(171,800
)
 
15.27

Restricted stock awards at June 30, 2011
750,728

 
$
5.00

LP recorded compensation expense related to these awards in the first six months of 2011 of $0.7 million.
Through 2010, LP annually granted to each director restricted stock or restricted stock units. As of June 30, 2011, LP had 750,728 shares (or restricted stock units) outstanding under this program.
Phantom stock
Beginning in 2011, LP annually grants phantom stock units to its directors. The director does not receive rights of a

9


shareholder, nor is any stock transfered. The units will be paid out in cash at the end of the five year vesting period. The value of one unit is based on the market value of one share of common stock on the vesting date. The cost of the grants is recognized over the vesting period and is included in stock-based compensation expense. As of June 30, 2011, LP had 39,944 shares outstanding under this program.
NOTE 3 – FAIR VALUE MEASUREMENTS
LP’s investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant non-observable inputs.

Dollar amounts in millions
June 30, 2011
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Available for sale securities
$
19.6

 
$
—

 
$
4.4

 
$
15.2

Trading securities
2.8

 
2.8

 
—

 
—

Total
$
22.4

 
$
2.8

 
$
4.4

 
$
15.2

Dollar amounts in millions
December 31, 2010
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Available for sale securities
$
15.4

 
$
—

 
$
3.8

 
$
11.6

Trading securities
2.6

 
2.6

 
—

 
—

Total
$
18.0

 
$
2.6

 
$
3.8

 
$
11.6


Available for sale securities measured at fair value as of June 30, 2011 and December 31, 2010 are recorded in cash and cash equivalents, long-term investments and restricted cash on LP’s consolidated balance sheets. Included in available for sale securities are auction rate securities (ARS).
Due to the lack of observable market quotations on a portion of LP’s ARS portfolio, LP evaluates the structure of its ARS holdings and current market estimates of fair value, including fair value estimates from issuing banks that rely exclusively on Level 3 inputs. These inputs include those that are based on expected cash flow streams and collateral values, including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of LP’s ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact LP’s valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. Subsequent to June 30, 2011, LP generated $18.7 million in cash plus accrued interest associated with the sale of these securities with a fair market value as of June 30, 2011 of $18.5 million ($35.9 million, par value). This sale will result in a gain of $14.4 million which LP will recorded in the third quarter of 2011.
Trading securities consist of rabbi trust financial assets which are recorded in other assets in LP’s consolidated balance sheets. The rabbi trust holds the assets of the Louisiana-Pacific Corporation 2004 Executive Deferred Compensation Plan (EDC), a non-qualified deferred compensation plan which allows certain management employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds. The assets of the rabbi trust are invested in mutual funds and are reported at fair value based on active market quotations, which represent Level 1 inputs.
The following table summarizes assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods ended June 30, 2010 and June 30, 2011.


10


Dollar amounts in millions
Available for
sale  securities
Balance at December 31, 2009
$
26.3

Total realized/unrealized gains (losses) included in other comprehensive income
7.8

Balance at June 30, 2010
$
34.1

The amount of total losses for the period included in net loss attributable to the fair value of changes in assets still held at June 30, 2010
$
—

 
 
Balance at December 31, 2010
$
11.6

Total realized/unrealized gains (losses) included in other comprehensive income
3.6

Balance at June 30, 2011
$
15.2

The amount of total losses for the period included in net loss attributable to the fair value of changes in assets still held at June 30, 2011
$
—


Carrying amounts reported on the balance sheet for cash, cash equivalents, receivables and accounts payable approximate fair value due to the short-term maturity of these investments.
During the quarter ended March 31, 2010, LP recorded an impairment charge of $1.1 million to reduce the carrying value of the assets held for sale to the estimated selling price less selling cost. The valuation of these assets was determined using level one inputs under the market approach.
During the quarter ended March 31, 2011, LP recorded an impairment charge of $3.6 million to reduce the carrying value of the assets held for sale to the estimated selling price less selling cost. The valuation of these assets was determined using level one inputs under the market approach. Additionally, LP recorded an impairment charge of $1.9 million on assets no longer used.
During the quarter ended June 30, 2011, LP recorded an impairment charge of $2.5 million on assets no longer used.
NOTE 4 – EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings per share are based upon the weighted-average number of shares of common stock outstanding plus all potentially dilutive securities that were assumed to be converted into common shares at the beginning of the period under the treasury stock method. This method requires that the effect of potentially dilutive common stock equivalents (employee stock options, stock settled stock appreciation rights, incentive shares and warrants) be excluded from the calculation of diluted earnings per share for the periods in which losses from continuing operations are reported because the effect is anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share:


11


Dollar and share amounts in millions, except per
share amounts
Quarter Ended June 30,
 
Six Months Ended June 30,
2011
 
2010
 
2011
 
2010
Numerator:
 
 
 
 
 
 
 
Loss attributed to LP common shares:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(33.0
)
 
$
23.5

 
$
(56.0
)
 
$
1.2

Loss from discontinued operations
(2.5
)
 
(1.2
)
 
(2.5
)
 
(1.4
)
Net income (loss)
$
(35.5
)
 
$
22.3

 
$
(58.5
)
 
$
(0.2
)
Denominator:
 
 
 
 
 
 
 
Basic - weighted average common shares outstanding
131.4

 
128.5

 
131.3

 
127.2

Dilutive effect of stock warrants
—

 
9.5

 
—

 
9.3

Dilutive effect of stock plans
—

 
1.8

 
—

 
1.7

Diluted shares outstanding
131.4

 
139.8

 
131.3

 
138.2

Basic earnings per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.25
)
 
$
0.18

 
$
(0.43
)
 
$
0.01

Loss from discontinued operations
(0.02
)
 
(0.01
)
 
(0.02
)
 
(0.01
)
Net income (loss) per share
$
(0.27
)
 
$
0.17

 
$
(0.45
)
 
$
—

Diluted earnings per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.25
)
 
$
0.17

 
$
(0.43
)
 
$
0.01

Loss from discontinued operations
(0.02
)
 
(0.01
)
 
(0.02
)
 
(0.01
)
Net income (loss) per share
$
(0.27
)
 
$
0.16

 
$
(0.45
)
 
$
—


For the quarter and six month period ended June 30, 2011, stock options, stock warrants and SSARs relating to approximately 9.0 million and 9.2 million shares of LP common stock were considered anti-dilutive for purposes of LP’s earnings per share calculation due to LP’s loss position from continuing operations. For the quarter and six month period ended June 30, 2010, stock options, stock warrants and SSARs relating to approximately 5.6 million and 5.4 million shares of LP common stock were considered anti-dilutive or not in-the-money for purpose of LP's earnings per share calculation
NOTE 5 – RECEIVABLES
Receivables consist of the following:
 
Dollar amounts in millions
June 30, 2011
 
December 31, 2010
Trade receivables
$
83.5

 
$
56.2

Interest receivables
1.1

 
1.1

Other receivables
9.8

 
10.8

Allowance of doubtful accounts
(1.4
)
 
(1.3
)
Total
$
93.0

 
$
66.8


Other receivables at June 30, 2011 and December 31, 2010 primarily consist of short-term notes receivable, settlements, Canadian sales tax receivables and other items.
NOTE 6 – INVENTORIES
Inventories are valued at the lower of cost or market. Inventory cost includes materials, labor and operating overhead. The major types of inventories are as follows (work in process is not material):
 

12


Dollar amounts in millions
June 30, 2011
 
December 31, 2010
Logs
$
26.7

 
$
22.4

Other raw materials
20.2

 
21.4

Finished products
118.3

 
100.3

Supplies
9.4

 
8.5

LIFO reserve
(0.7
)
 
(0.7
)
Total
$
173.9

 
$
151.9


NOTE 7 – ASSETS HELD FOR SALE
Over the last several years, LP has adopted and implemented plans to sell selected assets in order to improve its operating results. LP is required to classify assets held for sale which are not part of a discontinued business separately on the face of the financial statements outside of “Property, plant and equipment”. As of June 30, 2011 and December 31, 2010, LP included three OSB mills and various non-operating sites in its held for sale category. See Note 3 for discussion of impairments recorded on these assets. The current book values of assets held for sale by category is as follows:
 
Dollars in millions
June 30, 2011
 
December 31, 2010
Property, plant and equipment, at cost:
 
 
 
Land, land improvements and logging roads, net of road amortization
$
13.3

 
$
13.4

Buildings
22.2

 
24.5

Machinery and equipment
187.9

 
197.7

 
223.4

 
235.6

Accumulated depreciation
(171.9
)
 
(177.7
)
Net property, plant and equipment
$
51.5

 
$
57.9

NOTE 8 – INCOME TAXES
Accounting standards require that LP 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 bases of assets and liabilities. This method also requires the recognition of future tax benefits, such as net operating loss carry forwards 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 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. 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 to the current quarter.
For the first six months of 2011, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to state income taxes, the effect of foreign tax rates and increases in valuation allowances attributed to net operating loss carry forwards in various jurisdictions. For the first six months of 2010, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to state income taxes, the effect of foreign tax rates and a discrete adjustment for state income taxes.
The income tax components and associated effective income tax rates for the quarter and six months periods ended June 30, 2011 and 2010 are as follows:
 

13


 
Quarter Ended June 30,
 
2011
 
2010
Dollars in millions
Tax Benefit
 
Tax Rate
 
Tax Provision (Benefit)
 
Tax Rate
Continuing operations
$
(8.4
)
 
20
%
 
$
12.7

 
35
%
Discontinued operations
(1.6
)
 
39
%
 
(0.8
)
 
39
%
 
$
(10.0
)
 
22
%
 
$
11.9

 
35
%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2011
 
2010
 
Tax Benefit
 
Tax Rate
 
Tax Provision (Benefit)
 
Tax Rate
Continuing operations
$
(15.2
)
 
21
%
 
$
2.4

 
69
%
Discontinued operations
(1.6
)
 
39
%
 
(0.9
)
 
39
%
 
$
(16.8
)
 
22
%
 
$
1.5

 
115
%

LP and its domestic subsidiaries are subject to U.S. federal income tax as well as income taxes of multiple state jurisdictions. LP’s foreign subsidiaries are subject to income tax in Canada, Chile and Brazil. During 2011, the U.S. Internal Revenue Service initiated an audit of tax years 2007 through 2009. All U.S. federal audits of prior years have been completed. LP remains subject to state and local tax examinations for the tax years 2005 through 2010. LP’s Canadian income tax returns have been audited and effectively settled through 2004. Quebec provincial audits have been effectively settled through 2007. No Canadian federal or provincial audits are currently in progress.
If LP were to determine that it would not be able to realize a portion of an existing net deferred tax asset for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period in which such determination was made. Conversely, if it were to make a determination that it is more likely than not that an existing deferred tax asset for which there is currently a valuation allowance would be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded in the period in which such determination was made.
NOTE 9 – LONG-TERM DEBT
LP’s long-term debt consists of the following:
 
Dollars in millions
June 30, 2011
 
December 31, 2010
Debentures:
 
 
 
Senior secured notes, maturing 2017
$
186.4

 
$
183.5

Bank credit facilities:
 
 
 
Chilean term credit facility, maturing 2019, denominated in UF
44.2

 
42.3

Limited recourse notes payable:
 
 
 
Senior notes, payable 2012
7.9

 
7.9

Senior notes, payable 2013 - 2018
112.0

 
112.0

Other financing
 
 
 
Non-recourse notes, payable 2018
368.7

 
368.7

Other
0.5

 
0.3

Total
719.7

 
714.7

Less: current portion
(2.9
)
 
(0.2
)
Net long-term portion
$
716.8

 
$
714.5


LP issued $47.9 million of senior notes in 1997 in a private placement to institutional investors. The $7.9 million remaining notes are secured by $9.9 million in notes receivable from Sierra Pacific Industries and mature in 2012. In the event of a default by Sierra Pacific Industries, LP is fully liable for the notes payable with the underlying timberlands as security for the notes receivable.
LP issued $348.6 million of senior debt in 1998 in a private placement to institutional investors. The remaining $112.0 million

14


of these notes mature in principal amounts of $90.0 million in 2013 and $22.0 million in 2018. The remaining notes are secured by $113.7 million of notes receivable from Green Diamond Resource Company (Green Diamond). Pursuant to the terms of the notes payable, in the event of a default by Green Diamond, LP would be liable to pay only 10% of the indebtedness represented by the notes payable with the underlying timberlands as security for the notes receivable.
LP issued $368.7 million of senior debt in 2003 in a private placement to unrelated third parties. The notes mature in 2018. The notes are supported by a bank letter of credit. LP’s reimbursement obligations under the letter of credit are secured by $410 million in notes receivable from assets sales. In general, the creditors under this arrangement have no recourse to LP’s assets, other than the notes receivable. However, under certain circumstances, LP may be liable for certain liabilities (including liabilities associated with the marketing or remarketing of the notes payable and reimbursement obligations, which are fully cash collateralized under the letter of credit supporting the notes payable) in an amount not to exceed 10% of the aggregate principal amount of the notes receivable. LP’s maximum exposure in this regard was approximately $41 million as of June 30, 2011 and December 31, 2010.
In December 2009, LP entered into a term loan agreement with a Chilean bank. This loan is denominated in UF (inflation adjusted Chilean pesos) and is partially secured by property, plant and equipment in Chile. The loan will be repaid in 16 equal semi-annual payments beginning in June 2012 and ending December 2019. As of June 30, 2011, no principal payments have been made on this loan. Any increases or decreases in the loan balance shown are related to the change in the underlying foreign currency exchange rates or required inflation adjustments.
LP estimates the senior secured notes maturing in 2017 to have a fair value of $255.9 million as of June 30, 2011 and $263 million at December 31, 2010 based upon market quotations.
Additional descriptions of LP’s indebtedness are included in consolidated financial statements and the notes thereto included in LP’s Annual Report on Form 10-K for the year ended December 31, 2010.
NOTE 10 – 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 six month periods ended June 30, 2011 and 2010 are reflected in the table below and are described in the paragraphs following the table:
 
 
Quarter Ended June 30,
 
Six Months Ended June 30,
Dollar amounts in millions
2011
 
2010
 
2011
 
2010
Reversal of severance
$
—

 
$
—

 
$
—

 
$
0.1

Construction related legal reserves
—

 
(0.6
)
 
—

 
(0.6
)
Addition to environmental reserves
(0.9
)
 
—

 
(0.9
)
 
—

Timber related reserves
1.5

 
—

 
1.5

 
—

Settlement of legal claim
—

 
—

 
0.8

 
—

 
$
0.6

 
$
(0.6
)
 
$
1.4

 
$
(0.5
)

During the second quarter of 2011, LP recorded a gain of $1.5 million related to reductions in reforestation liabilities associated with LP's Canadian timber obligations and an increase of $0.9 million in environmental reserves associated with a facility currently held for sale.
During the first quarter of 2011, LP recorded a gain of $0.8 million related to an action against a previous claim inspector associated with LP’s hardboard class action for various states.
During the second quarter of 2010, LP recorded a loss of $0.6 million associated with an assessment in connection with its indefinitely curtailed OSB mills.
NOTE 11 – TRANSACTIONS WITH AFFILIATES
LP has equity investments in AbitibiBowater-LP (a manufacturer of I-joist) and Canfor-LP ( a manufacturer of OSB). LP sells products and raw materials to AbitibiBowater-LP and purchases products for resale from AbitibiBowater-LP and Canfor-LP. 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 June 30, 2011 and 2010, LP sold $1.5 million and $2.3 million of products to AbitibiBowater-LP and purchased $9.1 million and $13.3 million of I-joist from AbitibiBowater-LP. LP also purchased $21.9

15


million and $30.5 million of OSB from Canfor-LP during the quarters ended June 30, 2011 and 2010. For the six month periods ended June 30, 2011 and 2010, LP sold $2.9 million and $4.0 million of products to AbitibiBowater-LP and purchased $16.8 million and $24.0 million of I-joist from AbitibiBowater-LP. LP also purchased $46.5 million and $54.1 million of OSB from Canfor-LP during the six months ended June 30, 2011 and 2010. Included in LP’s Consolidated Balance Sheets at June 30, 2011 and December 31, 2010 are $1.9 million and $1.6 million in accounts receivable from these affiliates and $2.1 million and $2.4 million in accounts payable related to these affiliates.
NOTE 12 – LEGAL AND ENVIRONMENTAL MATTERS
Certain environmental matters and legal proceedings are discussed below.
Environmental Matters
LP maintains 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's estimates of its 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. LP regularly monitors its estimated exposure to environmental loss contingencies and, as additional information becomes known, may change its estimates significantly. However, no estimate of the range of any such change can be made at this time.
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 13 – 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, 2010.


16


 
Quarter Ended June 30,
 
Six Months Ended June 30,
Dollar amounts in millions
2011
 
2010
 
2011
 
2010
Net sales:
 
 
 
 
 
 
 
OSB
$
140.6

 
$
217.8

 
$
272.6

 
$
335.4

Siding
118.6

 
130.6

 
224.7

 
220.4

Engineered Wood Products
53.6

 
55.9

 
101.9

 
104.7

Other
49.9

 
47.6

 
95.8

 
88.9

Intersegment Sales
(0.3
)
 
(4.4
)
 
(0.9
)
 
(4.9
)
 
$
362.4

 
$
447.5

 
$
694.1

 
$
744.5

Operating profit (loss):
 
 
 
 
 
 
 
OSB
$
(22.9
)
 
$
47.9

 
$
(32.0
)
 
$
43.4

Siding
11.3

 
21.8

 
24.0

 
30.3

Engineered Wood Products
(3.2
)
 
(4.4
)
 
(8.7
)
 
(10.9
)
Other
2.2

 
3.7

 
5.3

 
3.7

Less intersegment profits
—

 
(0.5
)
 
—

 
(0.5
)
Other operating credits and charges, net
0.6

 
(0.6
)
 
1.4

 
(0.5
)
Gain (loss) on sale or impairment of long-lived assets
(2.5
)
 
0.1

 
(8.0
)
 
(1.2
)
General corporate and other expenses, net
(16.5
)
 
(18.2
)
 
(34.5
)
 
(37.9
)
Foreign currency gains (losses)
0.6

 
(0.1
)
 
2.4

 
1.4

Investment income
3.5

 
4.3

 
7.5

 
10.2

Interest expense, net of capitalized interest
(14.4
)
 
(17.7
)
 
(28.4
)
 
(34.5
)
Loss from continuing operations before taxes
(41.3
)
 
36.3

 
(71.0
)
 
3.5

Provision (benefit) for income taxes
(8.4
)
 
12.7

 
(15.2
)
 
2.4

Income (loss) from continuing operations
$
(32.9
)
 
$
23.6

 
$
(55.8
)
 
$
1.1

NOTE 14 – 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. As of June 30, 2011, the undiscounted cash flows for the facilities indefinitely curtailed support the conclusion that no impairment is necessary for those facilities. However, if demand and pricing for the relevant products continues at levels significantly below cycle average demand and 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.
NOTE 15 – CONTINGENCY RESERVES
LP maintains reserves for various contingent liabilities as follows:
 
Dollar amounts in millions
June 30, 2011
 
December 31, 2010
Environmental reserves
$
14.8

 
$
14.3

Hardboard siding reserves
17.2

 
17.8

Other reserves
0.1

 
0.8

Total contingency reserves
32.1

 
32.9

Current portion of contingency reserves
(7.0
)
 
(7.0
)
Long-term portion of contingency reserves
$
25.1

 
$
25.9



17


Hardboard Siding Reserves
LP has established reserves relating to certain liabilities associated with a settlement agreement resulting from a nationwide class action lawsuit involving hardboard siding manufactured or sold by corporations acquired by LP in 1999 and installed prior to May 15, 2000 which 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, 2010. LP believes that the reserve balance for this settlement at June 30, 2011 will be adequate to cover future payments to claimants and related administrative costs.
The activity in the portion of LP's loss contingency reserves relating to hardboard siding contingencies for the first six months of 2011 and 2010 are summarized in the following table.
 
Dollar amounts in millions
June 30, 2011
 
June 30, 2010
Beginning balance, December 31,
$
17.8

 
$
24.2

Payments made for claims
(0.4
)
 
(2.0
)
Payments made for administrative costs
(0.2
)
 
(0.8
)
Ending balance
$
17.2

 
$
21.4

NOTE 16 – DEFINED BENEFIT PENSION PLANS
The following table sets forth the net periodic pension cost for LP’s defined benefit pension plans during the quarter ended June 30, 2011 and 2010. The net periodic pension cost included the following components:
 
 
Quarter Ended June 30,
 
Six Months Ended June 30,
Dollar amounts in millions
2011
 
2010
 
2011
 
2010
Service cost
$
0.8

 
$
0.7

 
$
1.6

 
$
1.7

Interest cost
4.0

 
4.4

 
8.0

 
9.8

Expected return on plan assets
(4.5
)
 
(4.7
)
 
(9.0
)
 
(10.7
)
Amortization of prior service cost
0.1

 
0.1

 
0.2

 
0.2

Amortization of net loss
1.1

 
1.2

 
2.2

 
2.8

Net periodic pension cost
$
1.5

 
$
1.7

 
$
3.0

 
$
3.8


During the six months ended June 30, 2011 and 2010, LP recognized $3.0 million and $3.8 million of pension expense for all of LP’s defined benefit pension plans.
During the six months ended June 30, 2011, LP made no significant pension contributions for LP’s defined benefit plans. LP presently anticipates making approximately $10 to $12 million of pension contributions for the plans during the remainder of 2011.
NOTE 17 – 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 21 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2010 for further discussion of LP’s guarantees and indemnifications.
During the first quarter of 2011, LP provided a guarantee on behalf of one of its joint ventures to the joint venture bank lender of $1.5 million.
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 second quarter and first six months of 2011 and 2010 are summarized in the following table:


18


 
Quarter Ended June 30,
 
Six Months Ended June 30,
Dollar amounts in millions
2011
 
2010
 
2011
 
2010
Beginning balance
$
28.3

 
$
31.9

 
$
29.5

 
$
32.9

Accrued to expense
3.8

 
2.0

 
4.9

 
3.1

Payments made
(1.5
)
 
(3.3
)
 
(3.8
)
 
(5.4
)
Total warranty reserves
30.6

 
30.6

 
30.6

 
30.6

Current portion of warranty reserves
(10.0
)
 
(10.0
)
 
(10.0
)
 
(10.0
)
Long-term portion of warranty reserves
$
20.6

 
$
20.6

 
$
20.6

 
$
20.6


During the second quarter of 2011, LP increased the warranty reserves related to discontinued composite decking products by $3.8 million. The additional reserves reflect revised estimates of future claim payments based upon an increase in decking warranty claims related to a specific operation and specific time period. LP continues to monitor warranty and other claims associated with these products and believes as of June 30, 2011 that the reserves associated with these matters are adequate.
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 18 - NON-CONTROLLING INTEREST

On June 14, 2011, LP purchased the remaining 25% ownership of LP Brazil from Massisa for a payment of $24.0 million. This amount was paid through general cash reserves as well as an increase in LP's short term notes payable of $4.5 million.

NOTE 19 - DISCONTINUED OPERATIONS
Over the last several years, 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 second quarter of 2011 is an increase in warranty reserves of $3.8 million associated with previously discontinued composite decking products based upon expected increases in warranty claim activity.
Included in the operating losses of discontinued operations for the second quarter of 2010 is a settlement with a customer associated with a previously discontinued product of $1.9 million.

NOTE 20 - RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial Accounting Standards Board ("FASB") amended Accounting Standards Codification ("ASC") 220, “Presentation of Comprehensive Income.” This amendment will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amended guidance, which must be applied retroactively, is effective for interim and annual periods beginning after December 15, 2011, with earlier adoption permitted. This Accounting Standards Update ("ASU") impacts presentation only and will have no effect on LP's financial condition, results of operations or cash flows.
In May 2011, the FASB amended ASC 820, "Fair Value Measurement." This amendment is intended to result in convergence between U.S. GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. This guidance clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The amendment is effective for interim and annual periods beginning after December 15, 2011. Based upon initial assessment, LP does not believe the adoption of this amendment will have a material impact on its consolidated financial statements.

19



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. Our manufacturing facilities are primarily located in the U.S. and Canada, but we also operate two facilities in Chile and a Brazilian facility (the remaining 25% ownership interest of which was acquired during the second quarter of 2011).
To serve our markets, we operate in three segments: Oriented Strand Board (OSB), Siding, and Engineered Wood Products (EWP).
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. For the second quarter of 2011, the U.S. Department of Census reported that actual single and multi-family housing starts were 4% lower than for the second quarter of 2010. For the first six months of 2011, the U.S. Department of Census reported that actual single and multi-family housing starts were 5% lower than for the first six months of 2010. We believe the reduced level of building as compared to the first six months of 2010 is related to certain housing initiatives by the U.S. government in 2010 which were not in place in 2011. Building activity is unlikely to improve to “normal” levels until the number of homes available for sale is reduced, foreclosure activity subsides, employment grows and housing prices stabilize further.
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. For the second quarter of 2011 and first six months of 2011, OSB prices, as reported by Random Lengths, were 42% and 27% lower than the same periods in 2010.
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, 2010 and to “About Forward-Looking Statements” and “Risk Factors” in this report.
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, 2010 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 the second quarter of 2011, 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 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 June 30, 2011, we

20


excluded from our estimates approximately $1.3 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 June 30, 2011, we had established valuation allowances against certain deferred tax assets, primarily related to state and foreign carryovers of net operating losses, credits and capital losses. We have not established valuation allowances against other deferred tax assets based upon tax strategies implemented or 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.
Auction Rate Securities: Our auction-rate securities represent interests in collateralized debt obligations, a portion of which are

21


supported by pools of residential and commercial mortgages, bank trust preferred notes and other securities. Historically, liquidity for these auction-rate securities was typically provided by an auction process that reset the applicable interest rate at pre-determined intervals, usually every 7, 28, 35 or 90 days. As of June 30, 2011, auction-rate securities that we hold had experienced multiple failed auctions as the amount of securities for sale exceeded the amount of purchase orders. Consequently, we have classified $19.6 million ($61.5 million, par value) of auction-rate securities as long-term available-for-sale securities.
Our estimates of the valuation of our current holdings of auction rate securities are based upon our evaluation of the structure of our auction rate securities and current market estimates of fair value, including fair value estimates from the issuing banks and indicative pricing from other parties. We review several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time a security is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer, and (iv) our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Due to the numerous variables associated with these judgments, both the precision and reliability of the resulting estimates of the related valuation allowance are subject to substantial uncertainties. We regularly monitor our estimated exposure to these investments and, as additional information becomes known, may change our estimates significantly.
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.
Workers’ Compensation. We are self insured for most of our U.S. employees’ workers compensation claims. 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.
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. In this report on Form 10-Q, we disclose earnings (loss) from continuing operations 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 sales or impairment of long lived assets, other operating charges and credits, other than temporary investment impairment, (gain) loss on early debt extinguishment 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 in this report on Form 10-Q 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 measures have material limitations as performance measures because they exclude interest expense, income tax (benefit) expense and depreciation and amortization which are necessary to

22


operate our business or which we otherwise incurred or experienced 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 Adjusted EBITDA from continuing operations:
 
(Dollar amounts in millions)
Three Months Ended June 30, 2011
OSB
 
Siding
 
EWP
 
Other
 
Corporate
 
Total
Sales
$
140.6

 
$
118.6

 
$
53.6

 
$
49.9

 
$
(0.3
)
 
$
362.4

Depreciation and amortization
9.4

 
3.9

 
3.1

 
3.3

 
0.5

 
20.2

Cost of sales and selling and administrative
148.6

 
103.4

 
53.7

 
42.5

 
15.7

 
363.9

Loss on sale or impairment of long lived assets
—

 
—

 
—

 
—

 
2.5

 
2.5

Other operating credits and charges, net
—

 
—

 
—

 
—

 
(0.6
)
 
(0.6
)
Total operating costs
158.0

 
107.3

 
56.8

 
45.8

 
18.1

 
386.0

Income (loss) from operations
(17.4
)
 
11.3

 
(3.2
)
 
4.1

 
(18.4
)
 
(23.6
)
Total non-operating income (expense)
 
 
 
 
 
 
 
 
(10.3
)
 
(10.3
)
Income (loss) before income taxes and equity in earnings of unconsolidated affiliates
(17.4
)
 
11.3

 
(3.2
)
 
4.1

 
(28.7
)
 
(33.9
)
Benefit for income taxes
 
 
 
 
 
 
 
 
(8.4
)
 
(8.4
)
Equity in loss of unconsolidated affiliates
5.5

 
—

 
—

 
1.9

 
—

 
7.4

Income (loss) from continuing operations
(22.9
)
 
11.3

 
(3.2
)
 
2.2

 
(20.3
)
 
(32.9
)
Reconciliation of income (loss) from continuing operations to adjusted EBITDA from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
(22.9
)
 
11.3

 
(3.2
)
 
2.2

 
(20.3
)
 
(32.9
)
Income tax benefit
—

 
—

 
—

 
—

 
(8.4
)
 
(8.4
)
Interest expense, net of capitalized interest
—

 
—

 
—

 
—

 
14.4

 
14.4

Depreciation and amortization
9.4

 
3.9

 
3.1

 
3.3

 
0.5

 
20.2

EBITDA from continuing operations
(13.5
)
 
15.2

 
(0.1
)
 
5.5

 
(13.8
)
 
(6.7
)
Stock based compensation expense
0.2

 
0.1

 
0.1

 
—

 
1.0

 
1.4

Loss on sale or impairment of long lived assets
 
 
 
 
 
 
 
 
2.5

 
2.5

Investment income
 
 
 
 
 
 
 
 
(3.5
)
 
(3.5
)
Other operating credits and charges, net
 
 
 
 
 
 
 
 
(0.6
)
 
(0.6
)
Adjusted EBITDA from continuing operations
$
(13.3
)
 
$
15.3

 
$
—

 
$
5.5

 
$
(14.4
)
 
$
(6.9
)

23


Three Months Ended June 30, 2010
(Dollar amounts in millions)
OSB
 
Siding
 
EWP
 
Other
 
Corporate
 
Total
Sales
$
217.8

 
$
130.6

 
$
55.9

 
$
47.6

 
$
(4.4
)
 
$
447.5

Depreciation and amortization
9.9

 
5.4

 
3.7

 
2.8

 
0.6

 
22.4

Cost of sales and selling and administrative
162.7

 
103.4

 
56.6

 
39.3

 
13.7

 
375.7

Gain on sale or impairment of long lived assets
—

 
—

 
—

 
—

 
(0.1
)
 
(0.1
)
Other operating credits and charges, net
—

 
—

 
—

 
—

 
0.6

 
0.6

Total operating costs
172.6

 
108.8

 
60.3

 
42.1

 
14.8

 
398.6

Income (loss) from operations
45.2

 
21.8

 
(4.4
)
 
5.5

 
(19.2
)
 
48.9

Total non-operating income (expense)
 
 
 
 
 
 
 
 
(13.5
)
 
(13.5
)
Income (loss) before income taxes and equity in earnings of unconsolidated affiliates
45.2

 
21.8

 
(4.4
)
 
5.5

 
(32.7
)
 
35.4

Provision for income taxes
 
 
 
 
 
 
 
 
12.7

 
12.7

Equity in (income) loss of unconsolidated affiliates
(2.7
)
 
—

 
—

 
1.8

 
—

 
(0.9
)
Income (loss) from continuing operations
47.9

 
21.8

 
(4.4
)
 
3.7

 
(45.4
)
 
23.6

Reconciliation of income (loss) from continuing operations to adjusted EBITDA from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
47.9

 
21.8

 
(4.4
)
 
3.7

 
(45.4
)
 
23.6

Provision for income taxes
—

 
—

 
—

 
—

 
12.7

 
12.7

Interest expense, net of capitalized interest
—

 
—

 
—

 
—

 
17.7

 
17.7

Depreciation and amortization
9.9

 
5.4

 
3.7

 
2.8

 
0.6

 
22.4

EBITDA from continuing operations
57.8

 
27.2

 
(0.7
)
 
6.5

 
(14.4
)
 
76.4

Stock based compensation expense
0.2

 
0.2

 
0.1

 
—

 
1.6

 
2.1

Gain on sale or impairment of long lived assets
 
 
 
 
 
 
 
 
(0.1
)
 
(0.1
)
Investment income