LPX-2013.9.30 - 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 September 30, 2013
Commission File Number 1-7107
LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
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| | |
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):
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| | | |
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: 141,121,253 shares of Common Stock, $1 par value, outstanding as of November 5, 2013.
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:
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• | changes in governmental fiscal and monetary policies and levels of employment; |
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• | changes in general economic conditions; |
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• | changes in the cost and availability of capital; |
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• | changes in the level of home construction activity; |
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• | changes in competitive conditions and prices for our products; |
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• | changes in the relationship between supply of and demand for building products; |
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• | changes in the relationship between supply of and demand for raw materials, including wood fiber and resins, used in manufacturing our products; |
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• | changes in the cost of and availability of energy, primarily natural gas, electricity and diesel fuel; |
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• | changes in other significant operating expenses; |
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• | changes in exchange rates between the U.S. dollar and other currencies, particularly the Canadian dollar, Australian dollar, Brazilian real and the Chilean peso; |
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• | changes in general and industry specific environmental laws and regulations; |
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• | changes in tax laws, and interpretations thereof; |
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• | changes in circumstances giving rise to environmental liabilities or expenditures; |
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• | the resolution of existing and future product related litigation and other legal proceedings; |
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• | governmental gridlock and curtailment of government services ans spending; and |
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• | 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.
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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, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net sales | $ | 507.4 |
| | $ | 462.1 |
| | $ | 1,605.5 |
| | $ | 1,237.3 |
|
Operating costs and expenses: | | | | | | | |
Cost of sales | 416.3 |
| | 364.4 |
| | 1,221.7 |
| | 1,026.9 |
|
Depreciation and amortization | 25.8 |
| | 18.8 |
| | 65.0 |
| | 55.5 |
|
Selling and administrative | 33.5 |
| | 30.5 |
| | 103.6 |
| | 92.1 |
|
(Gain) loss on sale or impairment of long-lived assets, net | 0.3 |
| | 4.3 |
| | (0.4 | ) | | 4.5 |
|
Other operating credits and charges, net | (16.1 | ) | | 1.2 |
| | (9.1 | ) | | 1.2 |
|
Total operating costs and expenses | 459.8 |
| | 419.2 |
| | 1,380.8 |
| | 1,180.2 |
|
Income from operations | 47.6 |
| | 42.9 |
| | 224.7 |
| | 57.1 |
|
Non-operating income (expense): | | | | | | | |
Interest expense, net of capitalized interest | (7.6 | ) | | (10.7 | ) | | (28.0 | ) | | (36.4 | ) |
Investment income | 1.7 |
| | 4.1 |
| | 8.3 |
| | 11.7 |
|
Early debt extinguishment | (0.8 | ) | | — |
| | (0.8 | ) | | (52.2 | ) |
Gain on acquisition | — |
| | — |
| | 35.9 |
| | — |
|
Other non-operating items | 1.0 |
| | 0.4 |
| | (3.3 | ) | | (2.3 | ) |
Total non-operating income (expense) | (5.7 | ) | | (6.2 | ) | | 12.1 |
| | (79.2 | ) |
Income (loss) from continuing operations before taxes and equity in (income) loss of unconsolidated affiliates | 41.9 |
| | 36.7 |
| | 236.8 |
| | (22.1 | ) |
Provision (benefit) for income taxes | 4.4 |
| | 7.7 |
| | 51.6 |
| | (5.6 | ) |
Equity in (income) loss of unconsolidated affiliates | — |
| | (2.0 | ) | | (11.3 | ) | | 2.6 |
|
Income (loss) from continuing operations | 37.5 |
| | 31.0 |
| | 196.5 |
| | (19.1 | ) |
Income from discontinued operations before taxes | 1.0 |
| | 0.5 |
| | 1.6 |
| | 2.8 |
|
Provision for income taxes | 0.4 |
| | 0.2 |
| | 0.6 |
| | 1.0 |
|
Income from discontinued operations | 0.6 |
| | 0.3 |
| | 1.0 |
| | 1.8 |
|
Net income (loss) | $ | 38.1 |
| | $ | 31.3 |
| | $ | 197.5 |
| | $ | (17.3 | ) |
Income (loss) per share of common stock (basic): | | | | | | | |
Income (loss) from continuing operations | $ | 0.27 |
| | $ | 0.23 |
| | $ | 1.41 |
| | $ | (0.14 | ) |
Income from discontinued operations | — |
| | — |
| | 0.01 |
| | 0.01 |
|
Net income (loss) per share | $ | 0.27 |
| | $ | 0.23 |
| | $ | 1.42 |
| | $ | (0.13 | ) |
Net income (loss) per share of common stock (diluted): | | | | | | | |
Income (loss) from continuing operations | $ | 0.26 |
| | $ | 0.22 |
| | $ | 1.36 |
| | $ | (0.14 | ) |
Income from discontinued operations | — |
| | — |
| | 0.01 |
| | 0.01 |
|
Net income (loss) per share | $ | 0.26 |
| | $ | 0.22 |
| | $ | 1.37 |
| | $ | (0.13 | ) |
| | | | | | | |
Average shares of stock outstanding - basic | 140.0 |
| | 137.1 |
| | 139.1 |
| | 136.9 |
|
Average shares of stock outstanding - diluted | 144.0 |
| | 142.6 |
| | 144.1 |
| | 136.9 |
|
| | | | | | | |
The accompanying notes are an integral part of these unaudited financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net income (loss) | $ | 38.1 |
| | $ | 31.3 |
| | 197.5 |
| | $ | (17.3 | ) |
Other comprehensive income (loss) | | | | | | | |
Foreign currency translation adjustments | 0.3 |
| | 2.9 |
| | (6.8 | ) | | 1.7 |
|
Unrealized loss on derivative instruments | (0.1 | ) | | (0.5 | ) | | (0.1 | ) | | (0.7 | ) |
Unrealized gain (loss) on marketable securities, net of reversals | (0.2 | ) | | 0.5 |
| | 1.0 |
| | 0.7 |
|
Defined benefit pension plans | 1.0 |
| | 0.7 |
| | 4.0 |
| | 2.7 |
|
Other comprehensive income (loss), net of tax | 1.0 |
| | 3.6 |
| | (1.9 | ) | | 4.4 |
|
| | | | | | | |
Comprehensive income (loss) | $ | 39.1 |
| | $ | 34.9 |
| | $ | 195.6 |
| | $ | (12.9 | ) |
The accompanying notes are an integral part of these unaudited financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
|
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
ASSETS | | | |
Cash and cash equivalents | $ | 669.5 |
| | $ | 560.9 |
|
Receivables, net of allowance for doubtful accounts of $1.1 million at September 30, 2013 and December 31, 2012 | 109.2 |
| | 82.7 |
|
Inventories | 225.0 |
| | 209.8 |
|
Other current assets | 10.2 |
| | 6.0 |
|
Deferred income taxes | 13.7 |
| | 12.3 |
|
Current portion of notes receivable from asset sales | — |
| | 91.4 |
|
Assets held for sale | 31.4 |
| | 32.5 |
|
Total current assets | 1,059.0 |
| | 995.6 |
|
Timber and timberlands | 72.2 |
| | 40.1 |
|
Property, plant and equipment, at cost | 2,214.3 |
| | 2,061.6 |
|
Accumulated depreciation | (1,350.3 | ) | | (1,310.8 | ) |
Net property, plant and equipment | 864.0 |
| | 750.8 |
|
Goodwill | 9.7 |
| | — |
|
Notes receivable from asset sales | 432.2 |
| | 432.2 |
|
Long-term investments | 3.8 |
| | 2.0 |
|
Restricted cash | 11.2 |
| | 12.0 |
|
Investments in and advances to affiliates | 4.2 |
| | 68.6 |
|
Deferred debt costs | 7.4 |
| | 9.2 |
|
Other assets | 33.8 |
| | 15.5 |
|
Long-term deferred tax asset | — |
| | 5.0 |
|
Total assets | $ | 2,497.5 |
| | $ | 2,331.0 |
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LIABILITIES AND EQUITY | | | |
Current portion of long-term debt | $ | 2.3 |
| | $ | 7.8 |
|
Current portion of limited recourse notes payable | — |
| | 90.0 |
|
Accounts payable and accrued liabilities | 173.5 |
| | 139.5 |
|
Current portion of contingency reserves | 2.0 |
| | 2.0 |
|
Total current liabilities | 177.8 |
| | 239.3 |
|
Long-term debt, excluding current portion | 763.3 |
| | 782.7 |
|
Contingency reserves, excluding current portion | 12.4 |
| | 12.8 |
|
Other long-term liabilities | 171.8 |
| | 168.8 |
|
Deferred income taxes | 148.4 |
| | 93.6 |
|
Stockholders’ equity: | | | |
Common stock | 152.0 |
| | 150.4 |
|
Additional paid-in capital | 505.7 |
| | 533.6 |
|
Retained earnings | 908.1 |
| | 710.6 |
|
Treasury stock | (232.2 | ) | | (252.9 | ) |
Accumulated comprehensive loss | (109.8 | ) | | (107.9 | ) |
Total stockholders’ equity | 1,223.8 |
| | 1,033.8 |
|
Total liabilities and stockholders’ equity | $ | 2,497.5 |
| | $ | 2,331.0 |
|
The accompanying notes are an integral part of these unaudited financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
| |
| |
| |
|
Net income (loss) | $ | 38.1 |
| | $ | 31.3 |
| | $ | 197.5 |
| | $ | (17.3 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | 25.8 |
| | 18.8 |
| | 65.0 |
| | 55.5 |
|
(Income) loss from unconsolidated affiliates | — |
| | (2.0 | ) | | (11.3 | ) | | 2.6 |
|
(Gain) loss on sale or impairment of long-lived assets | 0.3 |
| | 4.3 |
| | (0.4 | ) | | 4.5 |
|
Gain on acquisition | — |
| | — |
| | (35.9 | ) | | — |
|
Gain on sale of discontinued operation | (1.7 | ) | | — |
| | (1.7 | ) | | — |
|
Early debt extinguishment | 0.8 |
| | — |
| | 0.8 |
| | 52.2 |
|
Payment of long-term deposit | (17.1 | ) | | — |
| | (17.1 | ) | | — |
|
Other operating credits and charges, net | (16.1 | ) | | 1.2 |
| | (9.1 | ) | | 1.2 |
|
Stock-based compensation related to stock plans | 2.4 |
| | 1.8 |
| | 6.6 |
| | 6.4 |
|
Exchange (gain) loss on remeasurement | (0.4 | ) | | 5.7 |
| | (0.5 | ) | | 4.8 |
|
Cash settlement of contingencies | — |
| | (0.4 | ) | | (0.4 | ) | | (1.6 | ) |
Cash settlements of warranties | (3.4 | ) | | (3.0 | ) | | (7.7 | ) | | (6.9 | ) |
Pension expense, net of cash payments | (0.1 | ) | | 2.2 |
| | 2.5 |
| | 6.3 |
|
Non-cash interest expense, net | 1.2 |
| | 0.5 |
| | 1.8 |
| | 1.9 |
|
Other adjustments, net of acquisition | 0.3 |
| | (1.7 | ) | | 1.2 |
| | (0.3 | ) |
Changes in assets and liabilities, net of acquisition: | | | | | | | |
Increase in receivables | (7.9 | ) | | (2.8 | ) | | (25.8 | ) | | (38.3 | ) |
(Increase) decrease in inventories | 15.8 |
| | (5.6 | ) | | (12.3 | ) | | (41.6 | ) |
(Increase) decrease in other current assets | 1.7 |
| | 0.6 |
| | (4.3 | ) | | (2.4 | ) |
Increase in accounts payable and accrued liabilities | 17.1 |
| | 7.2 |
| | 26.0 |
| | 26.6 |
|
Increase (decrease) in deferred income taxes | 2.4 |
| | 7.7 |
| | 47.9 |
| | (4.8 | ) |
Net cash provided by operating activities | 59.2 |
| | 65.8 |
| | 222.8 |
| | 48.8 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
| |
| |
| |
|
Property, plant and equipment additions | (17.7 | ) | | (9.3 | ) | | (43.3 | ) | | (16.1 | ) |
Investments in and advances to joint ventures | — |
| | 8.8 |
| | 13.9 |
| | 6.6 |
|
Proceeds from sales of assets | 15.0 |
| | — |
| | 16.7 |
| | 9.1 |
|
Acquisition, net of cash acquired | — |
| | — |
| | (67.4 | ) | | — |
|
Receipt of proceeds from notes receivable | 91.4 |
| | — |
| | 91.4 |
| | — |
|
(Increase) decrease in restricted cash under letters of credit/credit facility | (0.7 | ) | | — |
| | 0.7 |
| | 1.0 |
|
Net cash provided by (used in) investing activities | 88.0 |
| | (0.5 | ) | | 12.0 |
| | 0.6 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
| |
|
| |
|
| |
|
|
Borrowings of long-term debt | — |
| | — |
| | — |
| | 350.0 |
|
Repayment of long-term debt | (109.5 | ) | | (0.2 | ) | | (113.1 | ) | | (242.3 | ) |
Taxes paid related to net share settlement of equity awards | — |
| | — |
| | (12.0 | ) | | — |
|
Payment of debt issuance fees | — |
| | — |
| | — |
| | (6.3 | ) |
Other, net | (0.1 | ) | | 0.8 |
| | (0.1 | ) | | 1.2 |
|
Net cash provided by (used in) financing activities | (109.6 | ) | | 0.6 |
| | (125.2 | ) | | 102.6 |
|
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS | 1.2 |
| | (2.5 | ) | | (1.0 | ) | | (1.5 | ) |
Net increase in cash and cash equivalents | 38.8 |
| | 63.4 |
| | 108.6 |
| | 150.5 |
|
Cash and cash equivalents at beginning of period | 630.7 |
| | 427.1 |
| | 560.9 |
| | 340.0 |
|
Cash and cash equivalents at end of period | $ | 669.5 |
| | $ | 490.5 |
| | $ | 669.5 |
| | $ | 490.5 |
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The accompanying notes are an integral part of these unaudited financial statements.
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 |
| Shares | | Amount | | Shares | | Amount | |
Balance, December 31, 2012 | 150.4 |
| | $ | 150.4 |
| | (11.9 | ) | | $ | (252.9 | ) | | $ | 533.6 |
| | $ | 710.6 |
| | $ | (107.9 | ) | | $ | 1,033.8 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 197.5 |
| | — |
| | 197.5 |
|
Issuance of shares for employee stock plans and stock-based compensation | — |
| | — |
| | 1.6 |
| | 32.7 |
| | (32.6 | ) | | — |
| | — |
| | 0.1 |
|
Taxes paid related to net share settlement of equity awards | — |
| | — |
| | (0.6 | ) | | (12.0 | ) | | — |
| | — |
| | — |
| | (12.0 | ) |
Exercise of warrants | 1.6 |
| | 1.6 |
| | — |
| | — |
| | (1.6 | ) | | — |
| | — |
| | — |
|
Compensation expense associated with stock awards | — |
| | — |
| | — |
| | — |
| | 6.3 |
| | — |
| | — |
| | 6.3 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1.9 | ) | | (1.9 | ) |
Balance, September 30, 2013 | 152.0 |
| | $ | 152.0 |
| | (10.9 | ) | | $ | (232.2 | ) | | $ | 505.7 |
| | $ | 908.1 |
| | $ | (109.8 | ) | | $ | 1,223.8 |
|
The accompanying notes are an integral part of these unaudited financial statements.
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. These 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, 2012. During the third quarter of 2013, LP sold its moulding operations and has included the results of operations of this business in discontinued operations for all periods presented.
NOTE 2 – STOCK-BASED COMPENSATION
At September 30, 2013, 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 $2.4 million for the quarter ended September 30, 2013 as compared to $1.8 million for the quarter ended September 30, 2012 and $6.6 million for the nine months ended September 30, 2013 and $6.4 million for the nine months ended September 30, 2012.
Stock Compensation Plans
LP grants options to purchase LP common stock and stock settled stock appreciation rights (SSARs) to key employees and directors. On exercise, LP generally issues shares from treasury to settle these awards. 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 historically have 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 September 30, 2013, 5.6 million 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 nine months of the respective years noted: |
| | | |
| 2013 | | 2012 |
Expected stock price volatility | 69.2% | | 63.6% |
Expected dividend yield | —% | | —% |
Risk-free interest rate | 0.9% | | 0.7% |
Expected life of options | 5 years | | 5 years |
Weighted average fair value of options and SSARs granted | $11.68 | | $4.75 |
The following table summarizes stock options and SSARs outstanding as of September 30, 2013, as well as activity during the nine 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, 2013 | 8,475 |
| | $ | 12.88 |
| | | | |
SSARs granted | 343 |
| | 20.49 |
| | | | |
Options / SSARs exercised | (1,854 | ) | | 9.03 |
| | | | |
Options /SSARs canceled | — |
| | — |
| | | | |
Options/SSARs outstanding at September 30, 2013 | 6,964 |
| | $ | 14.28 |
| | 5.2 |
| | $ | 37.4 |
|
Vested and expected to vest at September 30, 2013 | 6,615 |
| | — |
| | — |
| | $ | 35.5 |
|
Options/SSARS exercisable at September 30, 2013 | 5,724 |
| | $ | 14.72 |
| | — |
| | $ | 29.9 |
|
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 third quarter of 2013 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 September 30, 2013. This amount changes based on the market value of LP's stock as reported by the New York Stock Exchange.
As of September 30, 2013, there was $5.0 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 1.4 years. LP recorded compensation expense related to these awards in the first nine months of 2013 of $2.5 million.
Incentive Share Awards
LP has granted incentive share stock awards (restricted stock units) to certain key employees and directors. The employee awards vest three years from date of grant and awards to directors vest one year from date of grant. 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 at the time of grant approximates the fair value. LP recorded compensation expense related to these awards in the first nine months of 2013 of $2.0 million. As of September 30, 2013, there was $3.9 million of total unrecognized compensation cost related to unvested incentive share awards. This expense will be recognized over a weighted-average period of 1.1 years.
The following table summarizes incentive share awards outstanding as of September 30, 2013 as well as activity during the nine months then ended.
|
| | | | | | | | | |
| Shares | | Weighted Average Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) |
Incentive share awards outstanding at January 1, 2013 | 960,388 |
| | | | |
Incentive share awards granted | 158,474 |
| | | | |
Incentive share awards vested | (346,107 | ) | | | | |
Incentive share awards canceled | (478 | ) | | | | |
Incentive shares outstanding at September 30, 2013 | 772,277 |
| | 1.1 |
| | $ | 13.5 |
|
Vested and expected to vest at September 30, 2013 | 733,663 |
| | — |
| | $ | 12.8 |
|
Restricted Stock
LP grants restricted stock to certain senior employees. The shares for employees vest three years from the date of grant and for directors vest five years from 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 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. As of September 30, 2013, there was $2.9 million of total unrecognized compensation costs related to restricted stock. This expense will be recognized over the next 1.3 years. LP recorded compensation expense related to these awards in the first nine months of 2013 of $1.3 million.
The following table summarizes the restricted stock outstanding as of September 30, 2013 as well as activity during the nine months then ended. |
| | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Restricted stock awards outstanding at January 1, 2013 | 556,987 |
| | $ | 8.51 |
|
Restricted stock awards granted | 108,174 |
| | 20.49 |
|
Restrictions lapsed | (205,739 | ) | | 7.00 |
|
Restricted stock awards at September 30, 2013 | 459,422 |
| | $ | 12.01 |
|
LP annually grants to each director restricted stock units with a one year vesting period. As of September 30, 2013, LP has 93,179 shares (or restricted stock units) outstanding under this program. Compensation expense recognized in the first nine months of 2013 related to these grants was $0.2 million.
Performance share awards
In connection with Mr. Stevens' appointment to Chief Executive Officer on May 4, 2012, he was awarded 300,000 performance shares. LP recorded compensation expense related to these awards of $0.3 million in the first nine months of 2013. As of September 30, 2013, there was $0.9 million of total unrecognized compensation costs related to this award. This expense will be recognized over the next 2.6 years.
Phantom stock
During 2011 and 2012, LP made annual grants of phantom stock units to its directors. Subsequent to the approval of the 2013 Omnibus Plan, phantom stock units are no longer granted to directors. The director does not receive rights of a 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. Since these awards are settled in cash, such awards are required to be remeasured based upon the changes in LP's stock price. As of September 30, 2013, LP had 75,816 shares outstanding under this program. LP recorded compensation expense related to these awards of $0.3 million in the first nine months of 2013.
NOTE 3 – FAIR VALUE MEASUREMENTS
LP’s investments that are measured at fair value on a recurring basis are categorized below using the fair value hierarchy. LP also measures the contingent consideration associated with the business combination (as discussed further in Note 19) 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.
The following table summarizes assets and liabilities measured on a recurring basis for each of the three hierarchy levels presented below. |
| | | | | | | | | | | | | | | |
Dollar amounts in millions | September 30, 2013 | | 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 | $ | 3.8 |
| | $ | — |
| | $ | — |
| | $ | 3.8 |
|
Trading securities | 2.0 |
| | 2.0 |
| | — |
| | — |
|
Contingent consideration | 7.2 |
| | — |
| | — |
| | 7.2 |
|
Total | $ | 13.0 |
| | $ | 2.0 |
| | $ | — |
| | $ | 11.0 |
|
Dollar amounts in millions | December 31, 2012 | | 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 | $ | 2.0 |
| | $ | — |
| | $ | — |
| | $ | 2.0 |
|
Trading securities | 1.7 |
| | 1.7 |
| | — |
| | — |
|
Total | $ | 3.7 |
| | $ | 1.7 |
| | $ | — |
| | $ | 2.0 |
|
Due to the lack of observable market quotations on a portion of LP’s auction rate securities (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.
The following table summarizes changes in assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013 and 2012.
|
| | | | | | |
Dollar amounts in millions | Available for sale securities | Contingent consideration |
Balance at December 31, 2011 | $ | 0.7 |
| $ | — |
|
Total realized/unrealized gains included in other comprehensive income | 1.1 |
| — |
|
Balance at September 30, 2012 | $ | 1.8 |
| $ | — |
|
| | |
Balance at December 31, 2012 | $ | 2.0 |
| $ | — |
|
Contingent consideration pursuant to business combination (see Note 19) | — |
| 24.3 |
|
Adjustment to contingent consideration fair value | — |
| (17.3 | ) |
Total realized/unrealized gains included in other comprehensive income | 1.8 |
| — |
|
Foreign currency gain | — |
| 0.2 |
|
Balance at September 30, 2013 | $ | 3.8 |
| $ | 7.2 |
|
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 items.
During the third quarter of 2013, LP recognized a gain of $17.3 million as a fair value adjustment to the contingent consideration associated with a business combination (as discussed in Note 19). The fair value of the contingent
consideration was reduced during the third quarter of 2013 due to the decline in projected OSB prices and resulting reduction in the estimated payment obligation The fair value adjustment is recorded in Other Operating Credits and Charges, Net. This fair value was determined based upon the income approach using significant non-observable inputs such as projected OSB pricing taking into consideration volatility of such projections.
During the third quarter of 2012, LP recognized an impairment charge of $4.4 million on an OSB mill in Quebec, Canada, based upon a change in the plan of sale of various assets held for sale to reduce their carrying value to the estimated selling price less selling costs. The valuation of these assets was determined using Level 2 inputs under the market approach.
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 (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 LP recognizes losses from continuing operations or at such time that the exercise prices of such awards are in excess of the weighted average market price of LP's common stock during these periods because the effect is anti-dilutive. Performance share awards are included in the calculation of earnings per share using the contingently issuable method. The following table sets forth the computation of basic and diluted earnings per share:
|
| | | | | | | | | | | | | | | |
Dollar and share amounts in millions, except per share amounts | Quarter Ended September 30, | | Nine Months Ended September 30, |
2013 | | 2012 | | 2013 | | 2012 |
Numerator: | | | | | | | |
Income (loss) attributed to LP common shares: | | | | | | | |
Income (loss) from continuing operations | $ | 37.5 |
| | $ | 31.0 |
| | $ | 196.5 |
| | $ | (19.1 | ) |
Income from discontinued operations | 0.6 |
| | 0.3 |
| | 1.0 |
| | 1.8 |
|
Net income (loss) | $ | 38.1 |
| | $ | 31.3 |
| | $ | 197.5 |
| | $ | (17.3 | ) |
Denominator: | | | | | | | |
Basic - weighted average common shares outstanding | 140.0 |
| | 137.1 |
| | 139.1 |
| | 136.9 |
|
Dilutive effect of stock warrants | 1.8 |
| | 3.0 |
| | 2.5 |
| | — |
|
Dilutive effect of stock plans | 2.2 |
| | 2.5 |
| | 2.5 |
| | — |
|
Diluted shares outstanding | 144.0 |
| | 142.6 |
| | 144.1 |
| | 136.9 |
|
Basic earnings per share: | | | | | | | |
Income (loss) from continuing operations | $ | 0.27 |
| | $ | 0.23 |
| | $ | 1.41 |
| | $ | (0.14 | ) |
Income from discontinued operations | — |
| | — |
| | 0.01 |
| | 0.01 |
|
Net income (loss) per share | $ | 0.27 |
| | $ | 0.23 |
| | $ | 1.42 |
| | $ | (0.13 | ) |
Diluted earnings per share: | | | | | | | |
Income (loss) from continuing operations | $ | 0.26 |
| | $ | 0.22 |
| | $ | 1.36 |
| | $ | (0.14 | ) |
Income from discontinued operations | — |
| | — |
| | 0.01 |
| | 0.01 |
|
Net income (loss) per share | $ | 0.26 |
| | $ | 0.22 |
| | $ | 1.37 |
| | $ | (0.13 | ) |
For the quarter and nine months ended September 30, 2013, stock options and SSARs related to approximately 2.4 million and 2.3 million shares of LP common stock were considered not in-the-money for purposes of LP's earnings per share calculation. For the quarter ended September 30, 2012, stock options, stock warrants and SSARs relating to approximately 4.4 million share of LP common stock were considered not in-the-money for purposes of LP's earnings per share calculation. For the nine months ended September 30, 2012, stock options, stock warrants and SSARs related to approximately 11.1 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.
At September 30, 2013, outstanding warrants were exercisable to purchase approximately 1,462,119 shares.
NOTE 5 – RECEIVABLES
Receivables consist of the following:
|
| | | | | | | |
Dollar amounts in millions | September 30, 2013 | | December 31, 2012 |
Trade receivables | $ | 102.1 |
| | $ | 76.0 |
|
Interest receivables | 0.7 |
| | 0.8 |
|
Income tax receivable | 0.8 |
| | 1.8 |
|
Other receivables | 6.7 |
| | 5.2 |
|
Allowance for doubtful accounts | (1.1 | ) | | (1.1 | ) |
Total | $ | 109.2 |
| | $ | 82.7 |
|
Other receivables at September 30, 2013 and December 31, 2012 primarily consist of sales tax receivables, receivables from joint ventures, accrued 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):
|
| | | | | | | |
Dollar amounts in millions | September 30, 2013 | | December 31, 2012 |
Logs | $ | 42.9 |
| | $ | 37.6 |
|
Other raw materials | 20.3 |
| | 17.7 |
|
Finished products | 148.5 |
| | 142.7 |
|
Supplies | 14.3 |
| | 12.8 |
|
LIFO reserve | (1.0 | ) | | (1.0 | ) |
Total | $ | 225.0 |
| | $ | 209.8 |
|
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 September 30, 2013 and December 31, 2012, LP included two OSB mills and various assets at a third OSB mill, as well as various non-operating sites, in its held for sale category. During the third quarter of 2012, LP recognized an impairment charge of $4.4 million on an OSB mill in Quebec, Canada, based upon a change in the plan of sale of various assets held for sale to reduce their carrying value. The current book values of assets held for sale by category is as follows:
|
| | | | | | | |
Dollars in millions | September 30, 2013 | | December 31, 2012 |
Property, plant and equipment, at cost: | | | |
Land, land improvements and logging roads, net of road amortization | $ | 9.9 |
| | $ | 10.0 |
|
Buildings | 15.6 |
| | 17.1 |
|
Machinery and equipment | 140.7 |
| | 140.8 |
|
| 166.2 |
| | 167.9 |
|
Accumulated depreciation | (134.8 | ) | | (135.4 | ) |
Net property, plant and equipment | $ | 31.4 |
| | $ | 32.5 |
|
NOTE 8 – INCOME TAXES
Accounting standards state that companies account for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards and other tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are recorded as necessary to reduce deferred tax assets to the amount thereof that is more likely than not to be realized. The likelihood of realizing deferred tax assets is evaluated by, among other things, estimating future taxable income, considering the future reversal of existing deferred tax liabilities to which the deferred tax assets may be applied and assessing the impact of tax planning strategies.
For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate to year-to-date results unless this method does not result in a reliable estimate of year-to-date income tax expense. 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.
The income tax components and associated effective income tax rates for the quarter and nine months ended September 30, 2013 and 2012 are as follows:
|
| | | | | | | | | | | | | |
| Quarter Ended September 30, |
| 2013 | | 2012 |
Dollars in millions | Tax Provision | | Tax Rate | | Tax Provision | | Tax Rate |
Continuing operations | $ | 4.4 |
| | 11 | % | | $ | 7.7 |
| | 20 | % |
Discontinued operations | 0.4 |
| | 35 | % | | 0.2 |
| | 35 | % |
| $ | 4.8 |
| | 11 | % | | $ | 7.9 |
| | 20 | % |
| | | | | | | |
| Nine Months Ended September 30, |
| 2013 | | 2012 |
| Tax Provision | | Tax Rate | | Tax Provision/(Benefit) | | Tax Rate |
Continuing operations | $ | 51.6 |
| | 21 | % | | $ | (5.6 | ) | | 23 | % |
Discontinued operations | 0.6 |
| | 35 | % | | 1.0 |
| | 35 | % |
| $ | 52.2 |
| | 21 | % | | $ | (4.6 | ) | | 21 | % |
For the first nine months of 2013, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to the effect of foreign tax rates and decreases in valuation allowances attributed to net operating loss carryforwards in various jurisdictions which are either anticipated to be utilized in the current year based upon projected income or recognized due to the recording of additional deferred tax liabilities. For the first nine months of 2012, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to the effect of foreign tax rates, increases in valuation allowances attributed to net operating loss carryforwards in various jurisdictions and increases in our reserves for uncertain tax positions.
LP periodically reviews the need for valuation allowances against deferred tax assets and recognizes these deferred tax assets to the extent that the realization is more likely than not. Based solely upon the future reversal of existing deferred tax liabilities, LP believes that the valuation allowances provided are appropriate. If LP were to determine that it would not be able to realize a portion of an existing net deferred tax asset in excess of an existing 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.
As a result of certain recognition requirements of ASC 718 Compensation -- Stock Compensation, certain deferred tax assets as of September 30, 2013 are not recognized in relation to amounts of tax deductions for equity compensation that are greater than the compensation recognized for financial reporting. Equity will be increased by $13.5 million if and when such deferred tax assets are ultimately realized. LP uses the "with and without" method for determining when excess tax benefits have been realized.
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, Chile, Peru and Brazil. During 2011, the U.S. Internal Revenue Service (IRS) initiated an audit of tax years 2007 - 2009 for which field work has been completed. LP has protested certain proposed adjustments and requested review by the IRS Appeals Office. During the third quarter of 2013, LP deposited $17.1 million with the IRS to suspend the accrual of interest pending the resolution of this matter. The deposit is included within other assets on the Condensed Consolidated Balance Sheet. 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 2012. Canadian federal income tax returns have been audited and effectively settled through 2008, and no examinations are currently in progress. Quebec provincial audits have been effectively settled through 2011. As of September 30, 2013, the Chilean Tax Office was in process of auditing tax year 2011.
NOTE 9 – LONG-TERM DEBT
LP’s long-term debt consists of the following:
|
| | | | | | | |
Dollars in millions | September 30, 2013 | | December 31, 2012 |
Debentures: | | | |
Senior notes, maturing 2020 | $ | 350.0 |
| | $ | 350.0 |
|
Bank credit facilities: | | | |
Chilean term credit facility, maturing 2019, denominated in UF | 16.2 |
| | 39.3 |
|
Brazilian export financing facility, maturing 2017 | 8.0 |
| | 10.0 |
|
Limited recourse notes payable: | | | |
Senior notes, payable 2013 - 2018 | 22.0 |
| | 112.0 |
|
Other financing | | | |
Non-recourse notes, payable 2018 | 368.7 |
| | 368.7 |
|
Other | 0.7 |
| | 0.5 |
|
Total | 765.6 |
| | 880.5 |
|
Less: current portion | (2.3 | ) | | (97.8 | ) |
Net long-term portion | $ | 763.3 |
| | $ | 782.7 |
|
LP issued $348.6 million of senior notes in 1998 in a private placement to institutional investors. The remaining $22.0 million of the notes payable will mature in 2018 and are secured by $22.3 million of notes receivable from Green Diamond that will mature in 2018. 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.
LP issued $368.7 million of senior notes in 2003 in a private placement to unrelated third parties. The senior notes mature in 2018 and are supported by a bank letter of credit. LP’s reimbursement obligations under the letter of credit are secured by $410.0 million in notes receivable from asset 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 senior debt 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.
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 secured by substantially all of the property owned by LP Chile S.A. The loan was required to be repaid in 16 equal semi-annual payments that began in June 2012 and end in December 2019. Payments of $21.0 million were made during the year which included a scheduled payment of $2.6 million in the second quarter of 2013 and an optional prepayment of $18.4 million during the third quarter of 2013. The next scheduled payment is not due until June 2017. In connection with the prepayment, LP recorded a loss on early debt extinguishment of $0.8 million, which included $0.5 million associated with the unamortized financing costs associated with the loan. Any additional increases or decreases in the loan balance shown are related to changes in the underlying foreign currency exchange rates or required inflation adjustments.
In August 2011, LP entered into an export financing loan agreement with a Brazilian bank pursuant to which it borrowed $10.0 million. This loan is denominated in U.S. dollars, is to be repaid in 10 equal semi-annual payments that began in January 2013 and end in July 2017.
In May 2012, LP issued $350.0 million of 7.5% Senior Notes due 2020. LP used a portion of the proceeds to fully retire the remaining balance outstanding on its Senior Secured Notes due in 2017. In connection with this repurchase, LP recorded a loss on early debt extinguishment of $52.2 million which included $4.5 million associated with the unamortized financing costs associated with the Senior Secured Notes. On or after June 1, 2016, LP may, at its option on one or more occasions, redeem all or any portion of the Notes at specified redemption rates.
Obligations under the indenture governing LP's Senior Notes due 2020 are unsecured and not presently guaranteed by any of its subsidiaries. The indenture contains customary covenants applicable to LP and its subsidiaries, other than certain unrestricted subsidiaries, including restrictions on actions and activities that are restricted under the credit facility. The indenture also contains customary events of default, the occurrence of which could result in acceleration of LP's obligations to repay the indebtedness outstanding thereunder.
LP estimated the Senior Notes maturing in 2020 to have a fair value of $378.9 million at September 30, 2013 and $397.3 million at December 31, 2012 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, 2012.
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 third quarter and nine months ended September 30, 2013 and September 30, 2012 are reflected in the table below and are described in the paragraphs following the table:
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
Dollar amounts in millions | 2013 | | 2012 | | 2013 | | 2012 |
Other operating charges and credits net: | | | | | | | |
Adjustment related to prior year inventory | $ | — |
| | $ | — |
| | $ | (1.6 | ) | | $ | — |
|
Adjustment related to prior year depreciation | — |
| | — |
| | (1.5 | ) | | — |
|
Construction related legal reserve | — |
| | — |
| | — |
| | 0.5 |
|
Addition to warranty reserves | (2.0 | ) | | (1.0 | ) | | (6.1 | ) | | (1.0 | ) |
Refundable value added tax receivable | 1.4 |
| | — |
| | 1.4 |
| | — |
|
Insurance recovery | 0.4 |
| | — |
| | 0.4 |
| | — |
|
Contingent consideration fair value adjustment | 17.3 |
| | — |
| | 17.3 |
| | — |
|
Addition to workers compensation reserves | (1.0 | ) | | — |
| | (1.0 | ) | | — |
|
Other | — |
| | (0.2 | ) | | 0.2 |
| | (0.7 | ) |
| $ | 16.1 |
| | $ | (1.2 | ) | | $ | 9.1 |
| | $ | (1.2 | ) |
Other operating charges and credits associated with unconsolidated affiliates: | | | | | | | |
Valuation allowance associated with deferred taxes | $ | — |
| | $ | — |
| | $ | (1.8 | ) | | $ | — |
|
Addition to contingency reserves | — |
| | — |
| | (0.9 | ) | | — |
|
| $ | — |
| | $ | — |
| | $ | (2.7 | ) | | $ | — |
|
During the third quarter of 2013, LP recorded a gain of $0.4 million related to proceeds received from an insurance claim associated with an OSB mill and a reduction in the fair value of $17.3 million payable in relation to the contingent consideration associated with a business combination (as discussed in Note 19). LP also recorded a loss of $1.0 million associated with a workers compensation reserve adjustment. LP recorded a loss of $2.0 million during the quarter related to an increase in product related warranty reserves associated with CanExel products sold in certain geographic areas from 2004 through 2008. During the third quarter of 2013, LP recorded a receivable of $1.4 million related to value added taxes.
During the second quarter of 2013, LP recorded a loss of $1.5 million related to a correction of prior years depreciation amounts associated with LP's South American operations. During the second quarter of 2013, LP recorded a loss of $4.1 million related to an increase in product related warranty reserves associated with Canexel products sold in certain geographic areas from 2004 to 2008. Additionally, other operating charges and credits reflected in Equity in (income) loss from unconsolidated affiliates includes a charge of $1.8 million associated with a valuation allowance on the joint venture's books associated with deferred tax assets as well as a loss of $0.9 million associated with the recording of a contingent liability from past years.
During the first quarter of 2013, LP recorded a loss of $1.6 million related to a prior year inventory adjustment.
During the third quarter 2012, LP recorded a loss of $1.0 million related to an increase in product related warranty reserves associated with Canexel products sold in Europe in prior years.
LP recorded losses of $0.2 million and $0.7 million during the third quarter and first nine months of 2012 associated with severance related to an indefinitely curtailed OSB mill in British Columbia.
NOTE 11 – TRANSACTIONS WITH AFFILIATES
LP has an equity investment in Abitibi-LP, a manufacturer of I-joists with Resolute Forest Products. LP sells products and raw materials to Abitibi-LP and purchases products for resale from Abitibi-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 September 30, 2013 and 2012, LP sold $3.3 million and $2.6 million of products to Resolute-LP and purchased $13.9 million and $11.3 million of I-joists from Resolute-LP. For the nine month period ended September 30, 2013 and 2012, LP sold $10.7 million and $6.3 million of products to Resolute-LP and purchased $38.4 million and $29.7 million of I-joists from Resolute-LP. Included in LP’s Consolidated Balance Sheets at September 30, 2013 and December 31, 2012 are $2.6 million and $1.4 million in accounts receivable from this affiliates and $1.3 million and $6.7 million in accounts payable from this affiliate.
LP purchased $42.6 million of OSB from Canfor-LP during the quarter ended September 30, 2012. LP also purchased $98.2 million and $101.9 million of OSB from Canfor-LP during the nine month period ended September 30, 2013 and 2012.
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.
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 four segments: Oriented Strand Board (OSB), Siding, Engineered Wood Products (EWP) and South America. LP’s business units have been aggregated into these four 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, 2012.
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
Dollar amounts in millions | 2013 | | 2012 | | 2013 | | 2012 |
Net sales: | | | | | | | |
OSB | $ | 245.4 |
| | $ | 226.6 |
| | $ | 838.3 |
| | $ | 571.0 |
|
Siding | 149.0 |
| | 134.1 |
| | 435.5 |
| | 384.2 |
|
Engineered Wood Products | 71.8 |
| | 61.5 |
| | 196.1 |
| | 161.8 |
|
South America | 41.5 |
|
| 42.0 |
|
| 130.9 |
|
| 127.1 |
|
Other | 3.9 |
| | 3.4 |
| | 10.3 |
| | 10.1 |
|
Intersegment sales | (4.2 | ) | | (5.5 | ) | | (5.6 | ) | | (16.9 | ) |
| $ | 507.4 |
| | $ | 462.1 |
| | $ | 1,605.5 |
| | $ | 1,237.3 |
|
Operating profit (loss): | | | | | | | |
OSB | $ | 30.2 |
| | $ | 49.3 |
| | $ | 223.7 |
| | $ | 66.0 |
|
Siding | 22.5 |
| | 20.3 |
| | 70.3 |
| | 56.4 |
|
Engineered Wood Products | (2.0 | ) | | (3.0 | ) | | (10.6 | ) | | (9.3 | ) |
South America | 5.3 |
|
| 4.5 |
|
| 17.8 |
|
| 11.2 |
|
Other | (2.1 | ) | | (2.6 | ) | | (6.1 | ) | | (7.8 | ) |
Other operating credits and charges, net | 16.1 |
| | (1.2 | ) | | 9.1 |
| | (1.2 | ) |
Other operating credits and charges associated with unconsolidated affiliates | — |
| | — |
| | (2.7 | ) | | — |
|
Gain (loss) on sale or impairment of long-lived assets | (0.3 | ) | | (4.3 | ) | | 0.4 |
| | (4.5 | ) |
Gain on acquisition | — |
| | — |
| | 35.9 |
| | — |
|
Early debt extinguishment | (0.8 | ) | | — |
| | (0.8 | ) | | (52.2 | ) |
General corporate and other expenses, net | (22.1 | ) | | (18.1 | ) | | (65.9 | ) | | (56.3 | ) |
Foreign currency gain (loss) | 1.0 |
| | 0.4 |
| | (3.3 | ) | | (2.3 | ) |
Investment income | 1.7 |
| | 4.1 |
| | 8.3 |
| | 11.7 |
|
Interest expense, net of capitalized interest | (7.6 | ) | | (10.7 | ) | | (28.0 | ) | | (36.4 | ) |
Income (loss) from continuing operations before taxes | 41.9 |
| | 38.7 |
| | 248.1 |
| | (24.7 | ) |
Provision (benefit) for income taxes | 4.4 |
| | 7.7 |
| | 51.6 |
| | (5.6 | ) |
Income (loss) from continuing operations | $ | 37.5 |
| | $ | 31.0 |
| | $ | 196.5 |
| | $ | (19.1 | ) |
Other operating charges and credits,net presented above includes both those items directly related to LP as well as those reflected in Equity in (income) loss of unconsolidated affiliates
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 September 30, 2013, there were no indications of impairment for the asset grouping that includes the company's indefinitely curtailed facilities. As of September 30, 2013, the fair value of facilities that have not been indefinitely curtailed are substantially in excess of its carrying value and supports the conclusion that no impairment is necessary for those facilities.
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 | September 30, 2013 | | December 31, 2012 |
Environmental reserves | $ | 13.9 |
| | $ | 14.1 |
|
Other reserves | 0.5 |
| | 0.7 |
|
Total contingency reserves | 14.4 |
| | 14.8 |
|
Current portion of contingency reserves | (2.0 | ) | | (2.0 | ) |
Long-term portion of contingency reserves | $ | 12.4 |
| | $ | 12.8 |
|
See Note 12 for discussion of environmental matters.
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 September 30, 2013 and 2012. The net periodic pension cost included the following components: |
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
Dollar amounts in millions | 2013 | | 2012 | | 2013 | | 2012 |
Service cost | $ | 0.8 |
| | $ | 0.9 |
| | $ | 2.5 |
| | $ | 2.7 |
|
Interest cost | 3.2 |
| | 3.7 |
| | 9.7 |
| | 11.0 |
|
Expected return on plan assets | (4.1 | ) | | (4.3 | ) | | (12.4 | ) | | (12.7 | ) |
Amortization of prior service cost | 0.1 |
| | 0.1 |
| | 0.2 |
| | 0.2 |
|
Amortization of net loss | 1.8 |
| | 1.7 |
| | 5.5 |
| | 5.0 |
|
Net periodic pension cost | $ | 1.8 |
| | $ | 2.1 |
| | $ | 5.5 |
| | $ | 6.2 |
|
During the nine months ended September 30, 2013, LP made $3.2 million in pension contributions for LP’s Canadian defined benefit plans. LP presently anticipates making approximately $1.9 million in additional pension contributions for the plans during the remainder of 2013.
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, 2012 for further discussion of LP’s guarantees and indemnifications.
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 2013 and 2012 are summarized in the following table:
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
Dollar amounts in millions | 2013 | | 2012 | | 2013 | | 2012 |
Beginning balance | $ | 21.0 |
| | $ | 26.5 |
| | $ | 21.4 |
| | $ | 30.3 |
|
Accrued to expense | 0.4 |
| | 0.4 |
| | 0.7 |
| | 0.9 |
|
Adjusted to other operating credits and charges | 2.0 |
| | 1.0 |
| | 6.1 |
| | 1.0 |
|
Payments made | (3.8 | ) | | (4.5 | ) | | (8.6 | ) | | (8.8 | ) |
Total warranty reserves | 19.6 |
| | 23.4 |
| | 19.6 |
| | 23.4 |
|
Current portion of warranty reserves | (12.0 | ) | | (12.0 | ) | | (12.0 | ) | | (12.0 | ) |
Long-term portion of warranty reserves | $ | 7.6 |
| | $ | 11.4 |
| | $ | 7.6 |
| | $ | 11.4 |
|
LP increased the warranty reserves related to CanExel siding products by $2.0 million and $6.1 million for the third quarter and the first nine months of 2013. The additional reserves reflect revised estimates of future claim payments based upon an increase in Canexel warranty claims related to a specific geographic location and for a specific time period. LP continues to monitor warranty and other claims associated with these products and believes as of September 30, 2013 that the reserves associated with these matters are adequate. However, it is possible that additional charges may be required in the future.
The current portion of the warranty reserve is included in the caption “Accounts payable and accrued liabilities” and the long-term portion is included in the caption “Other long-term liabilities” on LP’s Condensed Consolidated Balance Sheets.
NOTE 18 - OTHER COMPREHENSIVE INCOME
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02 "Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income." The amendments do not change the current requirement for reporting net income or other comprehensive income in financial statements; however, the amendment requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The new disclosure requirements were effective for all periods beginning after December 15, 2012 and adopted by LP effective January 1, 2013. The adoption of the amendments concerns presentation and disclosure only and did not have an impact on LP's consolidated financial statements.
Other comprehensive income activity, net of tax, is provided in the following table for the quarter ended September 30, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Dollar amounts in millions | | Foreign currency translation adjustments | | Pension adjustments | | Unrealized gain (loss) on derivative instruments | | Unrealized gain (loss) on investments | | Other | | Total |
Balance at June 30, 2013 | | $ | (14.7 | ) | | $ | (96.0 | ) | | $ | (0.3 | ) | | $ | 2.2 |
| | $ | (2.0 | ) | | $ | (110.8 | ) |
Other comprehensive income before reclassifications | | 0.3 |
| | 2.3 |
| | (0.1 | ) | | (0.2 | ) | | — |
| | $ | 2.3 |
|
Amounts reclassified from accumulated comprehensive income | | — |
| | (1.3 | ) | | — |
| | — |
| | — |
| | $ | (1.3 | ) |
Net current-period other comprehensive income | | 0.3 |
| | 1.0 |
| | (0.1 | ) | | (0.2 | ) | | — |
| | 1.0 |
|
Balance at September 30, 2013 | | $ | (14.4 | ) | | $ | (95.0 | ) | | $ | (0.4 | ) | | $ | 2.0 |
| | $ | (2.0 | ) | | $ | (109.8 | ) |
Reclassifications from accumulated other comprehensive loss for the quarter ended September 30, 2013 are summarized, in millions of dollars, in the following table:
|
| | | | | | |
Details about accumulated other comprehensive income components | | Amount reclassified from accumulated comprehensive income | | Affected line item in the statement where net income (loss) is presented |
Amortization of defined benefit pension plans | | | | |
Prior service cost | | $ | 0.1 |
| | (a) |
Actuarial loss | | 1.8 |
| | (a) |
Transition obligation | | (0.1 | ) | | (a) |
| | 1.8 |
| | Total before tax |
| | 0.5 |
| | Tax (provision) benefit |
Total reclassifications for the quarter ended September 30, 2013 | | $ | 1.3 |
| | Net of tax |
____________
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost, see Note 16 for additional details. The net periodic pension cost is included in Cost of sales and Selling and administrative line items in the Consolidated Statements of Income.
Other comprehensive income activity, net of tax, is provided in the following table for the nine months ended September 30, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Dollar amounts in millions | | Foreign currency translation adjustments | | Pension adjustments | | Unrealized gain (loss) on derivative instruments | | Unrealized gain (loss) on investments | | Other | | Total |
Balance at December 31, 2012 | | $ | (7.6 | ) | | $ | (99.0 | ) | | $ | (0.3 | ) | | $ | 1.0 |
| | $ | (2.0 | ) | | $ | (107.9 | ) |
Other comprehensive income before reclassifications | | (6.8 | ) | | 8.0 |
| | (0.1 | ) | | 1.0 |
| | — |
| | 2.1 |
|
Amounts reclassified from accumulated comprehensive income | | — |
| | (4.0 | ) | | — |
| | — |
| | — |
| | (4.0 | ) |
Net current-period other comprehensive income | | (6.8 | ) | | 4.0 |
| | (0.1 | ) | | 1.0 |
| | — |
| | (1.9 | ) |
Balance at September 30, 2013 | | $ | (14.4 | ) | | $ | (95.0 | ) | | $ | (0.4 | ) | | $ | 2.0 |
| | $ | (2.0 | ) | | $ | (109.8 | ) |
Reclassifications from accumulated other comprehensive loss for the nine months ended September 30, 2013 are summarized, in millions of dollars, in the following table:
|
| | | | | | |
Details about accumulated other comprehensive income components | | Amount reclassified from accumulated comprehensive income | | Affected line item in the statement where net income (loss) is presented |
Amortization of defined benefit pension plans | | | | |
Prior service cost | | $ | 0.2 |
| | (a) |
Actuarial loss | | 5.5 |
| | (a) |
Transition obligation | | (0.2 | ) | | (a) |
| | 5.5 |
| | Total before tax |
| | 1.5 |
| | Tax (provision) benefit |
Total reclassifications for the nine months ended September 30, 2013 | | $ | 4.0 |
| | Net of tax |
____________
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost, see Note 16 for additional details. The net periodic pension cost is included in Cost of sales and Selling and administrative line items in the Consolidated Statements of Income.
NOTE 19 - ACQUISITION OF PEACE VALLEY OSB
On May 31, 2013, LP acquired full control of the Peace Valley OSB joint venture in which LP previously maintained a 50% interest. Peace Valley OSB's results of operations have been fully consolidated in all periods subsequent to May 31, 2013. Since LP previously served as the exclusive distributor of all OSB produced by this venture, this acquisition will not have a material impact on LP's consolidated net sales.
Due to the pre-existing 50% ownership interest in Peace Valley OSB, this acquisition was accounted for as a step acquisition in accordance with ASC 805, Business Combinations (“ASC 805”). Accordingly, LP recognized a gain of $35.9 million in connection with this transaction to record its 50% ownership interest in Peace Valley at fair value on the acquisition date. The fair value of LP's existing 50% interest ($95.9 million) was determined using a combination of the income and market approach. In completing this valuation, management considered future earnings and cash flow potential of the business, earnings multiples, and recent market transactions of similar businesses. This gain is included in "Non-operating income (expense)."
The purchase price of the 50% acquired interest was $74.6 million (including working capital) paid in cash. Additionally, as part of the purchase consideration, LP agreed to pay contingent consideration equal to a pre-defined percentage of the operation's earnings before interest, taxes, depreciation and amortization (EBITDA) over a pre-defined threshold for each of the next three years. As of May 31, 2013, the fair value of the contingent consideration payable was valued at $24.3 million and was recorded in “accounts payable and accrued liabilities” and “other long term liabilities”. The fair value of the contingent consideration payable will be remeasured at the end of each reporting period. During the third quarter of 2013, the fair value of the contingent consideration payable was remeasured and reduced by $17.3 million due to the decline in projected OSB prices and therefore resulting reduction in the estimated EBITDA of the operation.
Including the 50% interest previously owned by LP, LP acquired net assets of $194.8 million, consisting of $22.7 million in current assets, $146.4 million in fixed asset, $43.8 million of intangible assets (comprised of $34.1 million of timber licenses and $9.7 million of goodwill) and $8.7 million in current liabilities and $9.4 million in long term liabilities. Certain information about Peace Valley OSB (e.g., pro forma financial information and allocation of purchase price) is not presented because such information is not material to LP's results of operations and financial position.
While LP uses its best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the business combination date, its estimates and assumptions are subject to refinement. As a result, during the preliminary purchase price allocation period, which may be up to one year from
the business combination date, LP may record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill. LP will record adjustments to assets acquired or liabilities assumed subsequent to the measurement period in its operating results in the period in which the adjustments were determined.
NOTE 20 - PROPOSED ACQUISITION OF AINSWORTH LUMBER CO. LTD.
LP announced that it signed an Arrangement Agreement (the “Arrangement Agreement”) with Ainsworth Lumber Co. Ltd., a British Columbia corporation (“Ainsworth”), providing an arrangement under British Columbia law whereby a wholly owned subsidiary of the Company will acquire all of the outstanding shares of Ainsworth capital stock in exchange for 0.114 shares of LP common stock (“LP Shares”) and C$1.94 in cash per Ainsworth common share (“Ainsworth Shares”) subject to certain terms and conditions. Although the Arrangement Agreement provides for Ainsworth shareholders to elect among cash consideration, share consideration and mixed consideration, proration provisions will ensure that the aggregate amounts of cash and LP Shares issued in the Transaction are fixed at approximately C$467.0 million and 27.5 million LP Shares, respectively.
On November 1, 2013, we entered into a commitment letter (the "Commitment Letter") with American AgCredit, FLCA ("AAC"), CoBank, ACB ("CoBank"), Farm Credit Services of America, PCA ("FCSA"), and AgFirst Farm Credit Bank ("AgFirst") pursuant to which AAC and FCSA (collectively, the "Lenders") have severally committed to provide senior secured revolving financing to the Company in an aggregate amount of up to $200 million on the terms and subject to the conditions set forth therein. The proceeds of the facility will be used by us to fund a portion of the purchase price for the previously announced acquisition (the "Acquisition") by the Company of Ainsworth Lumber Company Ltd. ("Ainsworth") and will otherwise be available for working capital purposes. The obligations of the Lenders to provide such financing are subject to the execution and delivery of mutually acceptable definitive loan documents, which are expected to contain customary representations, warranties, covenants and events of default, including a minimum liquidity covenant and a maximum capitalization ratio covenant. The commitments of the Lenders will expire on, and definitive loan documents must be executed and delivered by, December 2, 2013. The consummation of the Acquisition is not a condition to the closing of the financing.
As of November 5, 2013, LP anticipates the Transaction to be completed in either late fourth quarter of 2013 or early first quarter 2014, subject to the receipt of required regulatory approvals.
NOTE 21 - GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in goodwill for the third quarter and the nine months ended September 30, 2013 are provided in the following table:
|
| | | | |
Dollar amounts in millions | | 2013 |
Beginning balance, December 31, 2012 | | $ | — |
|
Additions | | 9.7 |
|
Total goodwill | | $ | 9.7 |
|
LP has recorded other intangible assets in its Consolidated Balance Sheets, as follows:
|
| | | | | | | | |
Dollar amounts in millions | | September 30, 2013 | | December 31, 2012 |
Timber licenses (recorded as part of Timber and timberlands) | | $ | 69.0 |
| | $ | 36.6 |
|
Customer relationships, net of amortization | | — |
| | 0.5 |
|
Other | | 0.1 |
| | 0.1 |
|
Total | | $ | 69.1 |
| | $ | 37.2 |
|
Customer relationships and other intangibles are included in Other assets in the Consolidated Balance Sheet.
Amortization of the above intangible assets over the next five years is as follows:
|
| | | |
Dollar amounts in millions | |
2013 | $ | 2.9 |
|
2014 | 2.9 |
|
2015 | 3.6 |
|
2016 | 3.6 |
|
2017 | 3.6 |
|
During the second quarter of 2013, LP completed the acquisition of the Peace Valley OSB joint venture. The acquisition resulted in the recognition of $9.7 million of goodwill and included timber licenses of $34.1 million. See Note 19 for further discussion.
NOTE 22 - 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.
During the third quarter of 2013, LP sold its moulding operations. Sales and operating profit included in discontinued operations are as follows:
|
| | | | | | | | | | | | | | | | |
Dollars amounts in millions | | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Sales | | $ | 4.1 |
| | $ | 5.8 |
| | $ | 16.1 |
| | $ | 20.2 |
|
Operating profit | | 1.0 |
| | 0.5 |
| | 1.6 |
| | 2.8 |
|
A gain of $1.7 million on the sale of the moulding operations was recognized in the third quarter of 2013, and is included in discontinued operations on the Consolidated Statement of Income.
| |
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 one facility in Brazil.
To serve our markets, we operate in four segments: Oriented Strand Board (OSB), Siding, Engineered Wood Products (EWP) and South America.
OSB is sold as a commodity for which sales prices fluctuate daily based on market factors over which we have little or no control. We cannot predict whether the prices of our OSB products will remain at current levels or increase or decrease in the future. OSB prices (NC 7/16"), as reported by Random Lengths, were 20% lower for the third quarter of 2013 than for the same period in 2012.
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, 2012 and to “About Forward-Looking Statements” and “Risk Factors” in this report.
PLANNED ACQUISTION OF AINSWORTH LUMBER CO. LTD.
On September 4, 2013, LP announced that it had signed an Arrangement Agreement (the “Arrangement Agreement”) with Ainsworth Lumber Co. Ltd., a British Columbia corporation (“Ainsworth”), providing an arrangement under British Columbia law whereby a wholly owned subsidiary of the Company will acquire all of the outstanding shares of Ainsworth capital stock in exchange for 0.114 shares of LP common stock (“LP Shares”) and C$1.94 in cash per Ainsworth common share (“Ainsworth Shares”) on the terms and subject to the conditions set forth therein (the “Transaction”). Although the Arrangement Agreement provides for Ainsworth shareholders to elect among cash consideration, share consideration and mixed consideration, proration provisions will ensure that the aggregate amounts of cash and LP Shares issued in the Transaction are fixed at approximately C$467 million and 27.5 million LP Shares, respectively.
The requisite approvals of the Transaction by Ainsworth shareholders and the Supreme Court of British Columbia were obtained on October 29, 2013 and October 31, 2013. As of November 5, 2013, the consummation of the Transaction remained subject to other customary closing conditions, including the receipt of regulatory approvals (which include the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the issuance of rulings and approvals required under Canadian competition laws and the Investment Canada Act). LP and Ainsworth have agreed to endeavor to cause all closing conditions (including the receipt of regulatory approvals) to be satisfied, which under certain circumstances could require the taking of actions that could adversely affect the value of the Transaction to us.
The Arrangement Agreement also contains certain termination rights for each of the Company and Ainsworth. Either party may terminate the Arrangement Agreement if: (i) the parties mutually agree; (ii) the Transaction has not been consummated by March 4, 2014 (subject to extension in certain circumstances); (iii) a governmental authority issues a law or order prohibiting the Transaction; (iv) the other party materially breaches its representations, warranties or covenants such that the applicable closing condition would not to be satisfied; or (v) the other party has incurred a Material Adverse Effect (as defined in the Arrangement Agreement).
We have entered into debt financing commitments for the purpose of financing a portion of the purchase price payable in the Transactions and related fees and expenses. The obligations of the lenders to provide debt financing under the debt commitments are subject to customary conditions.
On October 17, 2013, Ainsworth issued a press release announcing that it had received the requisite consents in connection with its consent solicitation (the "Consent Solicitation") from holders of Ainsworth's 7.5% Senior Secured Notes due 2017 (the "Notes") . The press release also announced that Ainsworth has entered into a supplemental indenture relating to the Notes, which modified certain definitions in the indenture relating to the Notes (the "Indenture") so that the proposed acquisition by Louisiana-Pacific Corporation (“LP”) of all of the
outstanding Ainsworth shares (the “Acquisition”) pursuant to the arrangement agreement entered into by LP and Ainsworth on September 4, 2013, and the designation by LP of members of Ainsworth’s board of directors upon and after the consummation of the Acquisition, will not constitute a “Change of Control” under the Indenture and Ainsworth will not be required to make a “Change of Control Offer” under the Indenture in connection with the Acquisition.
Subject to the satisfaction or waiver of the conditions set forth in the solicitation statement to be distributed by Ainsworth to holders of the Notes, LP will make the consent payments contemplated thereby as and when they become due. Whether or not Ainsworth receives the consents necessary to implement the Proposed Amendments, promptly following the consummation of the Acquisition, LP will unconditionally guarantee the prompt payment and performance of the obligations of Ainsworth under the Indenture and the Notes.
As of November 5, 2013, LP anticipates the Transaction to be completed in either late fourth quarter of 2013 or early first quarter 2014, subject to the receipt of regulatory above mentioned approvals.
The Transaction is expected to have a material effect on LP’s consolidated financial position, results of operations and cash flows. For additional information, see the Ainsworth Lumber Co. Ltd. Notice of Special Meeting and Management Proxy Circular furnished as Exhibit 99.1 to LP's Current Report on Form 8-K dated September 30, 2013.
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, 2012 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 third quarter of 2013, 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 September 30, 2013, we excluded from our estimates approximately $2.1 million of potential environmental liabilities that we estimate will be allocated to third parties pursuant to existing and anticipated future cost sharing arrangements.
Impairment of Long-Lived Assets. We review the long-lived assets held and used by us (primarily property, plant and equipment and timber and timberlands) for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. We consider the necessity of undertaking such a review at least quarterly, and also when certain events or changes in circumstances occur. Events and changes in circumstances that may necessitate such a review include, but are not limited to: a significant decrease in the market price of a long-lived asset or group of long-lived assets; a significant adverse change in the extent or manner in which a long-lived asset or group of long-lived assets is being used or in its physical condition; a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or group of long-lived assets, including an adverse action or assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or group of long-lived assets; current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or group of long-lived assets; and current expectation that, more likely than not, a long-lived asset or group of long-lived assets will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Identifying these events and changes in circumstances, and assessing their impact on the appropriate valuation of the affected assets under accounting principles generally accepted in the U.S., requires us to make judgments, assumptions and estimates.
In general, for assets held and used in our operations, impairments are recognized when the carrying amount of the long-lived asset or groups of long-lived assets is not recoverable and exceeds the fair value of the asset or group of assets. The carrying amount of a long-lived asset or groups of long-lived assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets or group of assets. The key assumptions in estimating these cash flows relate to future production volumes, pricing of commodity or specialty products and future estimates of expenses to be incurred as reflected in our long-range internal planning models. Our assumptions regarding pricing are based upon the average pricing over the commodity cycle (generally five years) due to the inherent volatility of commodity product pricing, and reflect our assessment of information gathered from industry research firms, research reports published by investment analysts and other published forecasts. Our assumptions regarding expenses reflect our expectation that we will continue to reduce production costs to offset inflationary impacts.
When impairment is indicated for assets held and used in our operations, the book values of the affected assets are written down to their estimated fair value, which is generally based upon discounted future cash flows associated with the affected assets. When impairment is indicated for assets to be disposed of, the book values of the affected assets are written down to their estimated fair value, less estimated selling costs. Consequently, a determination to dispose of particular assets can require us to estimate the net sales proceeds expected to be realized upon such disposition, which may be less than the estimated undiscounted future net cash flows associated with such assets prior to such determination, and thus require an impairment charge. In situations where we have experience in selling assets of a similar nature, we may estimate net sales proceeds on the basis of that experience. In other situations, we hire independent appraisers to estimate net sales proceeds.
Due to the numerous variables associated with our judgments and assumptions relating to the valuation of assets in these circumstances, and the effects of changes in circumstances affecting these valuations, both the precision and reliability of the resulting estimates of the related impairment charges are subject to substantial uncertainties and, as additional information becomes known, we may change our estimates significantly.
Income Taxes. The determination of the provision for income taxes, and the resulting current and deferred tax assets and liabilities, involves significant management judgment, and is based upon information and estimates available to management at the time of such determination. The final income tax liability to any taxing jurisdiction with respect to any calendar year will ultimately be determined long after our financial statements have been published for that year. We maintain reserves for known estimated tax exposures in federal, state and international jurisdictions; however, actual results may differ materially from our estimates.
Judgment is also applied in determining whether deferred tax assets will be realized in full or in part. When we consider it to be more likely than not that all or some portion of a deferred tax asset will not be realized, a valuation allowance is established for the amount of the deferred tax asset that is estimated not to be realizable. As of September 30, 2013, 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 deferred tax liabilities which we anticipate to reverse within the carry forward period. Accordingly, changes in facts or circumstances affecting the likelihood of realizing a deferred tax asset could result in the need to record additional valuation allowances.
Pension Plans. Most of our U.S. employees and many of our Canadian employees participate in defined benefit pension plans sponsored by LP. We account for the consequences of our sponsorship of these plans in accordance with accounting principles generally accepted in the U.S., which require us to make actuarial assumptions that are used to calculate the related assets, liabilities and expenses recorded in our financial statements. While we believe we have a reasonable basis for these assumptions, which include assumptions regarding long-term rates of return on plan assets, life expectancies, rates of increase in salary levels, rates at which future values should be discounted to determine present values and other matters, the amounts of our pension related assets, liabilities and expenses recorded in our financial statements would differ if we used other assumptions.
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 seve