LPX 2014.9.30 - 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, 2014
Commission File Number 1-7107
 
 LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
93-0609074
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
414 Union Street, Nashville, TN 37219
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (615) 986-5600
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filers” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 142,211,522 shares of Common Stock, $1 par value, outstanding as of November 5, 2014.
Except as otherwise specified and unless the context otherwise requires, references to "LP", the “Company”, “we”, “us”, and “our” refer to Louisiana-Pacific Corporation and its subsidiaries.
 



ABOUT FORWARD-LOOKING STATEMENTS
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their businesses and other matters as long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. This report contains, and other reports and documents filed by us with the Securities and Exchange Commission may contain, forward-looking statements. These statements are or will be based upon the beliefs and assumptions of, and on information available to, our management.
The following statements are or may constitute forward-looking statements: (1) statements preceded by, followed by or that include words like “may,” “will,” “could,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “potential,” “continue” or “future” or the negative or other variations thereof and (2) other statements regarding matters that are not historical facts, including without limitation, plans for product development, forecasts of future costs and expenditures, possible outcomes of legal proceedings, capacity expansion and other growth initiatives and the adequacy of reserves for loss contingencies.
Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to the following:
•
changes in governmental fiscal and monetary policies and levels of employment;
•
changes in general economic conditions;
•
changes in the cost and availability of capital;
•
changes in the level of home construction activity;
•
changes in competitive conditions and prices for our products;
•
changes in the relationship between supply of and demand for building products;
•
changes in the relationship between supply of and demand for raw materials, including wood fiber and resins, used in manufacturing our products;
•
changes in the cost of and availability of energy, primarily natural gas, electricity and diesel fuel;
•
changes in the cost of and availability of transportation;
•
changes in other significant operating expenses;
•
changes in exchange rates between the U.S. dollar and other currencies, particularly the Canadian dollar, Australian dollar, Brazilian real and the Chilean peso;
•
changes in general and industry specific environmental laws and regulations;
•
changes in tax laws, and interpretations thereof;
•
changes in circumstances giving rise to environmental liabilities or expenditures;
•
the resolution of existing and future product related litigation and other legal proceedings;
•
governmental gridlock and curtailment of government services and spending; and
•
acts of public authorities, war, civil unrest, natural disasters, fire, floods, earthquakes, inclement weather and other matters beyond our control.
In addition to the foregoing and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in the reports and other documents filed by us with the Commission that warn of risks or uncertainties associated with future results, events or circumstances identify important factors that could cause actual results, events and circumstances to differ materially from those reflected in the forward-looking statements.
ABOUT THIRD-PARTY INFORMATION
In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industry publications, U.S. government sources and other third parties. Although we believe

2


the information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.

3


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,
 
2014
 
2013
 
2014
 
2013
Net sales
$
518.1

 
$
507.4

 
$
1,481.3

 
$
1,605.5

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
477.0

 
416.3

 
1,326.9

 
1,221.7

Depreciation and amortization
26.9

 
25.8

 
77.4

 
65.0

Selling and administrative
31.9

 
33.5

 
108.7

 
103.6

(Gain) loss on sale or impairment of long-lived assets, net
(3.6
)
 
0.3

 
(4.1
)
 
(0.4
)
Other operating credits and charges, net
0.5

 
(16.1
)
 
1.1

 
(9.1
)
Total operating costs and expenses
532.7

 
459.8

 
1,510.0

 
1,380.8

Income (loss) from operations
(14.6
)
 
47.6

 
(28.7
)
 
224.7

 
 
 
 
 
 
 
 
Non-operating income (expense):
 
 
 
 
 
 
 
Interest expense, net of capitalized interest
(8.3
)
 
(7.6
)
 
(23.4
)
 
(28.0
)
Investment income
0.9

 
1.7

 
4.4

 
8.3

Other non-operating items
(1.3
)
 
0.2

 
(1.8
)
 
31.8

Total non-operating income (expense)
(8.7
)
 
(5.7
)
 
(20.8
)
 
12.1

 
 
 
 
 
 
 
 
Income (loss) from continuing operations before taxes and equity in income of unconsolidated affiliates
(23.3
)
 
41.9

 
(49.5
)
 
236.8

Provision (benefit) for income taxes
(3.6
)
 
4.4

 
(15.9
)
 
51.6

Equity in income of unconsolidated affiliates
(1.4
)
 
—

 
(3.2
)
 
(11.3
)
Income (loss) from continuing operations
(18.3
)
 
37.5

 
(30.4
)
 
196.5

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations before taxes
(3.2
)
 
1.0

 
(3.2
)
 
1.6

Provision (benefit) for income taxes
(1.1
)
 
0.4

 
(1.1
)
 
0.6

Income (loss) from discontinued operations
(2.1
)
 
0.6

 
(2.1
)
 
1.0

 
 
 
 
 
 
 
 
Net income (loss)
$
(20.4
)
 
$
38.1

 
$
(32.5
)
 
$
197.5

Income (loss) per share of common stock (basic):
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.13
)
 
$
0.27

 
$
(0.22
)
 
$
1.41

Income (loss) from discontinued operations
(0.01
)
 
—

 
(0.01
)
 
0.01

Net income (loss) per share
$
(0.14
)
 
$
0.27

 
$
(0.23
)
 
$
1.42

Net income (loss) per share of common stock (diluted):
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.13
)
 
$
0.26

 
$
(0.22
)
 
$
1.36

Income (loss) from discontinued operations
(0.01
)
 
—

 
(0.01
)
 
0.01

Net income (loss) per share
$
(0.14
)
 
$
0.26

 
$
(0.23
)
 
$
1.37

 
 
 
 
 
 
 
 
Average shares of stock outstanding - basic
140.8

 
140.0

 
140.9

 
139.1

Average shares of stock outstanding - diluted
140.8

 
144.0

 
140.9

 
144.1

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

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
(20.4
)
 
$
38.1

 
(32.5
)
 
$
197.5

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(9.5
)
 
0.3

 
(10.6
)
 
(6.8
)
Unrealized loss on derivative instruments
—

 
(0.1
)
 
—

 
(0.1
)
Unrealized gain on marketable securities
—

 
(0.2
)
 
0.5

 
1.0

Defined benefit pension plans
1.4

 
1.0

 
3.2

 
4.0

Other comprehensive income (loss), net of tax
(8.1
)
 
1.0

 
(6.9
)
 
(1.9
)
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
(28.5
)
 
$
39.1

 
$
(39.4
)
 
$
195.6

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

5


CONDENSED CONSOLIDATED BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
 
 
September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
Cash and cash equivalents
$
579.9

 
$
656.8

Receivables, net of allowance for doubtful accounts of $1.1 million at September 30, 2014 and December 31, 2013
142.6

 
78.1

Inventories
218.3

 
224.4

Other current assets
9.4

 
7.7

Deferred income taxes
23.2

 
50.9

Assets held for sale
9.3

 
16.3

Total current assets
982.7

 
1,034.2

Timber and timberlands
67.1

 
71.6

Property, plant and equipment, at cost
2,299.4

 
2,294.6

Accumulated depreciation
(1,443.4
)
 
(1,407.8
)
Net property, plant and equipment
856.0

 
886.8

 
 
 
 
Goodwill
9.7

 
9.7

Notes receivable from asset sales
432.2

 
432.2

Restricted cash
10.3

 
11.3

Investments in and advances to affiliates
6.4

 
3.2

Other assets
45.2

 
44.3

Total assets
$
2,409.6

 
$
2,493.3

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current portion of long-term debt
$
2.3

 
$
2.3

Accounts payable and accrued liabilities
171.9

 
161.9

Current portion of contingency reserves
2.0

 
2.0

Total current liabilities
176.2

 
166.2

Long-term debt, excluding current portion
759.2

 
762.7

Contingency reserves, excluding current portion
12.6

 
13.3

Other long-term liabilities
127.8

 
136.1

Deferred income taxes
142.1

 
188.7

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock
152.0

 
152.0

Additional paid-in capital
506.3

 
508.0

Retained earnings
855.2

 
887.7

Treasury stock
(225.7
)
 
(232.2
)
Accumulated comprehensive loss
(96.1
)
 
(89.2
)
Total stockholders’ equity
1,191.7

 
1,226.3

Total liabilities and stockholders’ equity
$
2,409.6

 
$
2,493.3

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

6


CONSOLIDATED STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net income (loss)
$
(20.4
)
 
$
38.1

 
$
(32.5
)
 
$
197.5

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
26.9

 
25.8

 
77.4

 
65.0

Income from unconsolidated affiliates
(1.4
)
 
—

 
(3.2
)
 
(11.3
)
(Gain) loss on sale or impairment of long-lived assets, net
(3.6
)
 
0.3

 
(4.1
)
 
(0.4
)
Gain on acquisition
—

 
—

 
—

 
(35.9
)
Gain on sale of discontinued operation
—

 
(1.7
)
 
—

 
(1.7
)
Early debt extinguishment
—

 
0.8

 
—

 
0.8

Payment of long-term deposit
—

 
(17.1
)
 
—

 
(17.1
)
Other operating credits and charges, net
0.5

 
(16.1
)
 
1.1

 
(9.1
)
Stock-based compensation related to stock plans
2.4

 
2.4

 
6.9

 
6.6

Exchange loss on remeasurement
(2.4
)
 
(0.4
)
 
(1.1
)
 
(0.5
)
Cash settlement of contingencies
(1.2
)
 
—

 
(1.2
)
 
(0.4
)
Cash settlements of warranties, net of accruals
0.1

 
(3.4
)
 
(4.9
)
 
(7.7
)
Pension contributions, net of expense
(5.1
)
 
(0.1
)
 
(3.8
)
 
2.5

Non-cash interest expense, net
0.7

 
1.2

 
1.3

 
1.8

Other adjustments, net
—

 
0.3

 
0.4

 
1.2

Changes in assets and liabilities, net of acquisition:
 
 
 
 
 
 
 
Increase in receivables
(0.2
)
 
(7.9
)
 
(67.4
)
 
(25.8
)
(Increase) decrease in inventories
15.6

 
15.8

 
4.3

 
(12.3
)
(Increase) decrease in other current assets
(2.5
)
 
1.7

 
(1.8
)
 
(4.3
)
Increase in accounts payable and accrued liabilities
24.1

 
17.1

 
18.1

 
26.0

Increase (decrease) in deferred income taxes
(6.0
)
 
2.4

 
(19.8
)
 
47.9

Net cash provided by (used in) operating activities
27.5

 
59.2

 
(30.3
)
 
222.8

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Property, plant and equipment additions
(12.6
)
 
(17.7
)
 
(54.8
)
 
(43.3
)
Investments in and refunds from joint ventures
—

 
—

 
—

 
13.9

Proceeds from sales of assets
12.0

 
15.0

 
12.8

 
16.7

Acquisitions, net of cash
—

 
—

 
—

 
(67.4
)
Receipt of proceeds from notes receivable
—

 
91.4

 
—

 
91.4

(Increase) decrease in restricted cash under letters of credit/credit facility
(0.1
)
 
(0.7
)
 
0.9

 
0.7

Net cash provided by (used in) investing activities
(0.7
)
 
88.0

 
(41.1
)
 
12.0

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
Repayment of long-term debt
(1.1
)
 
(109.5
)
 
(2.2
)
 
(113.1
)
Taxes paid related to net share settlement of equity awards
—

 
—

 
(1.5
)
 
(12.0
)
Other, net
—

 
(0.1
)
 
—

 
(0.1
)
Net cash used in financing activities
(1.1
)
 
(109.6
)
 
(3.7
)
 
(125.2
)
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
(0.5
)
 
1.2

 
(1.8
)
 
(1.0
)
Net increase (decrease) in cash and cash equivalents
25.2

 
38.8

 
(76.9
)
 
108.6

Cash and cash equivalents at beginning of period
554.7

 
630.7

 
656.8

 
560.9

Cash and cash equivalents at end of period
$
579.9

 
$
669.5

 
$
579.9

 
$
669.5

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

7



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, 2013
152.0

 
$
152.0

 
(10.9
)
 
$
(232.2
)
 
$
508.0

 
$
887.7

 
$
(89.2
)
 
$
1,226.3

Net loss
—

 
—

 
—

 
—

 
—

 
(32.5
)
 
—

 
(32.5
)
Issuance of shares for employee stock plans and stock-based compensation
—

 
—

 
0.4

 
8.0

 
(8.6
)
 
—

 
—

 
(0.6
)
Taxes paid related to net share settlement of equity awards
—

 
—

 
(0.1
)
 
(1.5
)
 
—

 
—

 
—

 
(1.5
)
Compensation expense associated with stock awards
—

 
—

 
—

 
—

 
6.9

 
—

 
—

 
6.9

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
(6.9
)
 
(6.9
)
Balance, September 30, 2014
152.0

 
$
152.0

 
(10.6
)
 
$
(225.7
)
 
$
506.3

 
$
855.2

 
$
(96.1
)
 
$
1,191.7

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


8


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS FOR PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments, except for other operating credits and charges, net referred to in Note 9) 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, 2013.
NOTE 2 – STOCK-BASED COMPENSATION
At September 30, 2014, 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, 2014 and 2013, and $6.9 million for the nine months ended September 30, 2014 and $6.6 million for the nine months ended September 30, 2013.
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. Prior to January 1, 2013, options were granted to directors and became 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, 2014, 5.2 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: 
 
2014
 
2013
Expected stock price volatility
57.5%
 
69.2%
Expected dividend yield
—%
 
—%
Risk-free interest rate
1.5%
 
0.9%
Expected life of options (in years)
5 years
 
5 years
Weighted average fair value of options and SSARs granted
$9.03
 
$11.68

9


The following table summarizes stock options and SSARs outstanding as of September 30, 2014, 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 outstanding at January 1, 2014
6,937

 
$
14.26

 
 
 
 
Options granted
494

 
18.09

 
 
 
 
Options exercised
(3
)
 
15.27

 
 
 
 
Options canceled
(377
)
 
21.08

 
 
 
 
Options outstanding at September 30, 2014
7,051

 
$
14.17

 
4.8

 
$
21.5

Vested and expected to vest at September 30, 2014(1)
6,698

 
—

 
—

 
$
20.4

Options exercisable at September 30, 2014
6,054

 
$
13.91

 
—

 
$
20.0

_______________
(1) 
Options or SSARS expected to vest based upon historical forfeiture rate
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 2014 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, 2014. This amount changes based on the market value of LP's stock as reported by the New York Stock Exchange.
As of September 30, 2014, there was $5.4 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 1.5 years. LP recorded compensation expense related to these awards in the first nine months of 2014 of $2.8 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 2014 of $2.2 million. As of September 30, 2014, there was $3.8 million of total unrecognized compensation cost related to unvested incentive share awards. This expense will be recognized over a weighted-average period of 1.0 years.
The following table summarizes incentive share awards outstanding as of September 30, 2014 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, 2014
752,595

 
 
 
 
Incentive share awards granted
183,890

 
 
 
 
Incentive share awards vested
(290,912
)
 
 
 
 
Incentive share awards canceled
(19,474
)
 
 
 
 
Incentive shares outstanding at September 30, 2014
626,099

 
1.0

 
$
8.5

Vested and expected to vest at September 30, 2014(1)
594,794

 
—

 
$
8.1

_______________
(1) 
Incentive shares expected to vest based upon historical forfeiture rate

10


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, 2014, there was $2.9 million of total unrecognized compensation costs related to restricted stock. This expense will be recognized over the next 1.1 years.
The following table summarizes the restricted stock outstanding as of September 30, 2014 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, 2014
512,085

 
$
11.48

Restricted stock awards granted
122,649

 
17.93

Restrictions lapsed
(160,567
)
 
9.64

Restricted stock canceled
(11,021
)
 
12.35

Restricted stock awards at September 30, 2014
463,146

 
$
13.80

Compensation expense related to these awards recognized in the first nine months of 2014 was $1.6 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 2014. As of September 30, 2014, there was $0.6 million of total unrecognized compensation costs related to this award. This expense will be recognized over the next 1.6 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 expense associated with these 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, 2014, LP had 66,339 shares outstanding under this program.
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 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.

11


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, 2014
 
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
$
4.5

 
$
—

 
$
—

 
$
4.5

Trading securities
2.2

 
2.2

 
—

 
—

Contingent consideration
3.8

 
—

 
—

 
3.8

 
 
 
 
 
 
 
 
Dollar amounts in millions
December 31, 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
$
3.7

 
$
—

 
$
—

 
$
3.7

Trading securities
2.0

 
2.0

 
—

 
—

Contingent consideration
3.8

 
—

 
—

 
3.8

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, 2014 and 2013.
Dollar amounts in millions
Available for
sale securities
Contingent consideration
Balance at December 31, 2012
$
2.0

$
—

Contingent consideration pursuant to business combination
—

24.3

Adjustment to contingent consideration fair value
—

(17.3
)
Total unrealized gains included in other comprehensive income
1.8

—

Foreign currency gain
—

0.2

Balance at September 30, 2013
$
3.8

$
7.2

 
 
 
Balance at December 31, 2013
$
3.7

$
3.8

Adjustment to contingent consideration fair value
—

0.1

Total unrealized gains included in other comprehensive income
0.8

—

Foreign exchange rate changes
—

(0.1
)
Balance at September 30, 2014
$
4.5

$
3.8

LP estimated the Senior Notes maturing in 2020 to have a fair value of $372.8 million at September 30, 2014 and $390.3 million at December 31, 2013 based upon market quotations.

12


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 payable in connection with a business combination. The fair value of the contingent consideration payable 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 the volatility of such projections. The contingent consideration is payable in Canadian dollars and a gain on remeasurement of $0.1 million was recorded during the nine month period ended September 30, 2014.

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,
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Income (loss) common shares:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(18.3
)
 
$
37.5

 
$
(30.4
)
 
$
196.5

Income (loss) from discontinued operations
(2.1
)
 
0.6

 
(2.1
)
 
1.0

Net income (loss)
$
(20.4
)
 
$
38.1

 
$
(32.5
)
 
$
197.5

Denominator:
 
 
 
 
 
 
 
Basic - weighted average common shares outstanding
140.8

 
140.0

 
140.9

 
139.1

Dilutive effect of stock warrants
—

 
1.8

 
—

 
2.5

Dilutive effect of stock plans
—

 
2.2

 
—

 
2.5

Diluted shares outstanding
140.8

 
144.0

 
140.9

 
144.1

Basic earnings per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.13
)
 
$
0.27

 
$
(0.22
)
 
$
1.41

Income (loss) from discontinued operations
(0.01
)
 
—

 
(0.01
)
 
0.01

Net income (loss) per share
$
(0.14
)
 
$
0.27

 
$
(0.23
)
 
$
1.42

Diluted earnings per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.13
)
 
$
0.26

 
$
(0.22
)
 
$
1.36

Income (loss) from discontinued operations
(0.01
)
 
—

 
(0.01
)
 
0.01

Net income (loss) per share
$
(0.14
)
 
$
0.26

 
$
(0.23
)
 
$
1.37

For the quarter and nine months ended September 30, 2014, stock options, warrants and SSARs relating to approximately 3.8 million and 2.5 million shares of LP common stock were considered anti-dilutive for purposes of

13


LP's earnings per share calculation due to LP's loss position from continuing operations. 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.
At September 30, 2014, outstanding warrants were exercisable to purchase approximately 1,462,119 shares. Subsequent to September 30, 2014, additional warrants were exercised reducing the outstanding warrants exercisable to purchase approximately 573,521 shares.
NOTE 5 – RECEIVABLES
Receivables consist of the following:
Dollar amounts in millions
September 30, 2014
 
December 31, 2013
Trade receivables
$
130.6

 
$
69.2

Interest receivables
0.6

 
0.2

Income tax receivable
2.5

 
1.2

Other receivables
10.0

 
8.6

Allowance for doubtful accounts
(1.1
)
 
(1.1
)
Total
$
142.6

 
$
78.1

Other receivables at September 30, 2014 and December 31, 2013 primarily consist of sales tax receivables, receivables from out joint venture, miscellaneous 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, 2014
 
December 31, 2013
Logs
$
29.3

 
$
46.9

Other raw materials
20.5

 
27.8

Semi finished inventory
24.3

 
11.1

Finished products
144.2

 
138.6

Total
$
218.3

 
$
224.4

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, 2014, LP included an OSB mill and various non-operating sites in its held for sale category. During the third quarter ended September 30, 2014, LP sold the assets of one of its non-operating locations for $11.9 million. The current book values of assets held for sale by category is as follows:
Dollars in millions
September 30, 2014
 
December 31, 2013
Property, plant and equipment, at cost:
 
 
 
Land, land improvements and logging roads, net of road amortization
$
4.5

 
$
6.9

Buildings
2.9

 
6.2

Machinery and equipment
52.0

 
99.1

 
59.4

 
112.2

Accumulated depreciation
(50.1
)
 
(95.9
)
Net property, plant and equipment
$
9.3

 
$
16.3


14


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 basis of assets and liabilities. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards and other tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are recorded as necessary to reduce deferred tax assets to the amount thereof that is more likely than not to be realized. The likelihood of realizing deferred tax assets is evaluated by, among other things, estimating future taxable income, considering the future reversal of existing deferred tax liabilities to which the deferred tax assets may be applied and assessing the impact of tax planning strategies.
For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate to year-to-date results unless this method does not result in a reliable estimate of year-to-date income tax expense.  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. Changes in the profitability estimates in various jurisdictions will impact our quarterly effective income tax rates.
The income tax components and associated effective income tax rates for the quarter and nine months ended September 30, 2014 and 2013 are as follows:
 
Quarter Ended September 30,
 
2014
 
2013
 
Tax Benefit
 
Tax Rate
 
Tax Provision
 
Tax Rate
Continuing operations
$
(3.6
)
 
(16
)%
 
$
4.4

 
11
%
Discontinued operations
(1.1
)
 
35
 %
 
0.4

 
35
%
 
$
(4.7
)
 
(19
)%
 
$
4.8

 
11
%
 
Nine Months Ended September 30,
 
2014
 
2013
 
Tax Benefit
 
Tax Rate
 
Tax Provision
 
Tax Rate
Continuing operations
$
(15.9
)
 
(34
)%
 
$
51.6

 
21
%
Discontinued operations
(1.1
)
 
35
 %
 
0.6

 
35
%
 
$
(17.0
)
 
(34
)%
 
$
52.2

 
21
%
For the first nine months of 2014, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to state income taxes and the effect of foreign tax rates.  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.
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 upon its review of available positive and negative evidence, 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.

15


As a result of certain recognition requirements of ASC 718 Compensation -- Stock Compensation, certain deferred tax assets as of September 30, 2014 are not recognized in relation to amounts of tax deductions for equity compensation that are greater than the compensation expense recognized for financial reporting. Equity will be increased by $13.2 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. The U.S. Internal Revenue Service (IRS) has proposed certain adjustments to the federal returns for tax years 2007 - 2009, and LP is currently engaged in settlement discussions with 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 these matters. The deposit is included within other assets on the Consolidated Balance Sheet. LP remains subject to U.S. federal examinations of tax years 2011 through 2013, as well as state and local tax examinations for the tax years 2007 through 2013. Canadian federal income tax returns for years 2010 through 2013 are subject to examination and no examinations are currently in progress. Quebec provincial returns have been audited and effectively settled through 2012. As of September 30, 2014, Chilean returns for years 2010 - 2012 are under review by the Chilean Tax Office. Brazilian returns for years 2009 - 2013 are subject to audit, but no examinations are currently in progress.
NOTE 9 – OTHER OPERATING CREDITS AND CHARGES, NET
The major components of “Other operating credits and charges, net” in the Consolidated Statements of Income for the quarter and nine months ended September 30, 2014 and September 30, 2013 is reflected in the table below and is described in the paragraphs following the table:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
Dollar amounts in millions
2014
 
2013
 
2014
 
2013
Other operating charges and credits net:
 
 
 
 
 
 
 
   Adjustment related to prior year inventory
$
—

 
$
—

 
$
—

 
$
(1.6
)
   Adjustment related to prior year depreciation
—

 
—

 
—

 
(1.5
)
Refundable value added tax receivable
—

 
1.4

 
—

 
1.4

Additions to environmental related contingency reserve
—

 
—

 
(0.5
)
 
—

Contingent consideration fair value adjustment
—

 
17.3

 
(0.1
)
 
17.3

Additions to workers compensation reserve
(1.0
)
 
(1.0
)
 
(1.0
)
 
(1.0
)
Adjustment to product related warranty reserves
—

 
(2.0
)
 
—

 
(6.1
)
   Other
0.5

 
0.4

 
0.5

 
0.6

 
$
(0.5
)
 
$
16.1

 
$
(1.1
)
 
$
9.1

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 2014, LP recorded a loss of $1.0 million associated with a workers compensation reserve adjustment.
During the second quarter of 2014, LP recorded a loss of $0.5 million related to an environmental contingency reserve. LP also recorded a loss of $0.1 million related to the fair market value adjustment of the contingent consideration payable in connection with a business combination.
During the third quarter of 2013, LP recorded a $17.3 million reduction in the fair value of the contingent consideration payable in connection with a business combination. LP also recorded a loss of $1.0 million associated with a workers compensation reserve adjustment and a loss of $2.0 million during the quarter related to an increase

16


in product related warranty reserves associated with CanExel products sold in certain geographic areas from 2004 through 2008. 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 and a loss of $4.1 million related to adjustments in product related warranty reserves associated with Canexel products sold in certain geographic areas from 2004 to 2008.
During the first quarter of 2013, LP recorded a loss of $1.6 million related to a prior year inventory adjustment.
Additionally, during 2013, other operating charges and credits included in Equity in (income) loss from unconsolidated affiliates is a charge of $1.8 million related to 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 prior years.
NOTE 10 – 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, 2014 and 2013, LP sold $2.7 million and $3.3 million of products to Abitibi-LP and purchased $14.7 million and $13.9 million of I-joists from Abitibi-LP. For the nine month period ended September 30, 2014 and 2013, LP sold $8.0 million and $10.7 million of products to Abitibi-LP and purchased $42.9 million and $38.4 million of I-joists from Abitibi-LP. Included in LP’s Consolidated Balance Sheets at September 30, 2014 and December 31, 2013 are $1.1 million and $0.8 million in accounts receivable from this affiliate.
Prior to LP's purchase of the remaining joint venture interest from Canfor-LP in May 2013, LP purchased $98.2 million of OSB from Canfor-LP during the nine months ended September 30, 2013.
NOTE 11 – 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 12 – 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, 2013.

17


 
Quarter Ended September 30,
 
Nine Months Ended September 30,
Dollar amounts in millions
2014
 
2013
 
2014
 
2013
Net sales:
 
 
 
 
 
 
 
OSB
$
233.4

 
$
245.4

 
$
652.0

 
$
838.3

Siding
163.2

 
149.0

 
476.4

 
435.5

Engineered Wood Products
82.1

 
71.8

 
229.1

 
196.1

South America
36.0

 
41.5

 
114.5

 
130.9

Other
3.5

 
3.9

 
11.2

 
10.3

Intersegment Sales
(0.1
)
 
(4.2
)
 
(1.9
)
 
(5.6
)
 
$
518.1

 
$
507.4

 
$
1,481.3

 
$
1,605.5

Operating profit (loss):
 
 
 
 
 
 
 
OSB
$
(16.4
)
 
$
30.2

 
$
(23.8
)
 
$
223.7

Siding
20.8

 
22.5

 
65.9

 
70.3

Engineered Wood Products
(0.3
)
 
(2.0
)
 
(8.4
)
 
(10.6
)
South America
0.3

 
5.3

 
8.5

 
17.8

Other
(2.2
)
 
(2.1
)
 
(4.2
)
 
(6.1
)
Other operating credits and charges, net
(0.5
)
 
16.1

 
(1.1
)
 
9.1

Other operating credits and charges associated with unconsolidated affiliates
—

 
—

 
—

 
(2.7
)
Gain (loss) on sale or impairment of long-lived assets
3.6

 
(0.3
)
 
4.1

 
0.4

General corporate and other expenses, net
(18.5
)
 
(22.1
)
 
(66.5
)
 
(65.9
)
Foreign currency gains (losses)
(1.3
)
 
1.0

 
(1.8
)
 
(3.3
)
Gain on acquisition
—

 
—

 
—

 
35.9

Early debt extinguishment
—

 
(0.8
)
 
—

 
(0.8
)
Investment income
0.9

 
1.7

 
4.4

 
8.3

Interest expense, net of capitalized interest
(8.3
)
 
(7.6
)
 
(23.4
)
 
(28.0
)
Income (loss) from continuing operations before taxes
(21.9
)
 
41.9

 
(46.3
)
 
248.1

Provision (benefit) for income taxes
(3.6
)
 
4.4

 
(15.9
)
 
51.6

Income (loss) from continuing operations
$
(18.3
)
 
$
37.5

 
$
(30.4
)
 
$
196.5

NOTE 13 – 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, 2014, there were no indications of impairment for the asset grouping that includes the company's indefinitely curtailed facilities. As of September 30, 2014, 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.

18


NOTE 14 – CONTINGENCY RESERVES
LP maintains reserves for various contingent liabilities as follows: 
Dollar amounts in millions
September 30, 2014
 
December 31, 2013
Environmental reserves
$
13.8

 
$
14.9

Other reserves
0.8

 
0.4

Total contingency reserves
14.6

 
15.3

Current portion of contingency reserves
(2.0
)
 
(2.0
)
Long-term portion of contingency reserves
$
12.6

 
$
13.3

See Note 11 for discussion of legal and environmental matters.

NOTE 15 – DEFINED BENEFIT PENSION PLANS
The following table sets forth the net periodic pension cost for LP’s defined benefit pension plans during the quarter and nine months ended September 30, 2014 and 2013. The net periodic pension cost included the following components:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
Dollar amounts in millions
2014
 
2013
 
2014
 
2013
Service cost
$
0.9

 
$
0.8

 
$
2.8

 
$
2.5

Interest cost
3.7

 
3.2

 
11.0

 
9.7

Expected return on plan assets
(4.2
)
 
(4.1
)
 
(12.7
)
 
(12.4
)
Amortization of prior service cost
—

 
0.1

 
—

 
0.2

Amortization of net loss
1.4

 
1.8

 
4.2

 
5.5

Net periodic pension cost
$
1.8

 
$
1.8

 
$
5.3

 
$
5.5

During the nine months ended September 30, 2014 and 2013, LP recognized $5.3 million and $5.5 million of pension expense for all of LP's defined benefit pension plans.
During the nine months ended September 30, 2014, LP made $9.1 million in pension contributions for LP's benefit plans. LP expects to contribute between $11.0 million and $13.0 million to its pension plans in 2014.
NOTE 16 – 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, 2013 for further discussion of LP’s guarantees and indemnifications.

19


LP provides warranties on the sale of most of its products and records an accrual for estimated future claims. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The activity in warranty reserves for the quarter and nine months of 2014 and 2013 are summarized in the following table:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
Dollar amounts in millions
2014
 
2013
 
2014
 
2013
Beginning balance
$
24.3

 
$
21.0

 
$
29.3

 
$
21.4

Accrued to expense
3.2

 
2.4

 
3.5

 
6.8

Foreign currency translation
(0.8
)
 
—

 
(0.7
)
 
—

Payments made
(3.0
)
 
(3.8
)
 
(8.4
)
 
(8.6
)
Total warranty reserves
23.7

 
19.6

 
23.7

 
19.6

Current portion of warranty reserves
(12.0
)
 
(12.0
)
 
(12.0
)
 
(12.0
)
Long-term portion of warranty reserves
$
11.7

 
$
7.6

 
$
11.7

 
$
7.6

During the quarter and nine months ended September 30, 2014, LP increased the warranty reserves associated with discontinued composite decking products by $3.0 million. LP continues to monitor warranty and other claims associated with these products and believes as of September 30, 2014 that the reserves associated with these matters are adequate. However, it is possible that additional charges may be required in the future. See Note 19 for further discussion.
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, which was recorded in Other Operating Credits and Charges, Net. 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, 2014 that the reserves associated with these matters are adequate. However, it is possible that additional charges may be required in the future.
LP believes that the warranty reserve balances as of September 30, 2014 are adequate to cover future warranty payments. However, it is possible that additional charges may be required.
The current portion of the warranty reserve is included in the caption “Accounts payable and accrued liabilities” and the long-term portion is included in the caption “Other long-term liabilities” on LP’s Consolidated Balance Sheets.
NOTE 17 - OTHER COMPREHENSIVE INCOME

Other comprehensive income activity, net of tax, is provided in the following table for the quarter and nine months ended September 30, 2014:
Dollar amounts in millions
 
Foreign currency translation adjustments
 
Pension adjustments
 
Unrealized gain (loss) on investments
 
Other
 
Total
Balance at June 30, 2014
 
$
(20.3
)
 
$
(68.5
)
 
$
2.5

 
$
(1.7
)
 
$
(88.0
)
Other comprehensive income before reclassifications
 
(9.5
)
 
2.6

 
—

 
0.1

 
(6.8
)
Amounts reclassified from accumulated comprehensive income
 
—

 
(1.3
)
 
—

 
—

 
(1.3
)
Net current-period other comprehensive income
 
(9.5
)
 
1.3

 
—

 
0.1

 
(8.1
)
Balance at September 30, 2014
 
$
(29.8
)
 
$
(67.2
)
 
$
2.5

 
$
(1.6
)
 
$
(96.1
)

20


Dollar amounts in millions
 
Foreign currency translation adjustments
 
Pension adjustments
 
Unrealized gain (loss) on investments
 
Other
 
Total
Balance at December 31, 2013
 
$
(19.2
)
 
$
(70.3
)
 
$
2.0

 
$
(1.7
)
 
$
(89.2
)
Other comprehensive income (loss) before reclassifications
 
(10.6
)
 
6.9

 
0.5

 
0.1

 
(3.1
)
Amounts reclassified from accumulated comprehensive income
 
—

 
(3.8
)
 
—

 
—

 
(3.8
)
Net current-period other comprehensive income (loss)
 
(10.6
)
 
3.1

 
0.5

 
0.1

 
(6.9
)
Balance at September 30, 2014
 
$
(29.8
)
 
$
(67.2
)
 
$
2.5

 
$
(1.6
)
 
$
(96.1
)

Other comprehensive income activity, net of tax, is provided in the following table for the quarter and 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 June 30, 2013
 
$
(14.7
)
 
$
(96.0
)
 
$
(0.3
)
 
$
2.2

 
$
(2.0
)
 
$
(110.8
)
Other comprehensive income (loss) 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 (loss)
 
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
)
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 (loss) 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 (loss)
 
(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
)


21


Reclassifications from accumulated other comprehensive loss for the quarter and nine months ended September 30, 2014 and September 30, 2013 are summarized, in millions of dollars, in the following table:
 
 
Amount reclassified from accumulated comprehensive loss
 
 
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
 
Details about accumulated other comprehensive income components
 
2014
 
2013
 
2014
 
2013
 
Affected line item in the statement where net income (loss) is presented
Amortization of defined benefit pension plans
 
 
 
 
 
 
 
 
 
 
     Prior service cost
 
$
—

 
$
0.1

 
$
—

 
$
0.2

 
(a) 
     Actuarial loss
 
1.4

 
1.8

 
4.2

 
5.5

 
(a) 
     Transition obligation
 
0.4

 
(0.1
)
 
1.1

 
(0.2
)
 
(a) 
 
 
1.8

 
1.8

 
5.3

 
5.5

 
Total before tax
 
 
0.5

 
0.5

 
1.5

 
1.5

 
Tax benefit
Total reclassifications
 
$
1.3

 
$
1.3

 
$
3.8

 
$
4.0

 
Net of tax
____________
(a) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost, see Note 15 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 18 - GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in goodwill for the nine months ended September 30, 2014 and September 30, 2013 are provided in the following table:
Dollar amounts in millions
 
2014
 
2013
Beginning balance, January 1,
 
$
9.7

 
$
—

Additions
 
—

 
9.7

Total goodwill
 
$
9.7

 
$
9.7


LP has recorded other intangible assets in its Consolidated Balance Sheets, as follows:
Dollar amounts in millions
 
September 30, 2014
 
December 31, 2013
Timber licenses (recorded as part of Timber and timberlands)
 
$
65.7

 
$
68.2

Other
 
0.1

 
0.1

Total
 
$
65.8

 
$
68.3


Amortization of the above intangible assets over the next five years is as follows:
Dollar amounts in millions
 
2014
$
3.4

2015
3.4

2016
4.2

2017
4.2

2018
4.2



22


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.

NOTE 19 - DISCONTINUED OPERATIONS

Over the last several years, LP has adopted and implemented plans to sell selected businesses and assets in order to improve its operating results. For all periods presented, these operations include residual losses of mills divested in past years and associated warranty and other liabilities associated with these operations.

Sales and operating profit included in discontinued operations for the quarter and nine months ended September 30, 2014 and 2013 are as follows:
Dollars amounts in millions
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Sales
 
$
—

 
$
4.1

 
$
—

 
$
16.1

Operating profit
 
(3.2
)
 
1.0

 
(3.2
)
 
1.6


Included in the operating losses of discontinued operations for the quarter and nine months ended September 30, 2014 is an increase in warranty reserves associated with discontinued composite decking products of $3.0 million.

During the third quarter of 2013, LP sold its moulding operations. Sales and operating profit included in discontinued operations related to it moulding operations are included in the table above.

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 in the Consolidated Statements of Income.

NOTE 20 - RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") 605, Revenue Recognition. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016. LP is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated results of operations and financial position.

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This guidance states that the disposal of a component of an entity is to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The pronouncement also requires additional disclosures regarding individually significant disposals of components that do not meet the criteria to be recognized as a discontinued operation as well as additional and expanded disclosures. The guidance is effective for all disposals (or classifications as held for sale) of components of an entity and all businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015; it is applied prospectively. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The adoption of this standard will impact presentation only and will not have an effect on LP's consolidated results of operations and financial position.

23


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.
Demand for our products correlates to a significant degree to the level of residential construction activity in North America, which historically has been characterized by significant cyclicality. For the quarter and first nine months of 2014, the U.S. Department of Census reported that actual U.S. single and multi-family housing starts were 15% higher than for the third quarter of 2013 and 10% higher than the comparable nine month period. OSB is sold as a commodity for which sales prices fluctuate daily based on market factors over which we have little or no control. We cannot predict whether the prices of our OSB products will remain at current levels or increase or decrease in the future. OSB prices (NC 7/16"), as reported by Random Lengths, were 14% lower for the third quarter of 2014 than for the same period in 2013 and 35% lower for the first nine months of 2014 as compared to the same period in 2013 .
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, 2013 and to “About Forward-Looking Statements” and “Risk Factors” in this report.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Presented in Note 1 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2013 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 2014, 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

24


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, 2014, we excluded from our estimates approximately $2.4 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.

25


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, 2014, we had established valuation allowances against certain deferred tax assets, primarily related to state carryovers of net operating losses and credits and capital losses in state and foreign jurisdictions. We have not established valuation allowances against other deferred tax assets based upon our review of the evidence supporting their realization. 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 e