Document


 
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, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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: 144,873,463 shares of Common Stock, $1 par value, outstanding as of November 6, 2017. 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 (SEC) 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 and repair 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, Brazilian real and Chilean peso;
•
changes in general and industry-specific environmental laws and regulations;
•
changes in tax laws, and interpretations thereof;
•
changes in circumstances giving rise to environmental liabilities or expenditures;
•
the resolution of existing and future product-related litigation and other legal proceedings; and
•
acts of public authorities, war, civil unrest, natural disasters, fire, floods, earthquakes, inclement weather and other matters beyond our control.
In addition to the foregoing and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in the reports and other documents filed by us with the SEC that warn of risks or uncertainties associated with future results, events or circumstances identify important factors that could cause actual results, events and circumstances to differ materially from those reflected in the forward-looking statements.
ABOUT THIRD-PARTY INFORMATION
In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industry publications, U.S. government sources and other third parties. Although we believe the information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.

2


Item 1.
Financial Statements.
CONSOLIDATED BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
848.7

 
$
659.3

Receivables, net of allowance for doubtful accounts of $1.0 million at September 30, 2017 and December 31, 2016
171.4

 
108.3

Inventories
231.0

 
234.6

Prepaid expenses and other current assets
8.8

 
6.1

Current portion of notes receivable from asset sales
22.2

 
—

Assets held for sale
8.7

 
8.2

Total current assets
1,290.8

 
1,016.5

Timber and timberlands
55.6

 
53.5

Property, plant and equipment
2,472.3

 
2,410.8

Accumulated depreciation
(1,599.6
)
 
(1,527.6
)
Property, plant and equipment, net
872.7

 
883.2

Goodwill
9.7

 
9.7

Notes receivable from asset sales
—

 
22.2

Investments in and advances to affiliates
7.4

 
6.2

Restricted cash
13.2

 
13.2

Other assets
57.2

 
22.4

Long-term deferred tax asset
1.4

 
4.3

Total assets
$
2,308.0

 
$
2,031.2

LIABILITIES AND EQUITY
 
 
 
Current portion of long-term debt
$
0.5

 
$
2.6

Current portion of limited recourse notes payable
22.0

 
—

Accounts payable and accrued liabilities
212.5

 
191.5

Income taxes payable
7.4

 
31.3

Current portion of contingency reserves
3.4

 
3.4

Total current liabilities
245.8

 
228.8

Long-term debt, excluding current portion
353.0

 
374.4

Deferred income taxes
51.3

 
27.7

Contingency reserves, excluding current portion
12.3

 
12.7

Other long-term liabilities
180.3

 
191.9

Stockholders’ equity:
 
 
 
Common stock, $1 par value, 200,000,000 shares authorized, 153,358,542 shares issued
153.4

 
153.4

Additional paid-in capital
470.0

 
478.2

Retained earnings
1,149.5

 
890.3

Treasury stock, 8,502,549 shares and 9,041,733 shares, at cost
(178.2
)
 
(189.0
)
Accumulated comprehensive loss
(129.4
)
 
(137.2
)
    Total stockholders’ equity
1,465.3

 
1,195.7

Total liabilities and stockholders’ equity
$
2,308.0

 
$
2,031.2

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

3


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,
 
2017
 
2016
 
2017
 
2016
Net sales
$
718.3

 
$
596.4

 
$
2,023.3

 
$
1,683.4

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
479.3

 
442.6

 
1,420.1

 
1,301.2

Depreciation and amortization
31.1

 
29.6

 
91.3

 
86.0

Selling and administrative
49.2

 
47.0

 
144.8

 
135.8

(Gain) loss on sale or impairment of long-lived assets, net
0.7

 
0.3

 
(1.8
)
 
1.0

Other operating credits and charges, net
(0.9
)
 
—

 
4.5

 
11.4

Total operating costs and expenses
559.4

 
519.5

 
1,658.9

 
1,535.4

Income from operations
158.9

 
76.9

 
364.4

 
148.0

 
 
 
 
 
 
 
 
Non-operating income (expense):
 
 
 
 
 
 
 
Interest expense, net of capitalized interest
(4.9
)
 
(9.0
)
 
(14.8
)
 
(26.3
)
Investment income
2.9

 
2.5

 
7.2

 
6.4

Loss on early debt extinguishment
—

 
(13.2
)
 
—

 
(13.2
)
Other non-operating items
(0.6
)
 
(0.5
)
 
(2.4
)
 
1.4

Total non-operating income (expense)
(2.6
)
 
(20.2
)
 
(10.0
)
 
(31.7
)
 
 
 
 
 
 
 
 
Income from continuing operations before taxes and equity in income of unconsolidated affiliates
156.3

 
56.7

 
354.4

 
116.3

Provision (benefit) for income taxes
46.4

 
(7.5
)
 
97.9

 
13.1

Equity in income of unconsolidated affiliates
(1.0
)
 
(1.4
)
 
(3.8
)
 
(4.4
)
Income from continuing operations
$
110.9

 
$
65.6

 
$
260.3

 
$
107.6

 
 
 
 
 
 
 
 
Loss from discontinued operations before tax
(1.7
)
 
—

 
(1.7
)
 
—

Benefit for income taxes
(0.6
)
 
—

 
(0.6
)
 
—

Loss from discontinued operations
(1.1
)
 
—

 
(1.1
)
 
—

 
 
 
 
 
 
 
 
Net income
$
109.8

 
$
65.6

 
$
259.2

 
$
107.6

 
 
 
 
 
 
 
 
Basic net income per share of common stock:
 
 
 
 
 
 
 
Income per share continuing operations
$
0.77

 
$
0.46

 
$
1.80

 
$
0.75

Loss per share discontinued operations
(0.01
)
 
—

 
(0.01
)
 
—

Net income per share
$
0.76

 
$
0.46

 
$
1.79

 
$
0.75

Diluted net income per share of common stock:
 
 
 
 
 
 
 
Income per share continuing operations
$
0.76

 
$
0.45

 
$
1.78

 
$
0.74

Loss per share discontinued operations
(0.01
)
 
$
—

 
$
(0.01
)
 
$
—

Net income per share
$
0.75

 
$
0.45

 
$
1.77

 
$
0.74

 
 
 
 
 
 
 
 
Weighted average shares of stock outstanding - basic
144.5

 
143.7

 
144.4

 
143.3

Weighted average shares of stock outstanding - diluted
146.5

 
145.4

 
146.3

 
145.2

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,
 
2017
 
2016
 
2017
 
2016
Net income
$
109.8

 
$
65.6

 
$
259.2

 
$
107.6

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
10.4

 
0.1

 
4.7

 
10.3

Unrealized gain (loss) on investments, net of tax
0.4

 
(0.5
)
 
0.8

 
(0.7
)
Defined benefit pension plans:
 
 
 
 
 
 
 
Change in benefit obligations, translation adjustment
(0.4
)
 
0.1

 
(0.8
)
 
(0.6
)
Amortization of amounts included in net periodic benefit cost:
 
 
 
 
 
 
 
Actuarial loss, net of tax
0.9

 
0.9

 
2.6

 
2.5

Prior service cost, net of tax
0.2

 
—

 
0.6

 
0.1

Other
(0.1
)
 
—

 
(0.1
)
 
—

Other comprehensive income (loss)
11.4

 
0.6

 
7.8

 
11.6

Comprehensive income
$
121.2

 
$
66.2

 
$
267.0

 
$
119.2

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

5


CONSOLIDATED STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED) 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net income
$
109.8

 
$
65.6

 
$
259.2

 
$
107.6

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
31.1

 
29.6

 
91.3

 
86.0

Equity in income of unconsolidated affiliates, including dividends
(0.2
)
 
—

 
(1.2
)
 
0.3

(Gain) loss on sale or impairment of long-lived assets, net
0.7

 
0.3

 
(1.8
)
 
1.0

Loss on early debt extinguishment
—

 
13.2

 
—

 
13.2

Other operating credits and charges, net
(0.9
)
 
—

 
4.5

 
11.4

Stock-based compensation related to stock plans
2.0

 
3.2

 
8.0

 
9.4

Exchange (gain) loss on remeasurement
(0.1
)
 
(0.2
)
 
1.6

 
(0.9
)
Cash settlements of warranties, net of accruals
0.1

 
(4.6
)
 
(5.5
)
 
(11.4
)
Pension expense, net of contributions
(3.2
)
 
—

 
(3.9
)
 
1.4

Non-cash interest expense, net
0.1

 
1.4

 
0.3

 
1.6

Other adjustments, net
(0.2
)
 
(0.6
)
 
(0.4
)
 
(1.3
)
Changes in assets and liabilities:
 
 
 
 
 
 
 
(Increase) decrease in receivables
(17.1
)
 
14.1

 
(61.9
)
 
(37.0
)
(Increase) decrease in inventories
(8.5
)
 
4.8

 
4.5

 
(3.2
)
(Increase) decrease in prepaid expenses
0.6

 
0.7

 
(2.7
)
 
(1.9
)
Increase in accounts payable and accrued liabilities
18.1

 
17.8

 
12.8

 
59.5

Increase (decrease) in income taxes
11.1

 
(9.2
)
 
0.2

 
4.6

Net cash provided by operating activities
143.4

 
136.1

 
305.0

 
240.3

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Property, plant and equipment additions
(35.0
)
 
(27.6
)
 
(80.7
)
 
(78.7
)
Proceeds from sales of assets
0.1

 
—

 
3.3

 
—

(Increase) decrease in restricted cash under letters of credit/credit facility
—

 
0.2

 
—

 
(0.1
)
Increase in restricted cash for redemption of long-term debt
—

 
(93.4
)
 
—

 
(93.4
)
Payment of long-term deposit
—

 
—

 
(32.0
)
 
—

Other investing activities
0.1

 
(0.1
)
 
0.1

 
(0.2
)
Net cash used in investing activities
(34.8
)
 
(120.9
)
 
(109.3
)
 
(172.4
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
Borrowings of long-term debt
—

 
350.0

 
—

 
350.0

Repayment of long-term debt
(1.2
)
 
(274.8
)
 
(2.5
)
 
(282.7
)
Payment of debt issuance fees
—

 
(5.0
)
 
—

 
(5.0
)
Sale of common stock, net of cash payments under equity plans
—

 
—

 
(0.4
)
 
(0.1
)
Taxes paid related to net share settlement of equity awards
(0.5
)
 
(0.8
)
 
(5.3
)
 
(8.9
)
Net cash provided by (used in) financing activities
(1.7
)
 
69.4

 
(8.2
)
 
53.3

EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
1.8

 
0.3

 
1.9

 
3.8

Net increase in cash and cash equivalents
108.7

 
84.9

 
189.4

 
125.0

Cash and cash equivalents at beginning of period
740.0

 
474.8

 
659.3

 
434.7

Cash and cash equivalents at end of period
$
848.7

 
$
559.7

 
$
848.7

 
$
559.7

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

6


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS FOR PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of LP and its subsidiaries for the interim periods presented. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. These 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, 2016.
NOTE 2 - STOCK-BASED COMPENSATION
LP has a Management Incentive Plan (MIP) that is administered by the Compensation Committee of the Board of Directors. The Compensation Committee authorizes the grants of restricted stock (shares or units), performance share awards payable in stock based upon the attainment of specified performance goals, stock settled stock appreciation rights (SSARs), other stock-based awards and cash-based awards at the discretion of the Compensation Committee. A detailed discussion of this is included in Note 14 to the consolidated financial statements included in LP's Annual Report on Form 10-K for the fiscal year ended December 31, 2016. As of September 30, 2017, 2.8 million shares were available for grant under the 2013 Omnibus Plan.
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
Dollar amounts in millions
2017
 
2016
 
2017
 
2016
Total stock-based compensation expense (costs of sales and general and administrative)
$
2.0

 
$
3.2

 
$
8.0

 
$
9.4

Income tax provision (benefit) related to stock-based compensation
$
0.2

 
$
(0.4
)
 
$
0.5

 
$
(3.2
)
Impact on cash flow due to taxes paid related to net share settlement of equity awards
$
0.5

 
$
0.8

 
$
5.3

 
$
8.9


At September 30, 2017, $12.4 million of compensation cost related to unvested performance shares, restricted stock and SSARs attributable to future service had not yet been recognized.
Grants of awards
During the first nine months of 2017, the Company granted 121,724 performance units at an average grant date fair value of $24.87 per share, 285,934 SSARs at an average grant date fair value of $8.02 per share and 352,897 restricted stock awards (shares or units) at an average grant date fair value of $19.91 per share.
NOTE 3 – FAIR VALUE MEASUREMENTS
LP estimated its Senior Notes due in 2024 to have a fair value of $361.5 million at September 30, 2017 and $344.3 million at December 31, 2016 based upon market quotations.
Carrying amounts reported on the balance sheet for cash and cash equivalents, accounts receivables and accounts payable approximate fair value due to the short-term maturity of these items.

7


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. LP's potentially dilutive securities consist of restricted stock, restricted stock units, performance share awards, and SSARs.
Share amounts in millions
Quarter Ended September 30,
 
Nine Months Ended September 30,
2017
 
2016
 
2017
 
2016
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
144.5

 
143.7

 
144.4

 
143.3

Effect of dilutive securities:
 
 
 
 
 
 
 
Dilutive effect of stock warrants
—

 
0.2

 
—

 
0.2

Dilutive effect of employee stock plans
2.0

 
1.5

 
1.9

 
1.7

Dilutive potential common shares
2.0

 
1.7

 
1.9

 
1.9

Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted
146.5

 
145.4

 
146.3

 
145.2

For the quarter and nine months ended September 30, 2017, restricted stock (shares or units), performance share awards and SSARs relating to approximately 0.2 million shares of LP common stock were considered not in-the-money for purposes of LP's earnings per share calculation.
For the quarter and nine months ended September 30, 2016, restricted stock (shares or units), performance share awards, SSARs and warrants relating to approximately 2.2 million and 2.7 million shares of LP common stock were considered not in-the-money for purposes of LP's earnings per share calculation.
NOTE 5 – RECEIVABLES
Receivables consist of the following:
Dollar amounts in millions
September 30, 2017
 
December 31, 2016
Trade receivables
$
157.1

 
$
96.1

Income tax receivable
2.8

 
1.7

Other receivables
12.5

 
11.5

Allowance for doubtful accounts
(1.0
)
 
(1.0
)
Total
$
171.4

 
$
108.3

Other receivables at September 30, 2017 and December 31, 2016 primarily consist of sales tax receivables, vendor rebates, interest receivables, a receivable associated with an affiliate and other miscellaneous receivables.

8


NOTE 6 – INVENTORIES
Inventories are valued at the lower of cost or net realizable value. Inventory cost includes materials, labor and operating overhead. The major types of inventories are as follows (work in process is not material):
Dollar amounts in millions
September 30, 2017
 
December 31, 2016
Logs
$
46.9

 
$
54.6

Other raw materials
24.2

 
23.0

Semi-finished inventory
20.8

 
16.8

Finished products
139.1

 
140.2

Total
$
231.0

 
$
234.6

NOTE 7 – INCOME TAXES
Accounting standards state that companies account for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards and other tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are recorded as necessary to reduce deferred tax assets to the amount thereof that is more likely than not to be realized. The likelihood of realizing deferred tax assets is evaluated by, among other things, estimating future taxable income, considering the future reversal of existing deferred tax liabilities to which the deferred tax assets may be applied and assessing the impact of tax planning strategies.
For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate to year-to-date results unless this method does not result in a reliable estimate of year-to-date income tax expense.  An exception is provided for situations in which an enterprise anticipates a loss in a separate jurisdiction for which no tax benefit can be recognized.
Each period the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted to the current quarter. Changes in the profitability estimates in various jurisdictions will impact our quarterly effective income tax rates.
For the first nine months of 2017, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s income relate to foreign tax rates, changes in Canadian valuation allowances, and the deduction for U.S. domestic production activities. For the first nine months of 2016, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to foreign tax rates, changes in Canadian and state valuation allowances, excess tax benefits in connection with LP's stock-based compensation plans, recognition of research and development credits from prior years and an increase in the reserve for unrecognized tax benefits associated with LP's South American operations.
LP periodically reviews the need for valuation allowances against deferred tax assets and recognizes these deferred tax assets to the extent that the realization is more likely than not. As part of our review, we consider all positive and negative evidence, including earnings history, the future reversal of deferred tax liabilities, and the relevant expirations of carryforwards. LP believes that the valuation allowances provided are appropriate. If in future periods our earnings estimates differ from the estimates used to establish these valuation allowances, or other objective positive or negative evidence arises, LP may be required to record an adjustment resulting in an impact on tax expense (benefit) for that period.
NOTE 8 - OTHER OPERATING CREDITS AND CHARGES

During the third quarter of 2017, LP recorded a refund of $0.9 million related to sales and use taxes.


9


During the second quarter of 2017, LP recorded an expense of $2.0 million related to an increase in product related warranty reserves associated with CanExel products sold in specific geographic locations and for a specific time period.

During the first quarter of 2017, LP recorded an expense of $3.4 million related to an increase in product related warranty reserves associated with CanExel products sold in specific geographic locations and for a specific time period.

During the second quarter of 2016, LP recorded an expense of $11.4 million related to an increase in product related warranty reserves and a related adjustment to value added taxes associated with CanExel products sold in specific geographic locations and for a specific time period.

NOTE 9 – LEGAL AND ENVIRONMENTAL MATTERS
Certain environmental matters and legal proceedings are discussed below.
Environmental Matters
LP maintains a reserve for undiscounted estimated environmental loss contingencies. This reserve is primarily for estimated future costs of remediation of hazardous or toxic substances at numerous sites currently or previously owned by the Company. LP’s estimates of its environmental loss contingencies are based on various assumptions and judgments, the specific nature of which varies in light of the particular facts and circumstances surrounding each environmental loss contingency. These estimates typically reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and/or monitoring activities and the probable cost of these activities, and in some cases reflect assumptions and judgments as to the obligation or willingness and ability of third parties to bear a proportionate or allocated share of the cost of these activities. Due to the numerous uncertainties and variables associated with these assumptions and judgments, and the effects of changes in governmental regulation and environmental technologies, both the precision and reliability of the resulting estimates of the related contingencies are subject to substantial uncertainties. LP regularly monitors its estimated exposure to environmental loss contingencies and, as additional information becomes known, may change its estimates significantly. However, no estimate of the range of any such change can be made at this time.
Other Proceedings
LP and its subsidiaries are parties to other legal proceedings. Based on the information currently available, management believes that the resolution of such proceedings will not have a material adverse effect on the financial position, results of operations, cash flows or liquidity of LP.

NOTE 10 – SELECTED SEGMENT DATA
LP operates in four segments: Siding, North America Oriented Strand Board (OSB), 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, 2016.

10


 
Quarter Ended September 30,
 
Nine Months Ended September 30,
Dollar amounts in millions
2017
 
2016
 
2017
 
2016
Net Sales
 
 
 
 
 
 
 
Siding
$
226.2

 
$
194.8

 
$
671.2

 
$
583.3

OSB
350.9

 
282.1

 
944.3

 
751.9

EWP
98.1

 
80.7

 
274.4

 
230.5

South America
38.3

 
31.7

 
114.8

 
103.2

Other
6.5

 
7.6

 
22.3

 
20.3

Intersegment sales
(1.7
)
 
(0.5
)
 
(3.7
)
 
(5.8
)
 
$
718.3

 
$
596.4

 
$
2,023.3

 
$
1,683.4

Operating profit (loss):
 
 
 
 
 
 
 
Siding
$
52.8

 
$
35.2

 
$
141.5

 
$
103.9

OSB
126.4

 
67.4

 
289.4

 
126.7

EWP
6.3

 
—

 
12.0

 
(2.0
)
South America
5.8

 
3.3

 
16.4

 
15.3

Other
(1.6
)
 
(0.4
)
 
(2.7
)
 
(1.0
)
Other operating credits and charges, net
0.9

 
—

 
(4.5
)
 
(11.4
)
Gain (loss) on sale or impairment of long-lived assets, net
(0.7
)
 
(0.3
)
 
1.8

 
(1.0
)
General corporate and other expenses, net
(30.0
)
 
(26.9
)
 
(85.7
)
 
(78.1
)
Interest expense, net of capitalized interest
(4.9
)
 
(9.0
)
 
(14.8
)
 
(26.3
)
Investment income
2.9

 
2.5

 
7.2

 
6.4

Loss on early debt extinguishment
—

 
(13.2
)
 
—

 
(13.2
)
Other non-operating items
(0.6
)
 
(0.5
)
 
(2.4
)
 
1.4

Income from continuing operations before taxes
157.3

 
58.1

 
358.2

 
120.7

Provision (benefit) for income taxes
46.4

 
(7.5
)
 
97.9

 
13.1

Income from continuing operations
$
110.9

 
$
65.6

 
$
260.3

 
$
107.6

NOTE 11 – POTENTIAL IMPAIRMENTS
LP continues to review certain operations and investments for potential impairments. LP’s management currently believes it has adequate support for the carrying value of each of these operations and investments based upon the anticipated cash flows that result from estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures.
LP also reviews from time to time possible dispositions of various assets in light of current and anticipated economic and industry conditions, its strategic plan and other relevant circumstances. Because a determination to dispose of particular assets can require management to make assumptions regarding the transaction structure of the disposition and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, LP may be required to record impairment charges in connection with decisions to dispose of assets.
NOTE 12 – DEFINED BENEFIT PENSION PLANS
The following table sets forth the net periodic pension cost for LP’s defined benefit pension plans during the quarter and nine months ended September 30, 2017 and 2016. The net periodic pension cost included the following components:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
Dollar amounts in millions
2017
 
2016
 
2017
 
2016
Service cost
$
1.4

 
$
1.2

 
$
4.1

 
$
3.6

Interest cost
3.3

 
3.3

 
9.7

 
10.1

Expected return on plan assets
(3.3
)
 
(3.3
)
 
(9.8
)
 
(10.0
)
Amortization of prior service cost 1
0.2

 
0.1

 
0.6

 
0.3

Amortization of net loss 1
1.4

 
1.4

 
4.2

 
4.1

Net periodic pension cost
$
3.0

 
$
2.7

 
$
8.8

 
$
8.1

1The amortization of prior service costs and net loss are included in the amounts reclassified from accumulated other comprehensive income (loss); see Note 14 for additional details. The net periodic pension cost is included in Cost of sales and Selling and administrative expense in the Consolidated Statements of Income.
During the nine months ended September 30, 2017, LP made $12.8 million in pension contributions to its defined benefit pension plans. LP expects to contribute between $1.0 million and $2.0 million to its defined benefit pension plans in the remaining months of 2017.

11


NOTE 13 – PRODUCT WARRANTY
LP provides warranties on the sale of most of its products and records an accrual for estimated future claims. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The activity in warranty reserves for the quarter ended September 30, 2017 and 2016 are summarized in the following table:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
Dollar amounts in millions
2017
 
2016
 
2017
 
2016
Beginning balance
$
25.3

 
$
25.6

 
$
24.1

 
$
21.0

Accrued to expense
0.2

 
0.2

 
0.6

 
0.6

Accrued to other operating credits and charges
—

 
—

 
5.4

 
10.9

Accrued to discontinued operations
1.5

 
—

 
1.5

 
—

Foreign currency translation
0.6

 
0.1

 
2.0

 
0.6

Payments made
(1.6
)
 
(4.8
)
 
(7.6
)
 
(12.0
)
Total warranty reserves
26.0

 
21.1

 
26.0

 
21.1

Current portion of warranty reserves
(9.0
)
 
(9.0
)
 
(9.0
)
 
(9.0
)
Long-term portion of warranty reserves
$
17.0

 
$
12.1

 
$
17.0

 
$
12.1

LP continues to monitor warranty and other claims associated with these products and believes as of September 30, 2017 that the reserves associated with these matters are adequate. However, it is possible that additional charges may be required in the future.

During the quarter ended September 30, 2017, LP increased the reserves associated with discontinued composite decking products by $1.5 million.
The current portion of the warranty reserve is included in the caption “Accounts payable and accrued liabilities” and the long-term portion is included in the caption “Other long-term liabilities” on LP’s Consolidated Balance Sheets.
NOTE 14 - OTHER COMPREHENSIVE INCOME

Other comprehensive income activity, net of tax, is provided in the following table for the quarter and nine months ended September 30, 2017:
 
 
 
 
Pension Adjustments
 
 
 
 
 
 
Dollar amounts in millions
 
Foreign currency translation adjustments
 
Actuarial losses
 
Prior service costs
 
Unrealized gain (loss) on investments
 
Other
 
Total
Balance at June 30, 2017
 
$
(52.0
)
 
$
(86.4
)
 
$
(4.8
)
 
$
3.1

 
$
(0.7
)
 
$
(140.8
)
Other comprehensive income (loss) before reclassifications
 
10.4

 
(0.4
)
 
—

 
0.7

 
(0.2
)
 
10.5

Income taxes
 
—

 
—

 
—

 
(0.3
)
 
—

 
(0.3
)
Net other comprehensive income (loss) before reclassifications
 
10.4

 
(0.4
)
 
—

 
0.4

 
(0.2
)
 
10.2

Amounts reclassified from accumulated comprehensive income (loss)
 
—

 
1.4

 
0.3

 
—

 
0.1

 
1.8

Income taxes
 
—

 
(0.5
)
 
(0.1
)
 
—

 
—

 
(0.6
)
Net amounts reclassified from cumulative other comprehensive income (loss)
 
—

 
0.9

 
0.2

 
—

 
0.1

 
1.2

Total other comprehensive income (loss)
 
10.4

 
0.5

 
0.2

 
0.4

 
(0.1
)
 
11.4

Balance at September 30, 2017
 
$
(41.6
)
 
$
(85.9
)
 
$
(4.6
)
 
$
3.5

 
$
(0.8
)
 
$
(129.4
)


 
 
 
 
Pension Adjustments
 
 
 
 
 
 
Dollar amounts in millions
 
Foreign currency translation adjustments
 
Actuarial losses
 
Prior service costs
 
Unrealized gain (loss) on investments
 
Other
 
Total
Balance at December 31, 2016
 
$
(46.3
)
 
$
(87.7
)
 
$
(5.2
)
 
$
2.7

 
$
(0.7
)
 
$
(137.2
)
Other comprehensive income (loss) before reclassifications
 
4.7

 
(0.8
)
 
—

 
1.3

 
(0.2
)
 
5.0

Income taxes
 
—

 
—

 
—

 
(0.5
)
 
—

 
(0.5
)
Net other comprehensive income (loss) before reclassifications
 
4.7

 
(0.8
)
 
—

 
0.8

 
(0.2
)
 
4.5

Amounts reclassified from accumulated comprehensive income (loss)
 
—

 
4.2

 
0.9

 
—

 
0.1

 
5.2

Income taxes
 
—

 
(1.6
)
 
(0.3
)
 
—

 
—

 
(1.9
)
Net amounts reclassified from cumulative other comprehensive income (loss)
 
—

 
2.6

 
0.6

 
—

 
0.1

 
3.3

Total other comprehensive income (loss)
 
4.7

 
1.8

 
0.6

 
0.8

 
(0.1
)
 
7.8

Balance at September 30, 2017
 
$
(41.6
)
 
$
(85.9
)
 
$
(4.6
)
 
$
3.5

 
$
(0.8
)
 
$
(129.4
)



12


Other comprehensive income activity, net of tax, is provided in the following table for the quarter and six months ended September 30, 2016:
 
 
 
 
Pension Adjustments
 
 
 
 
 
 
Dollar amounts in millions
 
Foreign currency translation adjustments
 
Actuarial losses
 
Prior service costs
 
Unrealized gain (loss) on investments
 
Other
 
Total
Balance at June 30, 2016
 
$
(44.9
)
 
$
(86.9
)
 
$
(5.4
)
 
$
3.1

 
$
(1.0
)
 
$
(135.1
)
Other comprehensive income (loss) before reclassifications
 
0.1

 
0.1

 
—

 
(0.8
)
 
—

 
(0.6
)
Income taxes
 
—

 
—

 
—

 
0.3

 
—

 
0.3

Net other comprehensive income (loss) before reclassifications
 
0.1

 
0.1

 
—

 
(0.5
)
 
—

 
(0.3
)
Amounts reclassified from accumulated other comprehensive income
 
—

 
1.4

 
0.1

 
—

 
—

 
1.5

Income taxes
 
—

 
(0.5
)
 
(0.1
)
 
—

 
—

 
(0.6
)
Net amounts reclassified from cumulative other comprehensive income
 
—

 
0.9

 
—

 
—

 
—

 
0.9

Total other comprehensive income (loss)
 
0.1

 
1.0

 
—

 
(0.5
)
 
—

 
0.6

Balance at September 30, 2016
 
$
(44.8
)
 
$
(85.9
)
 
$
(5.4
)
 
$
2.6

 
$
(1.0
)
 
$
(134.5
)



 
 
 
 
Pension Adjustments
 
 
 
 
 
 
Dollar amounts in millions
 
Foreign currency translation adjustments
 
Actuarial losses
 
Prior service costs
 
Unrealized gain (loss) on investments
 
Other
 
Total
Balance at December 31, 2015
 
$
(55.1
)
 
$
(87.8
)
 
$
(5.5
)
 
$
3.3

 
$
(1.0
)
 
$
(146.1
)
Other comprehensive income (loss) before reclassifications
 
10.3

 
(0.6
)
 
—

 
(1.1
)
 
—

 
8.6

Income taxes
 
—

 
—

 
—

 
0.4

 
—

 
0.4

Net other comprehensive income (loss) before reclassifications
 
10.3

 
(0.6
)
 
—

 
(0.7
)
 
—

 
9.0

Amounts reclassified from accumulated other comprehensive income
 
—

 
4.1

 
0.3

 
—

 
—

 
4.4

Income taxes
 
—

 
(1.6
)
 
(0.2
)
 
—

 
—

 
(1.8
)
Net amounts reclassified from cumulative other comprehensive income
 
—

 
2.5

 
0.1

 
—

 
—

 
2.6

Total other comprehensive income (loss)
 
10.3

 
1.9

 
0.1

 
(0.7
)
 
—

 
11.6

Balance at September 30, 2016
 
$
(44.8
)
 
$
(85.9
)
 
$
(5.4
)
 
$
2.6

 
$
(1.0
)
 
$
(134.5
)

The amounts reclassified from accumulated other comprehensive income (loss) are included in the computation of net periodic pension cost; see Note 12 for additional details. The net periodic pension cost is included in Cost of sales and Selling and administrative expense in the Consolidated Statements of Income.




13


NOTE 15 - RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
    
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) 605, Revenue Recognition. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective on January 1, 2018. LP has elected to adopt the revenue recognition standard in the first quarter of 2018 using the modified retrospective transition method with a cumulative adjustment to its opening balance of retained earnings. LP does not anticipate the adoption of this standard to have a material impact on LP’s financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). The standard simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. LP does not expect the adoption of this new standard to have a material impact on its consolidated results of operations and financial position.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715). The standard amends the requirements in ASC 715 related to the income statement presentation of the components of net periodic benefit cost for an entity's sponsored defined benefit pension and other post-retirement plans. The new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. LP does not expect the adoption of this new standard to have a material impact on its consolidated results of operations and financial position as only the presentation of the income statement will be affected.

In May 2017, the FASB issued ASU 2017-09, Modification Accounting for Share-Based Payment Arrangements. The standard amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. LP does not expect the adoption of this new standard to have a material impact on its consolidated results of operations and financial position.


14



Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
LP is a leading manufacturer of sustainable, quality engineered wood building materials including Oriented Strand Board (OSB), structural framing products, and exterior siding for use in residential, industrial and light commercial construction. Our products are used primarily in new home construction, repair and remodeling, and outdoor structures. We also market and sell our products in light industrial and commercial construction and we have a modest export business. Our manufacturing facilities are primarily located in the U.S. and Canada, but we also operate two facilities in Chile and one facility in Brazil.
To serve these markets, we operate in four segments: Siding; North America Oriented Strand Board (OSB); Engineered Wood Products (EWP); and South America.
Demand for our products correlates to a significant degree to the level of new home construction activity in North America, which historically has been characterized by significant cyclicality. For the third quarter and first nine months of 2017, the U.S. Department of Census reported that U.S. single and multi-family housing starts were 2% higher than for the same quarter of 2016 and 3% higher than the comparable nine month period. OSB is sold as a commodity for which sales prices fluctuate daily based on market factors over which we have little or no control. We cannot predict whether the prices of our OSB products will remain at current levels or increase or decrease in the future. OSB prices (NC 7/16"), as reported by Random Lengths, were 33% higher for the third quarter of 2017 and 30% for the first nine months of 2017 compared to the same periods in 2016.
For additional factors affecting our results, refer to the Management Discussion and Analysis of Financial Condition and Results of Operations overview contained in our Annual Report on Form 10-K for the year ended December 31, 2016 and to “About Forward-Looking Statements” and “Risk Factors” in this report.

EXECUTIVE SUMMARY

We recorded a 20% increase in sales to $718.3 million for the quarter ended September 30, 2017 from $596.4 million reported for the quarter ended September 30, 2016. We recorded income from operations of $158.9 million for the quarter ended September 30, 2017 compared to $76.9 million for the quarter ended September 30, 2016. We recorded net income of $109.8 million ($0.75 per diluted share) for the quarter ended September 30, 2017 compared to $65.6 million ($0.45 per diluted share) for the quarter ended September 30, 2016. We reported an increase of $81.3 million in Adjusted EBITDA from continuing operations for the third quarter of 2017 as compared to the third quarter of 2016. Improvements in OSB pricing in all North American operations had a positive impact on our operating results of $83.6 million for the quarter ended September 30, 2017 as compared to the quarter ended September 30, 2016.

We recorded a 20% increase in sales to $2.0 billion for the nine months ended September 30, 2017 from $1.7 billion reported for the six months ended September 30, 2016. We recorded income from operations of $364.4 million for the nine months ended September 30, 2017 compared to $148.0 million for the nine months ended September 30, 2016. We recorded net income of $259.2 million ($1.77 per diluted share) for the nine months ended September 30, 2017 compared to $107.6 million ($0.74 per diluted share) for the nine months ended September 30, 2016. We reported an increase of $206.2 million in Adjusted EBITDA from continuing operations for the nine months ended September 30, 2017 compared to the same period in 2016. Improvements in OSB pricing in all North American operations had a positive impact on our operating results of $211.3 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.

These changes are discussed further in "Our Operating Results" below.





15


CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Presented in Note 1 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2016 is a discussion of our significant accounting policies and significant accounting estimates and judgments. Throughout the preparation of the financial statements, we employ significant judgments in the application of accounting principles and methods. These judgments are primarily related to the assumptions used to arrive at various estimates. For 2017, these significant accounting estimates and judgments include:
Legal Contingencies. Our estimates of loss contingencies for legal proceedings are based on various judgments and assumptions regarding the potential resolution or disposition of the underlying claims and associated costs. In making judgments and assumptions regarding legal contingencies for ongoing class action settlements, we consider, among other things, discernible trends in the rate of claims asserted and related damage estimates and information obtained through consultation with statisticians and economists, including statistical analysis of potential outcomes based on experience to date and the experience of third parties 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, 2017, we excluded from our estimates approximately $2.1 million of potential environmental liabilities that we estimate will be allocated to third parties pursuant to existing and anticipated future cost-sharing arrangements.
Impairment of Long-Lived Assets. We review the long-lived assets held and used by us (primarily property, plant and equipment and timber and timberlands) for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. We consider the necessity of undertaking such a review at least quarterly, and also when certain events or changes in circumstances occur. Events and changes in circumstances that may necessitate such a review include, but are not limited to: a significant decrease in the market price of a long-lived asset or group of long-lived assets; a significant adverse change in the extent or manner in which a long-lived asset or group of long-lived assets is being used or in its physical condition; a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or group of long-lived assets, including an adverse action or assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or group of long-lived assets; current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or group of long-lived assets; and current expectation that, more likely than not, a long-lived asset or group of long-lived assets will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Identifying these events and changes in circumstances, and assessing their impact on the appropriate valuation of the affected assets under accounting principles generally accepted in the U.S., requires us to make judgments, assumptions and estimates.
In general, for assets held and used in our operations, impairments are recognized when the carrying amount of the long-lived asset or groups of long-lived assets is not recoverable and exceeds the fair value of the asset or group of

16


assets. The carrying amount of a long-lived asset or groups of long-lived assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets or group of assets. The key assumptions in estimating these cash flows relate to future production volumes, pricing of commodity or specialty products and future estimates of expenses to be incurred as reflected in our long-range internal planning models. Our assumptions regarding pricing are based upon the average pricing over the commodity cycle (generally five years) due to the inherent volatility of commodity product pricing, and reflect our assessment of information gathered from industry research firms, research reports published by investment analysts and other published forecasts. Our assumptions regarding expenses reflect our expectation that we will continue to reduce production costs to offset inflationary impacts.
When impairment is indicated for assets held and used in our operations, the book values of the affected assets are written down to their estimated fair value, which is generally based upon discounted future cash flows associated with the affected assets. When impairment is indicated for assets to be disposed of, the book values of the affected assets are written down to their estimated fair value, less estimated selling costs. Consequently, a determination to dispose of particular assets can require us to estimate the net sales proceeds expected to be realized upon such disposition, which may be less than the estimated undiscounted future net cash flows associated with such assets prior to such determination, and thus require an impairment charge. In situations where we have experience in selling assets of a similar nature, we may estimate net sales proceeds on the basis of that experience. In other situations, we hire independent appraisers to estimate net sales proceeds.
Due to the numerous variables associated with our judgments and assumptions relating to the valuation of assets in these circumstances, and the effects of changes in circumstances affecting these valuations, both the precision and reliability of the resulting estimates of the related impairment charges are subject to substantial uncertainties and, as additional information becomes known, we may change our estimates significantly.
Income Taxes. The determination of the provision for income taxes, and the resulting current and deferred tax assets and liabilities, involves significant management judgment, and is based upon information and estimates available to management at the time of such determination. The final income tax liability to any taxing jurisdiction with respect to any calendar year will ultimately be determined long after our financial statements have been published for that year. We maintain reserves for known estimated tax exposures in federal, state and international jurisdictions; however, actual results may differ materially from our estimates.
Judgment is also applied in determining whether deferred tax assets will be realized in full or in part. When we consider it to be more likely than not that all or some portion of a deferred tax asset will not be realized, a valuation allowance is established for the amount of the deferred tax asset that is estimated not to be realizable. As of September 30, 2017, we had established valuation allowances against certain deferred tax assets, primarily related to foreign and state carryovers of net operating losses, credits and capital losses. We have not established valuation allowances against other deferred tax assets based upon positive evidence such as recent earnings history, generally improving economic conditions and deferred tax liabilities which we anticipate to reverse within the carry forward period. Accordingly, changes in facts or circumstances affecting the likelihood of realizing a deferred tax asset could result in the need to record additional valuation allowances.
Pension Plans. Most of our U.S. employees and many of our Canadian employees participate in defined benefit pension plans sponsored by LP. We account for the consequences of our sponsorship of these plans in accordance with accounting principles generally accepted in the U.S., which require us to make actuarial assumptions that are used to calculate the related assets, liabilities and expenses recorded in our financial statements. While we believe we have a reasonable basis for these assumptions, which include assumptions regarding long-term rates of return on plan assets, life expectancies, rates of increase in salary levels, rates at which future values should be discounted to determine present values and other matters, the amounts of our pension related assets, liabilities and expenses recorded in our financial statements would differ if we used other assumptions.
Warranty Obligations. Customers are provided with a limited warranty against certain defects associated with our products for periods of up to fifty years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the historical and anticipated rates of warranty claims and the cost of resolving such. We periodically assess the adequacy of our recorded warranty liability for each product and adjust the amounts as

17


necessary. While we believe we have a reasonable basis for these assumptions, actual warranty costs in the future could differ from our estimates.
NON-GAAP FINANCIAL MEASURES
In evaluating our business, we utilize several non-GAAP financial measures. A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so excluded or included under applicable GAAP guidance. We disclose earnings before interest expense, taxes, depreciation and amortization ("EBITDA from continuing operations") which is a non-GAAP financial measure. Additionally, we disclose "Adjusted EBITDA from continuing operations" which further adjusts EBITDA from continuing operations to exclude stock-based compensation expense, (gain) loss on sale or impairment of long-lived assets, other operating credits and charges and investment income. Neither EBITDA from continuing operations nor Adjusted EBITDA from continuing operations is a substitute for the GAAP measures of net income or operating cash flows or for any other GAAP measures of operating performance or liquidity.
We have included EBITDA from continuing operations and Adjusted EBITDA from continuing operations because we use them as important supplemental measures of our performance and believe that they are frequently used by securities analysts, investors and other interested persons in the evaluation of companies in our industry, some of which present EBITDA when reporting their results. We use EBITDA from continuing operations and Adjusted EBITDA from continuing operations to evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates. It should be noted that companies calculate EBITDA and Adjusted EBITDA differently and, therefore, our EBITDA and Adjusted EBITDA measures may not be comparable to EBITDA and Adjusted EBITDA reported by other companies. Our EBITDA and Adjusted EBITDA have material limitations as performance measures because they exclude interest expense, income tax (benefit) expense, and depreciation and amortization, which are necessary to operate our business or which we otherwise incur or experience in connection with the operation of our business.

18


The following table represents significant items by operating segment and reconciles income (loss) from continuing operations to EBITDA from continuing operations and Adjusted EBITDA from continuing operations:
Quarter Ended September 30, 2017 (Dollar amounts in millions)
Siding
 
OSB
 
EWP
 
South America
 
Other
 
Corporate
 
Total
Net Sales
$
226.2

 
$
350.9

 
$
98.1

 
$
38.3

 
$
6.5

 
$
(1.7
)
 
$
718.3

Depreciation and amortization
8.1

 
15.2

 
4.0

 
2.4

 
0.7

 
0.7

 
31.1

Cost of sales and selling and administrative
165.3

 
209.3

 
88.8

 
30.1

 
7.4

 
27.6

 
528.5

Loss on sale or impairment of long lived assets, net
—

 
—

 
—

 
—

 
—

 
0.7

 
0.7

Other operating credits and charges, net
—

 
—

 
—

 
—

 
—

 
(0.9
)
 
(0.9
)
Total operating costs
173.4

 
224.5

 
92.8

 
32.5

 
8.1

 
28.1

 
559.4

Income (loss) from operations
52.8

 
126.4

 
5.3

 
5.8

 
(1.6
)
 
(29.8
)
 
158.9

Total non-operating expense
—

 
—

 
—

 
—

 
—

 
(2.6
)
 
(2.6
)
Income (loss) from continuing operations before taxes and equity in income of unconsolidated affiliates
52.8

 
126.4

 
5.3

 
5.8

 
(1.6
)
 
(32.4
)
 
156.3

Provision for income taxes
—

 
—

 
—

 
—

 
—

 
46.4

 
46.4

Equity in income of unconsolidated affiliates
—

 
—

 
(1.0
)
 
—

 
—

 
—

 
(1.0
)
Income (loss) from continuing operations
$
52.8

 
$
126.4

 
$
6.3

 
$
5.8

 
$
(1.6
)
 
$
(78.8
)
 
$
110.9

Reconciliation of income (loss) from continuing operations to Adjusted EBITDA from continuing operations
 
 
 
 
 
 
 
 
 
 
 
 

Income (loss) from continuing operations
$
52.8

 
$
126.4

 
$
6.3

 
$
5.8

 
$
(1.6
)
 
$
(78.8
)
 
$
110.9

Provision for income taxes
—

 
—

 
—

 
—

 
—

 
46.4

 
46.4

Interest expense, net of capitalized interest
—

 
—

 
—

 
—

 
—

 
4.9

 
4.9

Depreciation and amortization
8.1

 
15.2

 
4.0

 
2.4

 
0.7

 
0.7

 
31.1

EBITDA from continuing operations
60.9

 
141.6

 
10.3

 
8.2

 
(0.9
)
 
(26.8
)
 
193.3

Stock-based compensation expense
0.2

 
0.2

 
0.1

 
—

 
—

 
1.5

 
2.0

Loss on sale or impairment of long lived assets, net
—

 
—

 
—

 
—

 
—

 
0.7

 
0.7

Investment income
—

 
—

 
—

 
—

 
—

 
(2.9
)
 
(2.9
)
Other operating credits and charges, net
—

 
—

 
—

 
—

 
—

 
(0.9
)
 
(0.9
)
Adjusted EBITDA from continuing operations
$
61.1

 
$
141.8

 
$
10.4

 
$
8.2

 
$
(0.9
)
 
$
(28.4
)
 
$
192.2

Adjusted EBITDA Margin
27.0
%
 
40.4
%
 
10.6
%
 
21.4
%
 
(13.8
)%
 
NA

 
26.8
%

19


Quarter Ended September 30, 2016
(Dollar amounts in millions)
Siding
 
OSB
 
EWP
 
South America
 
Other
 
Corporate
 
Total
Net Sales
$
194.8

 
$
282.1

 
$
80.7

 
$
31.7

 
$
7.6

 
$
(0.5
)
 
$
596.4

Depreciation and amortization
6.3

 
15.3

 
3.8

 
2.5

 
0.9

 
0.8

 
29.6

Cost of sales and selling and administrative
153.3

 
199.4

 
78.3

 
25.9

 
7.1

 
25.6

 
489.6

Loss on sale or impairment of long lived assets, net
—

 
—

 
—

 
—

 
—

 
0.3

 
0.3

Other operating credits and charges, net
—

 
—

 
—

 
—

 
—

 
—

 
—

Total operating costs
159.6

 
214.7

 
82.1

 
28.4

 
8.0

 
26.7

 
519.5

Income (loss) from operations
35.2

 
67.4

 
(1.4
)
 
3.3

 
(0.4
)
 
(27.2
)
 
76.9

Total non-operating expense
—

 
—

 
—

 
—

 
—

 
(20.2
)
 
(20.2
)
Income (loss) from continuing operations before taxes and equity in income of unconsolidated affiliates
35.2

 
67.4

 
(1.4
)
 
3.3

 
(0.4
)
 
(47.4
)
 
56.7

Benefit for income taxes
—

 
—

 
—

 
—

 
—

 
(7.5
)
 
(7.5
)
Equity in income of unconsolidated affiliates
—

 
—

 
(1.4
)
 
—

 
—

 
—

 
(1.4
)
Income (loss) from continuing operations
$
35.2

 
$
67.4

 
$
—

 
$
3.3

 
$
(0.4
)
 
$
(39.9
)
 
$
65.6

Reconciliation of income (loss) from continuing operations to Adjusted EBITDA from continuing operations
 
 
 
 
 
 
 
 
 
 
 
 

Income (loss) from continuing operations
$
35.2

 
$
67.4

 
$
—

 
$
3.3

 
$
(0.4
)
 
$
(39.9
)
 
$
65.6

Benefit for income taxes
—

 
—

 
—

 
—

 
—

 
(7.5
)
 
(7.5
)
Interest expense, net of capitalized interest
—

 
—

 
—

 
—

 
—

 
9.0

 
9.0

Depreciation and amortization
6.3

 
15.3

 
3.8

 
2.5

 
0.9

 
0.8

 
29.6

EBITDA from continuing operations
41.5

 
82.7

 
3.8

 
5.8

 
0.5

 
(37.6
)
 
96.7

Stock-based compensation expense
0.2

 
0.3

 
0.2

 
—

 
—

 
2.5

 
3.2

Loss on sale or impairment of long lived assets, net
—

 
—

 
—

 
—

 
—

 
0.3

 
0.3

Investment income
—

 
—

 
—

 
—

 
—

 
(2.5
)
 
(2.5
)
Loss on early debt extinguishment
—

 
—

 
—

 
—

 
—

 
13.2

 
13.2

Other operating credits and charges, net
—

 
—

 
—

 
—

 
—

 
—

 
—

Adjusted EBITDA from continuing operations
$
41.7
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