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Louisiana-Pacific 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-10.3
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For Quarterly Period Ended June 30, 2005
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 
ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý  No o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock: 110,855,122 shares of Common Stock, $1 par value, outstanding as of August 6, 2005.

 

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

 

 



 

ABOUT FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

                  changes in general economic conditions;

                  changes in the cost and availability of capital;

                  changes in the level of home construction activity;

                  changes in competitive conditions and prices for our products;

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

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

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

                  changes in other significant operating expenses;

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

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

                  changes in circumstances giving rise to environmental liabilities or expenditures;

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

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

 

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

 

ABOUT THIRD PARTY INFORMATION

 

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

 

2



 

Item 1.    Financial Statements.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES

(AMOUNTS IN MILLIONS EXCEPT PER SHARE) (UNAUDITED)

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

692.0

 

$

790.2

 

$

1,353.4

 

$

1,464.0

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

Cost of sales

 

463.5

 

416.8

 

889.1

 

775.3

 

Depreciation, amortization and depletion

 

32.4

 

31.4

 

65.3

 

64.2

 

Selling and administrative

 

36.1

 

40.4

 

73.7

 

81.8

 

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

 

(0.7

)

0.2

 

(0.9

)

13.0

 

Other operating credits and charges, net

 

1.4

 

2.4

 

1.1

 

9.1

 

Total operating costs and expenses

 

532.7

 

491.2

 

1,028.3

 

943.4

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

159.3

 

299.0

 

325.1

 

520.6

 

 

 

 

 

 

 

 

 

 

 

NON-OPERATING INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Foreign currency exchange (loss) gain

 

(1.4

)

1.3

 

(2.0

)

1.1

 

Loss on early extinguishment of debt

 

 

(1.2

)

 

(41.3

)

Interest expense, net of capitalized interest

 

(15.3

)

(15.4

)

(31.0

)

(35.4

)

Investment income

 

16.9

 

9.0

 

32.4

 

19.3

 

Total non-operating income (expense)

 

0.2

 

(6.3

)

(0.6

)

(56.3

)

 

 

 

 

 

 

 

 

 

 

Income before taxes and equity in earnings of unconsolidated affliates

 

159.5

 

292.7

 

324.5

 

464.3

 

Provision for income taxes

 

55.2

 

105.4

 

115.5

 

168.0

 

Equity in (earnings) unconsolidated affliates

 

(0.1

)

(0.8

)

(0.8

)

(1.3

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

104.4

 

188.1

 

209.8

 

297.6

 

 

 

 

 

 

 

 

 

 

 

DISCONTINUED OPERATIONS

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

(6.6

)

7.0

 

(12.6

)

2.1

 

Income tax provision (benefit)

 

(2.5

)

2.7

 

(4.8

)

0.8

 

Income (loss) from discontinued operations

 

(4.1

)

4.3

 

(7.8

)

1.3

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

100.3

 

$

192.4

 

$

202.0

 

$

298.9

 

 

 

 

 

 

 

 

 

 

 

Net income per share of common stock (basic):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.94

 

$

1.73

 

$

1.90

 

$

2.76

 

Income (loss) from discontinued operations

 

(0.04

)

0.04

 

(0.07

)

0.01

 

Net Income - per share basic

 

$

0.90

 

$

1.77

 

$

1.83

 

$

2.77

 

 

 

 

 

 

 

 

 

 

 

Net income per share of common stock (diluted):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.94

 

$

1.71

 

$

1.89

 

$

2.72

 

Income (loss) from discontinued operations

 

(0.04

)

0.04

 

(0.07

)

0.01

 

Net Income - per share diluted

 

$

0.90

 

$

1.75

 

$

1.82

 

$

2.73

 

 

 

 

 

 

 

 

 

 

 

Average shares of stock outstanding - basic

 

110.9

 

109.0

 

110.5

 

107.9

 

Average shares of stock outstanding - diluted

 

111.5

 

110.2

 

111.3

 

109.3

 

 

 

 

 

 

 

 

 

 

 

Cash dividend per share

 

$

0.125

 

$

0.075

 

$

0.225

 

$

0.125

 

 

 

 

 

 

 

 

 

 

 

 

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

 

3



 

CONDENSED CONSOLIDATED BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES

(AMOUNTS IN MILLIONS) (UNAUDITED)

 

 

 

June 30, 2005

 

December 31, 2004

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

656.5

 

$

544.7

 

Short-term investments

 

635.4

 

608.2

 

Receivables, net

 

189.3

 

185.5

 

Inventories

 

218.5

 

203.5

 

Prepaid expenses and other current assets

 

17.3

 

15.9

 

Deferred income taxes

 

1.0

 

26.7

 

Current portion of notes receivable from asset sales

 

70.8

 

 

Current assets of discontinued operations

 

17.6

 

19.6

 

Total current assets

 

1,806.4

 

1,604.1

 

 

 

 

 

 

 

Timber and timberlands

 

95.6

 

97.7

 

 

 

 

 

 

 

Property, plant and equipment

 

1,762.8

 

1,758.6

 

Accumulated depreciation

 

(1,018.7

)

(1,008.3

)

Net property, plant and equipment

 

744.1

 

750.3

 

Goodwill

 

273.5

 

273.5

 

Notes receivable from asset sales

 

333.1

 

403.8

 

Long-term investments

 

35.3

 

30.2

 

Restricted cash

 

66.4

 

65.5

 

Investments in and advances to affliates

 

176.8

 

132.7

 

Other assets

 

49.2

 

37.6

 

Long-term assets of discontinued operations

 

27.1

 

55.2

 

Total assets

 

$

3,607.5

 

$

3,450.6

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current portion of long-term debt

 

$

193.0

 

$

178.0

 

Current portion of limited recourse notes payable

 

69.7

 

 

Accounts payable and accrued liabilities

 

218.3

 

250.0

 

Current portion of contingency reserves

 

12.0

 

12.0

 

Total current liabilities

 

493.0

 

440.0

 

 

 

 

 

 

 

Long-term debt, excluding current portion:

 

 

 

 

 

Limited recourse notes payable

 

326.8

 

396.5

 

Other long-term debt

 

209.7

 

226.0

 

Total long-term debt, excluding current portion

 

536.5

 

622.5

 

 

 

 

 

 

 

Contingency reserves, excluding current portion

 

37.4

 

42.1

 

Other long-term liabilities

 

54.5

 

60.7

 

Deferred income taxes

 

528.6

 

517.5

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

116.9

 

116.9

 

Additional paid-in capital

 

438.7

 

440.0

 

Retained earnings

 

1,583.3

 

1,406.2

 

Treasury stock

 

(113.3

)

(127.4

)

Accumulated comprehensive loss

 

(68.1

)

(67.9

)

Total stockholders’ equity

 

1,957.5

 

1,767.8

 

Total liabilities and equity

 

$

3,607.5

 

$

3,450.6

 

 

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

 

4



 

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

 

 

 

Six Months Ended June 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

202.0

 

$

298.9

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation, amortization and cost of timber harvested

 

66.4

 

67.0

 

Loss on sale or impairment of long-lived assets

 

2.0

 

20.6

 

Tax effect of exercise of stock options

 

3.5

 

 

Loss on early debt extinguishment

 

 

41.3

 

Exchange (gain) loss on remeasurement

 

6.3

 

(2.4

)

Other operating charges and credits, net

 

0.5

 

2.7

 

Cash settlement of contingencies

 

(4.7

)

(29.4

)

Other adjustments, net

 

7.6

 

11.3

 

Pension payments

 

(12.0

)

(33.0

)

(Increase) decrease in receivables

 

5.6

 

(27.8

)

Increase in inventories

 

(9.6

)

(1.5

)

Increase in prepaid expenses

 

(0.1

)

(3.7

)

Decrease in accounts payable and accrued liabilities

 

(50.9

)

(20.7

)

Increase in deferred income taxes

 

34.7

 

66.3

 

Net cash provided by operating activities

 

251.3

 

389.6

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Property, plant and equipment additions

 

(67.0

)

(55.4

)

Proceeds from asset sales

 

30.1

 

12.1

 

Investment in joint ventures

 

(52.1

)

(6.7

)

Proceeds of sales of investments

 

2,421.4

 

284.8

 

Cash paid for purchase of investments

 

(2,452.8

)

(788.6

)

Decrease (increase) in restricted cash under LOCs

 

(0.9

)

29.3

 

Other investing activities, net

 

0.1

 

(0.5

)

Net cash used in investing activities

 

(121.2

)

(525.0

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Repayment of long-term debt

 

 

(246.4

)

Sale of common stock under equity plans

 

8.7

 

29.6

 

Payment of cash dividends

 

(24.9

)

(13.4

)

Net cash used in financing activities

 

(16.2

)

(230.2

)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS:

 

(2.1

)

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

111.8

 

(365.6

)

Cash and cash equivalents at beginning of period

 

544.7

 

925.9

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

656.5

 

$

560.3

 

 

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

 

5



 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

Common Stock

 

Paid in

 

Retained

 

Treasury Stock

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Shares

 

Amount

 

Loss

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2004

 

116.9

 

$

116.9

 

$

440.0

 

$

1,406.2

 

6.8

 

$

(127.4

)

$

(67.9

)

$

1,767.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

202.0

 

 

 

 

202.0

 

Issuance of shares for employee stock plans and other purposes

 

 

 

(4.8

)

 

(0.8

)

14.1

 

 

9.3

 

Dividends

 

 

 

 

(24.9

)

 

 

 

(24.9

)

Tax effect of employee stock plan transactions

 

 

 

3.5

 

 

 

 

 

3.5

 

Other comprehensive loss

 

 

 

 

 

 

 

(0.2

)

(0.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2005

 

116.9

 

$

116.9

 

$

438.7

 

$

1,583.3

 

6.0

 

$

(113.3

)

$

(68.1

)

$

1,957.5

 

 

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

 

6



 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

100.3

 

$

192.4

 

$

202.0

 

$

298.9

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1.7

)

0.4

 

(1.7

)

Unrealized gain (loss) on marketable securities

 

0.1

 

(0.1

)

0.2

 

(0.2

)

Unrealized gain (loss) on derivative instruments

 

0.5

 

(1.1

)

(0.8

)

0.2

 

Other comprehensive income (loss), net of tax

 

0.6

 

(2.9

)

(0.2

)

(1.7

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income, net of tax

 

$

100.9

 

$

189.5

 

$

201.8

 

$

297.2

 

 

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

 

7



 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS FOR PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments, except for other operating credits and charges, net and (gain) loss on sale or impairment of long-lived assets referred to in Notes 8 and 9 and certain charges recorded in discontinued operations discussed in Note 6) necessary to present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of LP and its subsidiaries for the interim periods presented. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in LP’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

NOTE 2 - RECLASSIFICATIONS

 

Certain prior period amounts have been reclassified to conform to the current period presentation.  LP has announced its intent to divest its vinyl operations. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” LP is required to account for the businesses anticipated to be sold within one year as discontinued operations. Accordingly, commencing with the quarter ended June 30, 2005, LP is classifying its vinyl operations as discontinued operations and has reclassified all periods presented in the same manner.

 

Additionally, in LP’s Consolidated Statement of Cash Flows for the six month period ended June 30, 2005, the classification of changes in restricted cash balances have been reclassified to present such changes as an investing activity. Previously these changes were presented as a financing activity.  In the accompanying Consolidated Statement of Cash Flows for the six months ended June 30, 2004, changes in restricted cash balances were reclassified to be consistent with the 2005 presentation resulted in a $29.3 million increase to investing cash flows and a corresponding decrease to financing cash flows from the amounts previously reported.

 

Auction rate securities totaling $205 million as of June 30, 2004, which were previously reported in our consolidated balance sheets and consolidated statements of cash flows as cash equivalents, have been reclassified to short-term investments to conform to the presentation of auction rate securities as short-term investments as of December 31, 2004 and June 30, 2005.  This reclassification had no impact on LP’s results of operations, total assets or changes in stockholders’ equity.

 

NOTE 3 – 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 which were assumed to be converted into common shares at the beginning of the period under the treasury stock method. This method requires that the effect of potentially dilutive common stock equivalents (employee stock options and incentive shares) be excluded from the calculation of diluted earnings per share for the periods in which losses from continuing operations are reported because the effect is anti-dilutive.  The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):

 

8



 

Dollar and share amounts in millions, except per

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

share amounts

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Income attributed to common shares:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

104.4

 

$

188.1

 

$

209.8

 

$

297.6

 

Income (loss) from discontinued operations

 

(4.1

)

4.3

 

(7.8

)

1.3

 

Net income

 

$

100.3

 

$

192.4

 

$

202.0

 

$

298.9

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic - weighted average common shares outstanding

 

110.9

 

109.0

 

110.5

 

107.9

 

Dilutive effect of employee stock plans

 

0.6

 

1.2

 

0.8

 

1.4

 

Diluted shares outstanding

 

111.5

 

110.2

 

111.3

 

109.3

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.94

 

$

1.73

 

$

1.90

 

$

2.76

 

Income (loss) from discontinued operations

 

(0.04

)

0.04

 

(0.07

)

0.01

 

Net income per share

 

$

0.90

 

$

1.77

 

$

1.83

 

$

2.77

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.94

 

$

1.71

 

$

1.89

 

$

2.72

 

Income (loss) from discontinued operations

 

(0.04

)

0.04

 

(0.07

)

0.01

 

Net income per share

 

$

0.90

 

$

1.75

 

$

1.82

 

$

2.73

 

 

Stock options to purchase approximately 0.3 million shares at June 30, 2005 and 0.2 million shares at June 30, 2004 were considered anti-dilutive or not in-the-money for purposes of LP’s earnings per share calculation.

 

NOTE 4 – STOCK-BASED COMPENSATION

 

Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. See Note 14 of the Notes to the financial statements included in Item 8 of LP’s Annual Report on Form 10-K for the year ended December 31, 2004 for further discussion of LP’s stock plans. The following table illustrates the effect on net income per share as if LP had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

 

9



 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

Dollars amounts in millions, except per share amounts

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

100.3

 

$

192.4

 

$

202.0

 

$

298.9

 

Add: Stock-based employee compensation included in reported net income, net of related income tax effects

 

0.3

 

0.8

 

0.6

 

2.1

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(0.6

)

(1.6

)

(1.3

)

(3.7

)

Pro forma net income

 

$

100.0

 

$

191.6

 

$

201.3

 

$

297.3

 

 

 

 

 

 

 

 

 

 

 

Net income per share—basic, as reported

 

$

0.90

 

$

1.77

 

$

1.83

 

$

2.77

 

Net income per share— diluted, as reported

 

$

0.90

 

$

1.75

 

$

1.82

 

$

2.73

 

 

 

 

 

 

 

 

 

 

 

Net income per share—basic, proforma

 

$

0.90

 

$

1.76

 

$

1.82

 

$

2.76

 

Net income per share— diluted, proforma

 

$

0.90

 

$

1.74

 

$

1.81

 

$

2.72

 

 

NOTE 5 – INVENTORIES

 

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

 

Dollar amounts in millions

 

June 30, 2005

 

December 31, 2004

 

 

 

 

 

 

 

Logs

 

$

55.6

 

$

59.0

 

Other raw materials

 

39.8

 

36.8

 

Finished products

 

117.8

 

102.6

 

Supplies

 

8.0

 

7.8

 

LIFO reserve

 

(2.7

)

(2.7

)

Total

 

$

218.5

 

$

203.5

 

 

 

 

 

 

 

Inventory included in current assets of discontinued operations

 

 

 

 

 

Logs

 

$

 

$

1.1

 

Other raw materials

 

3.3

 

3.4

 

Finished products

 

14.2

 

14.9

 

Supplies

 

0.1

 

0.2

 

Total

 

$

17.6

 

$

19.6

 

 

The preparation of interim financial statements requires the estimation of LP’s year-end inventory quantities and costs for purposes of determining LIFO inventory adjustments.  These estimates are revised quarterly and the estimated incremental change in the LIFO inventory reserve is recognized over the remainder of the year.

 

10



 

NOTE 6 – BUSINESSES HELD FOR SALE AND DIVESTITURES

 

In 2003, LP announced further divestures from its original 2002 plan to sell or close most of its remaining lumber mills as well as an interior hardboard panel operation. In 2004, LP announced that it intended to also sell its cedar lumber operation in British Columbia, Canada. LP subsequently announced in the first quarter of 2005 that it would permanently close this cedar facility. During the second quarter of 2005, LP announced that it intended to sell its vinyl operations.  At June 30, 2005, LP had two vinyl plants classified as discontinued.

 

Sales and income (loss) for these businesses are as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

Dollar amounts in millions

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

44.6

 

$

76.0

 

$

82.7

 

$

153.1

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

$

(4.1

)

$

4.3

 

$

(7.8

)

$

1.3

 

 

Included in income (loss) from discontinued operations for the six months ended June 30, 2004 is income of $3.7 million associated with the liquidation of certain LIFO inventories due to reduced log inventories at sites to be sold or closed.

 

In the first quarter of 2004, LP recorded a loss of $6.7 million associated with impairment charges on assets held for sale. Additionally, LP recorded a loss of $2.1 million on the sale of a lumber facility in Montana; a loss of $0.2 million related to severance charges; and a loss of $0.4 million on a timber contract associated with previously sold or closed facilities.

 

In the second quarter of 2004, LP recorded a gain of $1.3 million associated with the settlement of a contingency regarding the sale of a lumber facility in Idaho.

 

In the first quarter of 2005, LP recorded a loss of $3.3 million related to severance charges associated with a cedar facility in British Columbia.

 

In the second quarter of 2005, LP recorded a gain of $1.6 million associated with the sale of a lumber facility in Michigan and a loss of $5.0 million associated with impairment charges on assets held for sale.

 

The assets of the discontinued operations included in the accompanying condensed consolidated balance sheets as of June 30, 2005 and December 31, 2004 are as follows:

 

Dollar amounts in millions

 

June 30, 2005

 

December 31, 2004

 

 

 

 

 

 

 

Inventories

 

$

17.6

 

$

19.6

 

 

 

 

 

 

 

Timber and timberlands

 

0.4

 

0.7

 

 

 

 

 

 

 

Property, plant and equipment

 

51.3

 

84.6

 

Accumulated depreciation

 

(24.6

)

(33.2

)

Net, property, plant and equipment

 

26.7

 

51.4

 

 

 

 

 

 

 

Goodwill

 

 

3.1

 

 

 

 

 

 

 

Total long-term assets of discontinued operations

 

27.1

 

55.2

 

 

 

 

 

 

 

Total assets of discontinued operations

 

$

44.7

 

$

74.8

 

 

NOTE 7 – INCOME TAXES

 

Accounting standards require that the estimated effective income tax rate (based upon estimated annual amounts of taxable income and expense) by income component for the year be applied to year-to-date income or loss at the end

 

11



 

of each quarter. In 2005, the primary difference between the U.S. statutory rate of approximately 39% and the effective rate on continuing operations relates to differences associated with non-taxable foreign currency exchange gains on certain intercompany debt that is denominated in Canadian dollars, recognition of the manufacturing deduction associated with the Jobs Creation Act of 2004, and a significant portion of income that will be taxable in foreign jurisdictions at lower tax rates. The components and associated estimated effective income tax rates applied to the six-month periods ended June 30 are as follows:

 

 

 

Six Months Ended June 30,

 

 

 

2005

 

2004

 

 

 

Tax Provision

 

Tax Rate

 

Tax Provision

 

Tax Rate

 

Continuing operations

 

$

115.5

 

36

%

$

168.0

 

36

%

Discontinued operations

 

(4.8

)

38

%

0.8

 

38

%

 

 

$

110.7

 

35

%

$

168.8

 

36

%

 

NOTE 8 - OTHER OPERATING CREDITS AND CHARGES, NET

 

The major components of “Other operating credits and charges, net” in the Condensed Consolidated Statements of Income for the quarter and six months ended June 30 are reflected in the table below and are described in the paragraphs following the table:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

Dollar amounts in millions

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Change in environmental contingency reserves

 

$

 

$

 

$

 

$

1.7

 

Charges associated with corporate relocation

 

(1.5

)

(2.4

)

(2.1

)

(4.4

)

Increase in litigation reserves

 

 

 

 

(6.0

)

Loss related to assets and liabilities transferred under contractual arrangement

 

0.1

 

 

0.9

 

 

Other

 

 

 

0.1

 

(0.4

)

 

 

$

(1.4

)

$

(2.4

)

$

(1.1

)

$

(9.1

)

 

In the first quarter of 2004, LP recorded a gain of $1.7 million associated with a reduction in environmental reserves related to our former Alaska operations, a charge of $6.0 million for an increase in litigation reserves due to an adverse court ruling and a charge of $2.0 million associated with the relocation and consolidation of LP’s corporate offices to Nashville, Tennessee.

 

In the second quarter of 2004, LP recorded a charge of $2.4 million associated with the relocation and consolidation of LP’s corporate offices to Nashville, Tennessee.

 

In the first quarter of 2005, LP recorded a gain of $0.9 million associated with the recovery of a previous loss associated with the sale of the Samoa, California pulp mill and a charge of $0.6 million associated with the relocation and consolidation of LP’s corporate offices to Nashville, Tennessee.

 

In the second quarter of 2005, LP recorded a charge of $1.5 million associated with the relocation and consolidation of LP’s corporate offices to Nashville, Tennessee.

 

NOTE 9 – GAINS (LOSSES) ON SALE OR IMPAIRMENT OF LONG-LIVED ASSETS

 

The major components of “Gain (loss) on sale or impairment of long-lived assets” in the Condensed Consolidated Statements of Income for the quarter and six months ended June 30 are reflected in the table below and are

 

12



 

described in the paragraph following the table:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

Dollar amounts in millions

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Loss on sale of long-lived assets

 

$

(0.5

)

$

(0.2

)

$

(0.3

)

$

(0.1

)

Impairment (charges) reversals on long-term assets

 

1.2

 

 

1.2

 

(12.9

)

 

 

$

0.7

 

$

(0.2

)

$

0.9

 

$

(13.0

)

 

In the first quarter of 2004, LP recorded a loss of $9.7 million on the cancellation of a capital project to build a veneer mill in British Columbia and $3.2 million for impairment of timber rights associated with a cedar mill in British Columbia, Canada to reduce the book value to the estimated realizable sales value.

 

In the second quarter of 2005, LP reversed $1.2 million of the impairment recorded in the first quarter of 2004 due to management’s decision to continue to retain and operate certain timber rights previously classified as discontinued operations.

 

NOTE 10 – LEGAL AND ENVIRONMENTAL MATTERS

 

The description of certain legal and environmental matters involving LP set forth in Part II of this report under the caption “Legal Proceedings” is incorporated herein by reference.

 

NOTE 11 – SELECTED SEGMENT DATA

 

LP operates in three segments: Oriented Strand Board (OSB); Siding; and Engineered Wood Products (EWP). LP’s business units have been aggregated into these three segments based upon the similarity of economic characteristics, customers and distribution methods. LP’s results of operations are summarized below for each of these segments separately as well as for the “other” category which comprises other products that are not individually significant.  Segment information was prepared in accordance with the same accounting principles as those described in Note 1 of the Notes to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

 

 

2005

 

2004

 

%

 

2005

 

2004

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

OSB

 

$

403.9

 

$

535.9

 

(25

)

$

820.1

 

$

992.5

 

(17

)

Siding

 

125.2

 

113.8

 

10

 

220.6

 

211.2

 

4

 

Engineered Wood Products

 

120.5

 

103.6

 

16

 

229.8

 

183.0

 

26

 

Other

 

45.6

 

37.6

 

21

 

88.4

 

81.8

 

8

 

Less: Intersegment sales

 

(3.2

)

(0.7

)

 

(5.5

)

(4.5

)

 

 

 

$

692.0

 

$

790.2

 

(12

)

$

1,353.4

 

$

1,464.0

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

OSB

 

$

146.6

 

$

309.1

 

(53

)

$

317.9

 

$

562.7

 

(44

)

Siding

 

16.4

 

16.4

 

0

 

23.4

 

27.7

 

(16

)

Engineered Wood Products

 

12.1

 

0.7

 

1629

 

17.7

 

(0.2

)

8950

 

Other

 

5.2

 

3.1

 

68

 

10.7

 

6.6

 

62

 

Other operating credits and charges, net

 

(1.4

)

(2.4

)

42

 

(1.1

)

(9.1

)

88

 

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

 

0.7

 

(0.2

)

450

 

0.9

 

(13.0

)

107

 

General corporate and other expenses, net

 

(20.2

)

(26.9

)

25

 

(43.6

)

(52.8

)

17

 

Early extinguishment of debt

 

 

(1.2

)

 

 

(41.3

)

 

Foreign currency gains (losses)

 

(1.4

)

1.3

 

(208

)

(2.0

)

1.1

 

(282

)

Investment income (interest expense), net

 

1.6

 

(6.4

)

125

 

1.4

 

(16.1

)

109

 

Income from operations before taxes

 

159.6

 

293.5

 

(46

)

325.3

 

465.6

 

(30

)

Provision for income taxes

 

55.2

 

105.4

 

48

 

115.5

 

168.0

 

31

 

Income from continuing operations

 

$

104.4

 

$

188.1

 

(44

)

$

209.8

 

$

297.6

 

(30

)

 

13



 

NOTE 12 – POTENTIAL IMPAIRMENTS

 

LP continues to review certain operations and investments for potential impairments. LP’s management currently believes it has adequate support for the carrying value of each of these assets based upon the anticipated cash flows that result from estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures. However, should the markets for the relevant products deteriorate to levels significantly below cycle average pricing or should LP decide to invest capital in alternative projects, it is possible that impairment charges will be required.

 

LP also reviews from time to time possible dispositions of various assets in light of current and anticipated economic and industry conditions, its strategic plan and other relevant circumstances. Because a determination to dispose of particular assets can require management to make assumptions regarding the transaction structure of the disposition and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, LP may be required to record impairment charges in connection with decisions to dispose of assets.

 

LP’s primary Canadian subsidiary has arrangements with the Canadian provincial governments which gives this subsidiary the right to harvest a volume of wood off public land from defined forest areas under supply and management agreements, long-term pulpwood agreements and various other timber licenses. In early 2005, the Quebec government announced changes to the provincial timber license structure. These included a reduction in the harvesting rights for holders of certain long-term timber licenses. LP currently anticipates that these changes will not affect LP’s timber licenses associated with our OSB facilities in Quebec; however, it may affect LP’s timber allocations associated with its sawmill operations in Quebec. As of the date of this report, management was unable to predict what effects these changes will have on this operation.

 

NOTE 13 – CONTINGENCY RESERVES

 

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

 

Dollar amounts in millions

 

June 30, 2005

 

December 31, 2004

 

 

 

 

 

 

 

Environmental reserves

 

$

9.7

 

$

11.4

 

Hardboard siding reserves

 

34.5

 

37.2

 

Other

 

5.2

 

5.5

 

Total contingency reserves

 

49.4

 

54.1

 

Current portion of contingency reserves

 

(12.0

)

(12.0

)

Long-term portion of contingency reserves

 

$

37.4

 

$

42.1

 

 

Hardboard Siding Reserves

 

LP has established reserves relating to certain liabilities associated with products manufactured that were the subject of a nationwide class action lawsuit. This settlement agreement relates to a nationwide class action suit involving hardboard siding manufactured or sold by corporations acquired by LP in 1999 and installed prior to May 15, 2000 and was approved by the applicable courts in 2000. This settlement is discussed in greater detail in the Notes to financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

LP and its subsidiaries are parties to other legal proceedings. Based on the information currently available, management believes that the resolution of such proceedings will not have a material adverse effect on the financial position, results of operations, cash flows or liquidity of LP.

 

NOTE 14 - EARLY DEBT EXTINGUISHMENT

 

During the first six months of 2004, LP repurchased $197.4 million of its publicly traded debt obligations ($193.6

 

14



 

million of the 10.875% Subordinated Notes and $3.8 million of the 8.5% Senior Notes). In connection with the repurchase, LP recorded a charge of $41 million to reflect the premiums paid and certain transaction costs.

 

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 six months period ended June 30, 2005 and 2004. The net periodic pension cost included the following components:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

Dollar amounts in millions

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Sevice cost

 

$

2.5

 

$

1.7

 

$

5.0

 

$

4.1

 

Interest cost

 

3.7

 

2.6

 

7.4

 

5.8

 

Expected return on plan assets

 

(3.9

)

(2.8

)

(7.8

)

(6.3

)

Amortization of prior service cost and transition assets

 

0.2

 

0.2

 

0.4

 

0.4

 

Recognized net actuarial loss

 

1.4

 

1.1

 

2.8

 

2.5

 

Net periodic pension cost

 

$

3.9

 

$

2.8

 

$

7.8

 

$

6.5

 

 

Through June 30, 2005, LP recognized $7.8 million of pension expense for all of LP’s defined benefit plans. We presently anticipate recognizing an additional $7.8 million of pension expense in the remainder of 2005 for a total of $15.6 million.

 

Through June 30, 2005, LP made $12 million of pension contributions for all of LP’s defined benefit plans. LP presently anticipates contributing an additional $3 to $8 million to fund LP’s defined benefit plans in the remainder of 2005 for a total of $15 to $20 million.

 

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 20 of the Notes to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004 for further discussion of LP’s guarantees and indemnifications.

 

Additionally, LP provides warranties on product sales. The reserves for these warranties are determined by applying the provisions of SFAS No. 5, “Accounting for Contingencies.” The activity in warranty reserves for the first six months of 2005 and 2004 are summarized in the following table: 

 

Dollar amounts in millions

 

June 30, 2005

 

June 30, 2004

 

 

 

 

 

 

 

Beginning Balance, December 31,

 

$

22.2

 

$

21.0

 

Accrued to expense

 

2.9

 

3.3

 

Payments made

 

(3.1

)

(4.9

)

Balance, June 30

 

22.0

 

19.4

 

Current portion of warranty reserve

 

(7.0

)

(7.0

)

Long-term portion of warranty reserves

 

$

15.0

 

$

12.4

 

 

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 balance sheet.

 

15



 

NOTE 17 – POTENTIAL INSURANCE RECOVERY

 

LP filed suit in June, 2001, against one of ABT Co, Inc’s insurers seeking indemnity, defense costs, and declaratory relief for claims arising out of a coverage dispute in the ABTco Hardboard Siding Settlement.   On May 31, 2005, after trial by jury and post-trial motions filed by the insurer, the United States District Court for the Western District of North Carolina entered judgment in favor of LP, ordering that the insurer pay damages in the amount of $11.7 million ($3.9 million damages trebled under the applicable statute), plus $2.5 million representing the insurer’s share of defense costs for the underlying hardboard siding suit, and that the insurer indemnify against 77.5% of any liability and a portion of the administrative costs associated with certain future claims that fall within the insurer’s policy periods.  On May 31, 2005, the judge also ordered the insurer to reimburse the Company $2 million for the costs in prosecuting this case.   On June 29, 2005, the insurer filed a Notice of Appeal.  LP has not recorded any gain in connection with this judgment as the matter remains on appeal and any such gain is contingent on prevailing in part or in whole at the appellate court.

 

NOTE 18 - RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

 

 In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “Share-Based Payment (Revised 2004).” This statement addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for the company’s equity instruments or liabilities that are based on the fair value of the company’s equity securities or may be settled by the issuance of these securities. SFAS No. 123R eliminates the ability to account for share-based compensation using APB 25 and generally requires that such transactions be accounted for using a fair value method. The provisions of this statement are effective for financial statements issued for fiscal periods beginning after December 15, 2005 and will become effective for LP beginning with the first quarter of 2006. LP has yet to determine a transition method to adopt SFAS 123R or which valuation method to use. The full impact that the adoption of this statement will have on our financial position and results of operations will be determined by share-based payments granted in future periods, the transition method and valuation model used.

 

In March 2005, the FASB issued Interpretation FIN No. 47, Accounting for Conditional Asset Retirement Obligations — An Interpretation of FASB Statement No. 143” (“FIN 47”), which will result in more consistent recognition of liabilities relating to asset retirement obligations. FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS No.143, “Accounting for Asset Retirement Obligations” which refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Management is currently evaluating the impacts of this statement.

 

16



 

Item 2.       Management’s Discussion and Analysis

 

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, have a modest export business for some of our specialty building products and operate a facility in Chile.

 

To serve these markets, we operate in three segments:  Oriented Strand Board (OSB), Siding, and Engineered Wood Products (EWP). OSB is the most significant segment, accounting for more than 60% of sales during the six month period ended June 30, 2005 and more than 65% of sales in the six months ended June 30, 2004.

 

During the six months ended June 30, 2005, compared to the comparable period of 2004, we saw continued increases in the cost of petroleum-based raw materials and wood throughout our businesses. In our non-commodity based businesses, we were able to implement price increases to partially mitigate these cost increases.

 

Our most significant product, OSB, is sold as a commodity for which sales prices fluctuate daily based on market factors over which we have little or no control.  We cannot predict whether the prices of our products will remain at current levels or increase or decrease in the future.  During the first six months of 2005, commodity OSB prices moderated significantly compared to the same period in the prior year but nonetheless remained at cyclically high levels.

 

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, 2004.

 

CRITICAL ACCOUNTING POLICIES

 

LP’s significant accounting policies are discussed in Note 1 of Notes to financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2004. While it is important to review and understand all of these policies when reading our financial statements, there are several policies that we have adopted and implemented from among acceptable alternatives that could lead to different financial results had another policy been chosen:

 

Inventory valuation.  We use the LIFO (last-in, first-out) method for some of our log inventories with the remaining inventories valued at FIFO (first-in, first-out) or average cost. Our inventories would have been approximately $2.7 million higher if the LIFO inventories were valued at average cost as of June 30, 2005.

 

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

 

Stock options. We have chosen to report our stock based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” under which no compensation cost for stock options is recognized for stock options granted at or above fair market value. As permitted, we apply only the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” which establishes a fair value approach to measuring compensation expense related to employee stock compensation plans. Had compensation expense for our stock-based compensation plans been determined based upon the fair value at the grant dates under those plans consistent with SFAS No. 123, our net income would have been lower. For the six month period ended June 30, 2005, had we recorded this compensation expense, our net income would have been lower by $0.7 million. In the later portion of 2004, the FASB issued SFAS No. 123R, which will require us to use the fair value method beginning in 2006.

 

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

 

17



 

various estimates.  For 2005, these significant accounting estimates and judgments include:

 

Legal Contingencies.  Our estimates of our 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, information obtained through consultation with statisticians and economists, including statistical analyses 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 our loss contingencies for environmental matters are also based on various judgments and assumptions. These estimates typically reflect judgments and assumptions relating to the probable nature, magnitude and timing of required investigation, remediation and/or monitoring activities and the probable cost of these activities, and in some cases reflect judgments and assumptions relating to the obligation or willingness and ability of third parties to bear a proportionate or allocated share of the cost of these activities, including third parties who purchased assets from us subject to environmental liabilities. We consider the ability of third parties to pay their apportioned cost when developing our estimates. In making these judgments and assumptions related to the development of our loss contingencies, we consider, among other things, the activity to date at particular sites, information obtained through consultation with applicable regulatory authorities and third-party consultants and contractors and our historical experience at other sites that are judged to be comparable.  Due to the numerous variables associated with these judgments and assumptions, and the effects of changes in governmental regulation and environmental technologies, both the precision and reliability of the resulting estimates of the related contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to environmental loss contingencies and, as additional information becomes known, may change our estimates significantly. At June 30, 2005, we excluded from our estimates approximately $6 million of potential environmental liabilities that we estimate will be allocated to third parties pursuant to existing and anticipated future cost sharing arrangements.

 

Impairment of Long-Lived Assets.  We review the long-lived assets held and used by us (primarily property, plant and equipment and timber and timberlands) for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Identifying these events and changes in circumstances, and assessing their impact on the appropriate valuation of the affected assets under accounting principles generally accepted in the U.S., requires us to make judgments, assumptions and estimates.  In general, on assets held and used, impairments are recognized when the book values exceed our estimate of the undiscounted future net cash flows associated with the affected assets. The key assumptions in estimating these cash flows include future production volumes and pricing of commodity products and future estimates of expenses to be incurred. Our assumptions regarding pricing are based upon the average pricing over the commodity cycle (generally five years) due to the inherent volatility of commodity product pricing. These prices are estimated from information gathered from industry research firms, research reports published by investment analysts and other published forecasts. Our estimates of expenses are based upon our long-range internal planning models and our expectation that we will continue to reduce product costs that will offset inflationary impacts.

 

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

 

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Income Taxes. The determination of the provision for income taxes, and the resulting current and deferred tax assets and liabilities, involves significant management judgment, and is based upon information and estimates available to management at the time of such determination. The final income tax liability to any taxing jurisdiction with respect to any calendar year will ultimately be determined long after our financial statements have been published for that year. We maintain reserves for known estimated tax exposures in federal, state and international jurisdictions; however, actual results may differ materially from our estimates.

 

Judgment is also applied in determining whether deferred tax assets will be realized in full or in part. When we consider it to be more likely than not that all or some portion of a deferred tax asset will not be realized, a valuation allowance is established for the amount of the deferred tax asset that is estimated not to be realizable. As of June 30, 2005, we had established valuation allowances against certain deferred tax assets, primarily related to state net operating loss and credit carryovers and foreign capital loss carryovers. We have not established valuation allowances against other deferred tax assets based upon expected future taxable income and/or tax strategies planned to mitigate the risk of impairment of these assets. Accordingly, changes in facts or circumstances affecting the likelihood of realizing a deferred tax asset could result in the need to record additional valuation allowances.

 

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

 

Due to the numerous variables associated with our judgments and assumptions relating to the valuation of assets in these circumstances, and the effects of changes in circumstances affecting these valuations, both the precision and reliability of the resulting estimates of the related impairment charges, if any, are subject to substantial uncertainties. Consequently, as additional information becomes known, we may change our estimates significantly.

 

Pension Plans.  Most of our U.S. employees and 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. See further discussion related to pension plans below under the heading “Defined Benefit Pension Plans” and in Note 13 of the Notes to the financial statements included in Item 8 in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

RESULTS OF OPERATIONS

 

Our net income for the second quarter of 2005 was $100 million, or $0.90 per diluted share, on sales of $692 million, compared to the second quarter of 2004 net income of $192 million, or $1.75 per diluted share, on sales of $790 million. For the second quarter of 2005, income from continuing operations was $104 million, or $0.94 per diluted share, compared to income from continuing operations of $188 million, or $1.71 per diluted share, for the second quarter of 2004.

 

Our net income for the six months ended June 30, 2005 was $202 million, or $1.82 per diluted share, on sales of $1.4 billion, compared to the six months ended June 30, 2004 net income of $299 million, or $2.73 per diluted share, on sales of $1.5 billion. For the six months ended June 30, 2005, income from continuing operations was $210 million, or $1.89 per diluted share, compared to income from continuing operations of $298 million, or $2.72 per

 

19



 

diluted share, for the six months ended June 30, 2004. For the comparable six-month period of 2004 results included charges primarily for the early extinguishment of debt, impairments of long-lived assets, litigation and other operating charges and credits totaling $63.4 million.

 

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

 

OSB
 

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

 

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

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30

 

 

 

2005

 

2004

 

Change

 

2005

 

2004

 

Change

 

Net sales

 

$

404

 

$

536

 

-25

%

$

820

 

$

993

 

-17

%

Operating profits

 

$

147

 

$

309

 

-53

%

$

318

 

$

563

 

-44

%

Depreciation, amortization and cost of timber harvested

 

$

22

 

$

20

 

 

 

$

44

 

$

42

 

 

 

 

Percent changes in average sales prices and unit shipments for the quarter and six months ended June 30, 2005 compared to the quarter and six months ended June 30, 2004 are as follows:

 

 

 

Quarter Ended June 30,
2005 versus 2004

 

Six Months Ended June 30,
2005 versus 2004

 

 

 

Average Net

 

Unit

 

Average Net

 

Unit

 

 

 

Selling Price

 

Shipments

 

Selling Price

 

Shipments

 

 

 

 

 

 

 

 

 

 

 

Commodity OSB

 

(27

)%

3

%

(19

)%

3

%

 

OSB prices declined for the second quarter and the first six months of 2005 as compared to the corresponding periods of 2004 due to better balance between supply and demand. The reduction in selling price accounted for a decrease in net sales and operating profits of approximately $142 million for the quarter and $193 million for the first six months.

 

Compared to the second quarter and first six months of 2004, the primary factor, along with the reduced sales price, for decreased operating profits was the significant increase in petroleum based raw materials and wood fiber. Compared to the same periods in 2004, resin costs per unit increased over 40% and wood fiber cost per unit over 15%. Additionally, a significant portion of our OSB costs are denominated in Canadian dollars. The Canadian dollar has strengthened significantly since the first half of 2004 which causes our cost stated in U.S. dollars to increase.

 

SIDING
 

Our siding segment produces and markets wood-based siding and related accessories, interior hardboard products and specialty OSB products.

 

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

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

 

 

2005

 

2004

 

Change

 

2005

 

2004

 

Change

 

Net sales

 

$

125

 

$

114

 

10

%

$

221

 

$

211

 

4

%

Operating profits

 

$

16

 

$

16

 

0

%

$