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Louisiana-Pacific 10-Q 2006

Documents found in this filing:

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

 

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, 2006
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): 

Large accelerated filer  x

 

Accelerated filer  o

 

Non-accelerated filer  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: 104,223,074 shares of Common Stock, $1 par value, outstanding as of November 4, 2006.

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 AMOUNTS) (UNAUDITED)

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 Net sales

 

$

534.5

 

$

621.3

 

$

1,865.5

 

$

1,974.7

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales

 

468.9

 

445.6

 

1,460.1

 

1,334.6

 

Depreciation, amortization and cost of timber harvested

 

32.8

 

33.5

 

99.7

 

98.8

 

Selling and administrative

 

39.6

 

36.8

 

122.4

 

110.5

 

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

 

0.9

 

0.9

 

0.9

 

 

Other operating credits and charges, net

 

(2.9

)

0.3

 

(2.8

)

1.4

 

Total operating costs and expenses

 

539.3

 

517.1

 

1,680.3

 

1,545.3

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(4.8

)

104.2

 

185.2

 

429.4

 

 

 

 

 

 

 

 

 

 

 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

Foreign currency exchange (loss) gain

 

(0.2

)

0.4

 

(8.7

)

(1.6

)

Interest expense, net of capitalized interest

 

(11.2

)

(13.1

)

(38.9

)

(44.1

)

Investment income

 

24.9

 

18.8

 

72.2

 

51.2

 

Total non-operating income

 

13.5

 

6.1

 

24.6

 

5.5

 

 

 

 

 

 

 

 

 

 

 

Income before taxes and equity in loss of unconsolidated affliates

 

8.7

 

110.3

 

209.8

 

434.9

 

Provision (benefit) for income taxes

 

(5.1

)

(66.5

)

57.5

 

49.0

 

Equity in loss of unconsolidated affliates

 

3.9

 

1.3

 

2.4

 

0.5

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

9.9

 

175.5

 

149.9

 

385.4

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before taxes

 

(0.6

)

(12.0

)

(2.6

)

(24.6

)

Income tax benefit

 

(0.2

)

(4.7

)

(1.0

)

(9.5

)

Loss from discontinued operations

 

(0.4

)

(7.3

)

(1.6

)

(15.1

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

9.5

 

$

168.2

 

$

148.3

 

$

370.3

 

 

 

 

 

 

 

 

 

 

 

Net income per share of common stock (basic):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.09

 

$

1.61

 

$

1.42

 

$

3.50

 

Loss from discontinued operations

 

 

(0.07

)

(0.01

)

(0.14

)

Net income per share - basic

 

$

0.09

 

$

1.54

 

$

1.41

 

$

3.36

 

 

 

 

 

 

 

 

 

 

 

Net income per share of common stock (diluted):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.09

 

$

1.59

 

$

1.41

 

$

3.48

 

Loss from discontinued operations

 

 

(0.06

)

(0.01

)

(0.14

)

Net income per share - diluted

 

$

0.09

 

$

1.53

 

$

1.40

 

$

3.34

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share of common stock

 

$

0.15

 

$

0.125

 

$

0.45

 

$

0.35

 

 

 

 

 

 

 

 

 

 

 

Average shares of stock outstanding - basic

 

104.9

 

109.0

 

105.5

 

110.1

 

Average shares of stock outstanding - diluted

 

105.2

 

109.6

 

106.0

 

110.8

 

 

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)

 

 

Setember 30, 2006

 

December 31, 2005

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

295.7

 

$

607.6

 

Short-term investments

 

885.7

 

717.3

 

Receivables, net

 

127.4

 

146.8

 

Inventories

 

232.5

 

240.3

 

Prepaid expenses and other current assets

 

15.5

 

14.4

 

Deferred income taxes

 

30.5

 

 

Current portion of notes receivable from asset sales

 

 

70.8

 

Total current assets

 

1,587.3

 

1,797.2

 

 

 

 

 

 

 

Timber and timberlands

 

89.7

 

92.9

 

 

 

 

 

 

 

Property, plant and equipment

 

1,954.0

 

1,848.9

 

Accumulated depreciation

 

(1,154.0

)

(1,065.6

)

Net property, plant and equipment

 

800.0

 

783.3

 

 

 

 

 

 

 

Goodwill, net of amortization

 

273.5

 

273.5

 

Notes receivable from asset sales

 

333.0

 

333.0

 

Long-term investments

 

46.1

 

13.5

 

Restricted cash

 

39.4

 

55.6

 

Investments in and advances to affiliates

 

214.8

 

211.0

 

Other assets

 

36.8

 

38.0

 

Total assets

 

$

3,420.6

 

$

3,598.0

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current portion of long-term debt

 

$

0.4

 

$

18.9

 

Current portion of limited recourse notes payable

 

 

69.7

 

Accounts payable and accrued liabilities

 

205.6

 

245.5

 

Current portion of contingency reserves

 

12.0

 

12.0

 

Total current liabilities

 

218.0

 

346.1

 

 

 

 

 

 

 

Long-term debt, excluding current portion:

 

 

 

 

 

Limited recourse notes payable

 

326.8

 

326.8

 

Other long-term debt

 

319.3

 

408.0

 

Total long-term debt, excluding current portion

 

646.1

 

734.8

 

 

 

 

 

 

 

Contingency reserves, excluding current portion

 

21.1

 

31.4

 

Other long-term liabilities

 

56.6

 

65.8

 

Deferred income taxes

 

366.3

 

377.0

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

116.9

 

116.9

 

Additional paid-in capital

 

434.7

 

435.5

 

Retained earnings

 

1,910.5

 

1,809.7

 

Treasury stock

 

(284.3

)

(257.0

)

Accumulated comprehensive loss

 

(65.3

)

(62.2

)

Total stockholders’ equity

 

2,112.5

 

2,042.9

 

Total liabilities and equity

 

$

3,420.6

 

$

3,598.0

 

 

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

4




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

 

 

Nine Months Ended September 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

148.3

 

$

370.3

 

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

 

 

 

 

 

Depreciation, amortization and cost of timber harvested

 

99.7

 

100.8

 

Loss from unconsolidated affiliates

 

2.4

 

0.5

 

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

 

0.4

 

18.6

 

Other operating credits and charges, net

 

(2.6

)

 

Tax effect of exercise of stock options

 

 

4.8

 

Stock-based compensation related to stock plans

 

4.8

 

 

Excess tax benefits from stock-based compensation

 

(3.3

)

 

Exchange loss on remeasurement

 

17.0

 

4.1

 

Cash settlement of contingencies

 

(10.8

)

(7.8

)

Other adjustments, net

 

(11.2

)

(8.8

)

Decrease in receivables

 

24.0

 

4.5

 

Decrease in inventories

 

8.0

 

 

(Increase) decrease in prepaid expenses

 

(1.6

)

0.5

 

Decrease in accounts payable and accrued liabilities

 

(35.0

)

(15.7

)

Decrease in deferred income taxes

 

(46.8

)

(96.1

)

Net cash provided by operating activities

 

193.3

 

375.7

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Property, plant and equipment additions

 

(122.5

)

(110.5

)

Proceeds from asset sales

 

2.6

 

33.4

 

Receipt of payment on notes receivable

 

70.8

 

 

Investments and advances to joint ventures

 

(6.6

)

(63.8

)

Proceeds from sales of investments

 

4,436.8

 

3,419.0

 

Cash paid for purchase of investments

 

(4,627.1

)

(3,196.4

)

Decrease in restricted cash under letters of credit

 

16.2

 

3.0

 

Net cash provided by (used in) investing activities

 

(229.8

)

84.7

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Repayment of debt

 

(190.7

)

(171.1

)

Sale of common stock under equity plans

 

5.5

 

11.7

 

Excess tax benefits from stock-based compensation

 

3.3

 

 

Purchase of treasury stock

 

(41.1

)

(150.6

)

Payment of cash dividends

 

(47.5

)

(38.7

)

Net cash used in financing activities

 

(270.5

)

(348.7

)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS:

 

(4.9

)

(2.0

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(311.9

)

109.7

 

Cash and cash equivalents at beginning of period

 

607.6

 

544.7

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

295.7

 

$

654.4

 

 

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)

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Accumulated

 

Total

 

 

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2005

 

116.9

 

$

116.9

 

11.2

 

$

(257.0

)

$

435.5

 

$

1,809.7

 

$

(62.2

)

$

2,042.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

148.3

 

 

148.3

 

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

 

 

 

(0.6

)

13.8

 

(7.2

)

 

 

6.6

 

Purchase of shares for treasury

 

 

 

2.2

 

(41.1

)

 

 

 

(41.1

)

Stock-based compensation related to stock plans

 

 

 

 

 

3.1

 

 

 

3.1

 

Excess tax benefits of stock-based compensation

 

 

 

 

 

3.3

 

 

 

3.3

 

Cash dividends

 

 

 

 

 

 

(47.5

)

 

(47.5

)

Other comprehensive loss

 

 

 

 

 

 

 

(3.1

)

(3.1

)

Balance, September 30, 2006

 

116.9

 

$

116.9

 

12.8

 

$

(284.3

)

$

434.7

 

$

1,910.5

 

$

(65.3

)

$

2,112.5

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 Net income

 

$

9.5

 

$

168.2

 

$

148.3

 

$

370.3

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

3.3

 

2.7

 

(3.7

)

3.1

 

Unrealized gain (loss) on marketable securities

 

0.3

 

(0.1

)

0.1

 

0.1

 

Unrealized gain (loss) on derivative instruments

 

 

(0.5

)

0.5

 

(1.3

)

Other comprehensive income (loss), net of tax

 

3.6

 

2.1

 

(3.1

)

1.9

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income, net of tax

 

$

13.1

 

$

170.3

 

$

145.2

 

$

372.2

 

 

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 condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments, except for other operating credits and charges, net referred to in Note 7) 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, 2005.

Stock-Based Compensation

Effective January 1, 2006, LP adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for the nine months ended September 30, 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. LP recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of three years. Prior to the adoption of SFAS 123R, LP recognized stock-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. LP has applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note 2 to the Condensed Consolidated Financial Statements for a further discussion of stock-based compensation.

NOTE 2 – STOCK-BASED COMPENSATION

At September 30, 2006, LP has stock-based employee compensation plans as described below. The total compensation expense related to all of LP’s stock-based compensation plans was $1.6 million and $4.8 million for the quarter and nine month period ended September 30, 2006. Prior to January 1, 2006, LP accounted for these plans under the recognition and measurement provisions of APB 25. Accordingly, LP generally recognized compensation expense only when it modified stock option terms (as required by Financial Accounting Standards Board (“FASB”) Interpretation No. 44 (“FIN 44”)) or granted restricted stock units or restricted stock. Any resulting expense was recognized ratably over the associated service period, which was generally the vesting term of the award.

Prior to January 1, 2006, LP provided pro forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”), as if the fair value method defined by SFAS 123 had been applied to its stock-based compensation.

Effective January 1, 2006, LP adopted the fair value recognition provisions of SFAS 123R, using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for the first nine months of 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. LP recognizes these compensation costs net of an estimated forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite

8




service period of the award, which is generally the vesting term of three years. LP estimated the forfeiture rate for the first nine months of 2006 based on its historical experience during the preceding two fiscal years.

As a result of adopting SFAS 123R, income before income taxes and net income for the quarter ended September 30, 2006 was $1.0 million and $0.6 million lower than if we had continued to account for stock-based compensation under APB 25. Income before income taxes and net income for the nine month period ended September 30, 2006 was $3.0 million and $1.8 million lower than if we had continued to account for stock-based compensation under APB 25. The impact on basic and diluted earnings per share for the third quarter of 2006 was a decrease of $0.01 per share and for the nine month period ended September 30, 2006 was a decrease of $0.02 per share. In addition, prior to the adoption of SFAS 123R, LP presented the tax benefit of stock option exercises as operating cash flows. Upon the adoption of SFAS 123R, tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows.

The following table illustrates the effect (in millions, except per share amounts) on net income and basic and diluted earnings per share as if the fair value recognition provisions of SFAS 123 had been applied to all outstanding and unvested awards in the quarter ended and nine month period ended September 30, 2005. For purposes of this pro forma disclosure, the value of the options was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants during the nine month period ended September 30, 2005: a risk free interest rate of 3.8%; an expected volatility factor for the market price of the Company’s common stock of 51.7%; a dividend yield of 1.6%; and an expected life of 4 years. The weighted-average estimated fair value of the options granted during the nine month period ended September 30, 2005 was $10.62.

Dollar amounts in millions, except per share amounts

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 30, 2005

 

September 30, 2005

 

 

 

 

 

 

 

Net income, as reported

 

$

168.2

 

$

370.3

 

 

 

 

 

 

 

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

 

0.2

 

0.8

 

 

 

 

 

 

 

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

 

(1.7

)

(3.3

)

Pro forma net income

 

$

166.7

 

$

367.8

 

 

 

 

 

 

 

Net income per share—basic, as reported

 

$

1.54

 

$

3.36

 

Net income per share— diluted, as reported

 

$

1.53

 

$

3.34

 

 

 

 

 

 

 

Net income per share—basic, pro forma

 

$

1.53

 

$

3.34

 

Net income per share— diluted, pro forma

 

$

1.52

 

$

3.32

 

Stock Compensation Plans

LP grants options and stock settled stock appreciation rights (SSARs) to key employees and directors to purchase LP common stock. On exercise or issuance, LP generally issues these shares from treasury. The options and SSARs are granted at market price at the date of grant. For employees, options and SSARs become exercisable over three years and expire ten years after the date of grant. For directors, these options become exercisable in 10% increments every three months, starting three months after the date of grant, and expire ten years after the date of grant. At September 30, 2006, 6,632,856 shares were available under the current stock award plans for stock-based awards. For the nine month period ended September 30, 2006, the fair value of the options granted was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: a risk free interest rate of 4.5%; an expected volatility factor for the market price of the Company’s common stock of 45.2% (based upon historical volatility over the expected life); a dividend yield of 1.9%; and an expected life of 4 years (based upon historical experience). The weighted-average fair value of each option granted during the nine month period ended September 30, 2006 was $10.25.

9




The following table summarizes stock options and stock settled stock appreciation rights outstanding as of September 30, 2006 as well as activity during the nine month period then ended.

Share amounts in thousands

 

Options/
SSARs

 

Weighted
Average
Exercise Price

 

Weighted
Average
Contractual
Term (in years)

 

Aggregate
Intrinsic Value
(in millions)

 

 

 

 

 

 

 

 

 

 

 

Outstanding options

 

 

 

 

 

 

 

 

 

Options outstanding at January 1, 2006

 

2,135

 

$

16.89

 

 

 

 

 

Options granted

 

579

 

$

28.48

 

 

 

 

 

Options exercised

 

(529

)

$

10.52

 

 

 

 

 

Options cancelled

 

(46

)

$

27.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at September 30, 2006

 

2,139

 

$

21.39

 

6.45

 

$

3.8

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at September 30, 2006

 

2,134

 

$

21.37

 

6.45

 

$

3.8

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at September 30, 2006

 

1,299

 

$

17.44

 

4.85

 

$

3.8

 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between LP’s closing stock price on the last trading day of the third quarter of 2006 and the exercise price, multiplied by the number of in-the-money options and SSARs) that would have been received by the holders had all holders exercised their awards on September 30, 2006. This amount changes based on the market value of LP’s stock as reported by the New York Stock Exchange. Total intrinsic value of options exercised for the nine month period ended September 30, 2006 was $9.2 million.

As of September 30, 2006, there was $6.5 million of total unrecognized compensation costs related to stock options and SSARs. These costs are expected to be recognized over a weighted-average period of 1.1 years.

Cash received from option exercises for the first nine months of 2006 was $5.5 million. The tax benefit realized for the tax deduction from option exercises of the share-based payment awards totaled $3.3 million for the nine month period ended September 30, 2006.

Incentive Share Awards

LP has granted incentive share stock awards (restricted stock units) to selected senior executives as allowed under the current stock award plans. The awards entitle the participant to receive a specified number of shares of LP common stock at no cost to the participant. For all years prior to 2005, these awards vest over a five-year period, subject to vesting acceleration upon the achievement of various stock price targets. The stock price targets were reached for all grants except for fifty percent of the 2004 grants.  For the remaining awards granted in 2004, if LP’s stock trades at or above $29.78 per share for five consecutive days prior to the end of the five-year period, the remaining awards will automatically vest on the next anniversary of the date of grant. The 2005 and 2006 awards for employees vest three years from the date of grant. The market value of these grants approximates the fair value. LP recorded compensation expense related to these awards in the third quarter and first nine months of 2006 of $­­­0.3 million and $0.8 million.  As of September 30, 2006, there was $2.2 million of total unrecognized compensation cost related to unvested incentive share awards. This expense will be recognized over a weighted-average period of 2.0 years.

10




The following table summarizes incentive share awards outstanding as of September 30, 2006 as well as activity during the nine months then ended.

 

Shares

 

Weighted
Average
Contractual
Term (in years)

 

Aggregate
Intrinsic Value
(in millions)

 

 

 

 

 

 

 

 

 

Incentive share awards outstanding at January 1, 2006

 

95,701

 

 

 

 

 

Incentive shares awards granted

 

51,850

 

 

 

 

 

Incentive share awards vested

 

0

 

 

 

 

 

Incentive share awards cancelled

 

(11,060

)

 

 

 

 

 

 

 

 

 

 

 

 

Incentive share awards outstanding at September 30, 2006

 

136,491

 

1.98

 

$

2.6

 

Vested and expected to vest at September 30, 2006

 

135,143

 

1.98

 

$

2.6

 

Incentive share awards exercisable at September 30, 2006

 

0

 

0

 

$

 

 

Restricted Stock

Beginning in 2005, LP began granting restricted stock to certain senior executive employees. The shares vest three years from the date of grant. During the vesting period, the participants have voting rights and receive dividends, but the shares may not be sold, assigned, transferred, pledged or otherwise encumbered. Additionally, granted but unvested shares are forfeited upon termination of employment. The fair value of the restricted shares on the date of the grant is amortized ratably over the vesting period. As of September 30, 2006, there was $2.3 million of total unrecognized compensation costs related to restricted stock. This expense will be recognized over the next 1.9 years.

The following table summarizes the restricted stock outstanding as of September 30, 2006 as well as activity during the nine months then ended.

 

Number of Shares

 

Weighted Average
Grant Date
Fair Value

 

Outstanding restricted shares

 

 

 

 

 

Restricted stock awards outstanding at January 1, 2006

 

65,600

 

$

27.04

 

Restricted stock awards granted

 

66,650

 

$

28.90

 

Restrictions lapsing

 

 

 

Restricted stock awards cancelled

 

 

 

 

 

 

 

 

 

Restricted stock awards at September 30, 2006

 

132,250

 

$

27.98

 

 

LP recorded compensation expense related to these awards in the third quarter and first nine months of 2006 of $0.3 million and $0.9 million.

LP annually grants to each director restricted stock or restricted stock units. As of September 30, 2006, LP has 47,697 shares (or restricted stock units) outstanding under this program. Compensation expense recognized in 2006 related to these grants was $0.2 million.

NOTE 3 – EARNINGS PER SHARE

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of employee stock options, SSARs, restricted stock units and restricted common stock.

11




SFAS  No. 128, “Earnings per Share,” requires that employee equity share options, non-vested shares and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options, which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

Dollar and share amounts in millions, except per

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

share amounts

 

2006

 

2005

 

2006

 

2005

 

Numerator:

 

 

 

 

 

 

 

 

 

Income attributed to common shares:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

9.9

 

$

175.5

 

$

149.9

 

$

385.4

 

Loss from discontinued operations

 

(0.4

)

(7.3

)

(1.6

)

(15.1

)

Net income

 

$

9.5

 

$

168.2

 

$

148.3

 

$

370.3

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic - weighted average common shares outstanding

 

104.9

 

109.0

 

105.5

 

110.1

 

Dilutive effect of stock plans

 

0.3

 

0.6

 

0.5

 

0.7

 

Diluted shares outstanding

 

105.2

 

109.6

 

106.0

 

110.8

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.09

 

$

1.61

 

$

1.42

 

$

3.50

 

Loss from discontinued operations

 

 

(0.07

)

(0.01

)

(0.14

)

Net income per share

 

$

0.09

 

$

1.54

 

$

1.41

 

$

3.36

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.09

 

$

1.59

 

$

1.41

 

$

3.48

 

Loss from discontinued operations

 

 

(0.06

)

(0.01

)

(0.14

)

Net income per share

 

$

0.09

 

$

1.53

 

$

1.40

 

$

3.34

 

 

Stock options to purchase approximately 1.3 million shares at September 30, 2006 and 0.3 million shares at September 30, 2005 were considered anti-dilutive or not in-the-money for purposes of LP’s earnings per share calculation.

NOTE 4 – 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 are as follows (work in process is not material):

12




 

Dollar amounts in millions

 

September 30, 2006

 

December 31, 2005

 

 

 

 

 

 

 

Logs

 

$

51.6

 

$

76.3

 

Other raw materials

 

37.5

 

38.8

 

Finished products

 

139.3

 

120.7

 

Supplies

 

8.0

 

8.4

 

LIFO reserve

 

(3.9

)

(3.9

)

Total

 

$

232.5

 

$

240.3

 

 

NOTE 5 – BUSINESSES HELD FOR SALE AND DIVESTITURES

At September 30, 2006, LP had no operations classified as discontinued.  For the first nine months of 2006, the loss from discontinued operations relates to residual charges from previously discontinued operations.  For the first nine months of 2005, LP’s discontinued operations included two lumber mills and its vinyl operations.

Sales and losses for these businesses are as follows:

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

Dollar amounts in millions

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

 

$

39.3

 

$

(0.3

)

$

122.1

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

$

(0.4

)

$

(7.3

)

$

(1.6

)

$

(15.1

)

 

In the first quarter of 2005, LP recorded a loss of $3.3 million related to severance charges associated with a cedar lumber mill 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.

In the third quarter of 2005, LP recorded a gain of $3.7 million associated with the sale of a non-operating lumber facility in Idaho and a loss of $17.0 million associated with impairment charges on assets held for sale.

NOTE 6 – INCOME TAXES

Accounting standards require that income tax expense be determined by applying the estimated annual effective tax rate (based upon estimated annual amounts of taxable income and expense) by income component for the year applied to year-to-date income or loss at the end of each quarter, further adjusted by any changes in reserve requirements or the impact of statutory tax rate changes, if any.  Each quarter the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted to the current quarter.

For the nine months ended September 30, 2006, the primary differences between the U.S. statutory rate of 35% and the effective rate on continuing operations relate to the company’s foreign debt structure, state income taxes, adjustments to prior year estimates and a reduction in LP’s Canadian deferred tax liabilities due to an enacted decrease in the statutory income tax rate. For the nine months ended September 30, 2005, the differences between the U.S. statutory rate of 35% and the effective rate on continuing operations relate to the company’s foreign debt structure and state income taxes.

During the third quarter of 2005, LP finalized its plans to repatriate accumulated earnings from its Canadian subsidiaries to the U.S. under the provisions of the American Jobs Creation Act of 2004.  LP decided to repatriate approximately $511 million of Canadian earnings in the fourth quarter of 2005 which resulted in an increase in

13




current US federal and state taxes payable of approximately $31 million and additional Canadian withholding taxes, net of tax benefit, of $22 million.   LP had previously anticipated repatriating a portion of the earnings as a dividend to the U.S. and accordingly, had accrued a tax liability of $155 million through June 30, 2005 ($144.3 million at December 31, 2004).  The American Jobs Creation Act of 2004 provided for a dividends received deduction for 85% of the qualified portion of this dividend and, therefore, in the third quarter of 2005, LP reversed $91 million of tax liabilities accrued in prior years as well as $10.7 million accrued in the first six months of 2005.

The components and associated estimated effective income tax rates applied to the nine-month periods ended September 30 are as follows:

 

 

Nine Months Ended September 30,

 

 

 

2006

 

2005

 

 

 

Tax Provision

 

Tax Rate

 

Tax Provision

 

Tax Rate

 

Continuing operations

 

$

57.5

 

28

%

$

140.0

 

32

%

Discontinued operations

 

(1.0

)

38

%

(9.5

)

38

%

Tax effect of repatriation

 

 

 

 

(91.0

)

 

 

 

 

$

56.5

 

28

%

$

39.5

 

10

%

 

NOTE 7 - 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 nine months ended September 30 are reflected in the table below and are described in the paragraphs following the table:

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

Dollar amounts in millions

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Charges associated with corporate relocation

 

$

0.1

 

$

(0.3

)

$

 

$

(2.4

)

Insurance recovery

 

2.8

 

 

2.8

 

 

Recovery on loss associated with Samoa pulp mill

 

 

 

 

1.0

 

 

 

$

2.9

 

$

(0.3

)

$

2.8

 

$

(1.4

)

 

In the first quarter of 2005, LP recorded a gain of $1.0 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.

In the third quarter of 2005, LP recorded a charge of $0.3 million associated with the relocation and consolidation of LP’s corporate offices to Nashville, Tennessee.

In the third quarter of 2006, LP recorded a gain of $2.8 million ($1.7 million after taxes, or $0.02 per diluted share) from an insurance recovery related to the hurricanes which occurred in the third and fourth quarter of 2005. LP expects to receive an additional $1.9 million ($1.1 million after taxes, or $0.01 per diluted share) in insurance recoveries related to these hurricanes in the fourth quarter of 2006.

NOTE 8 – GAINS (LOSSES) ON SALE OR IMPAIRMENT OF LONG-LIVED ASSETS

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

14




 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

Dollar amounts in millions

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Loss on sale of long-lived assets

 

$

 

$

(0.9

)

$

 

$

(1.2

)

Impairment (charges) reversals on long-term assets

 

(0.9

)

 

(0.9

)

1.2

 

 

 

$

(0.9

)

$

(0.9

)

$

(0.9

)

$

 

 

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.

In the third quarter of 2006, LP recorded an impairment charge of $0.9 million on manufacturing equipment that is held for sale to reduce the carrying value of this equipment to its estimated sales price, net of related selling expenses.

NOTE 9 - INVESTMENTS IN AND ADVANCES TO AFFILIATES

LP has investments in affiliates that are either accounted for under the equity method or the cost method based upon the specific terms of the agreement as well as advances to affiliates. The significant components of these investments and advances are as follows:

Dollar amounts in millions

 

September 30, 2006

 

December 31, 2005

 

 

 

 

 

 

 

Investments accounted for under the equity method

 

$

170.3

 

$

166.5

 

Investments accounted for under the cost method

 

44.5

 

44.5

 

Total

 

$

214.8

 

$

211.0

 

 

At September 30, 2006, LP’s significant equity method investees and its ownership interest and principal business activity in each investee, were as follows:

 

 

Ownership %

 

 

U.S. GreenFiber

 

50%

 

Established to manufacture and sell cellulose insulation products

Abitibi – LP

 

50%

 

Established to construct and operate I-Joist facilities in Eastern Canada

Canfor – LP

 

50%

 

Established to construct and operate an OSB facility in British Columbia, Canada

 

These investments do not meet the Regulation S-X significance test requiring the inclusion of the separate investee financial statements or summarized financial information.

LP sells products and raw materials to the Abitibi-LP entity and purchases products for resale from the Abitibi-LP and Canfor-LP entities. LP eliminates profits on these sales and purchases, to the extent the inventory has not been sold through to third parties, on the basis of its 50% interest.  For the quarters ended September 30, 2006 and 2005, LP sold $3.4 million and $4.2 million of products to Abitibi-LP and purchased $16.0 million and $14.2 million of I-joist from Abitibi-LP.  For the nine months ended September 30, 2006 and 2005, LP sold $21.0 million and $15.7 million of products to Abitibi-LP and purchased $69.7 million and $53.9 million of I-joist from Abitibi-LP.  LP also purchased $19.7 million and $64.5 million of OSB from Canfor-LP during the quarter and nine months ended

15




September 30, 2006.  LP did not purchase OSB from Canfor-LP during the quarter or nine months ended September 30, 2005 as the mill was not yet operational.

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 LP’s Annual Report on Form 10-K for the year ended December 31, 2005.

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

Dollar amounts in millions

 

2006

 

2005

 

% change

 

2006

 

2005

 

% change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

OSB

 

$

275.7

 

$

353.0

 

(22

)

$

1,028.0

 

$

1,173.0

 

(12

)

Siding

 

137.1

 

129.1

 

6

 

406.6

 

349.8

 

16

 

Engineered Wood Products

 

92.7

 

100.9

 

(8

)

315.0

 

330.7

 

(5

)

Other

 

29.0

 

40.1

 

(28

)

115.9

 

128.5

 

(10

)

Less: Intersegment sales

 

 

(1.8

)

(100

)

 

(7.3

)

(100

)

 

 

$

34.5

 

$

621.3

 

(14

)

$

1,865.5

 

$

1,974.7

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

OSB

 

$

(9.3

)

$

98.6

 

(109

)

$

164.0

 

$

416.4

 

(61

)

Siding

 

19.0

 

17.1

 

11

 

60.7

 

40.5

 

50

 

Engineered Wood Products

 

8.3

 

7.9

 

5

 

28.6

 

25.5

 

12

 

Other

 

(5.0

)

1.4

 

(457

)

2.8

 

12.4

 

(77

)

Other operating credits and charges, net

 

2.9

 

(0.3

)

1067

 

2.8

 

(1.4

)

300

 

Gains (losses) on sale or impairment of long-lived assets

 

(0.9

)

(0.9

)

 

(0.9

)

 

 

 

General corporate and other expenses, net

 

(23.7

)

(20.9

)

(13

)

(75.2

)

(64.5

)

(17

)

Foreign currency gains (losses)

 

(0.2

)

0.4

 

(150

)

(8.7

)

(1.6

)

(444

)

Investment income

 

24.9

 

18.8

 

32

 

72.2

 

51.2

 

41

 

Interest expense, net of capitalized interest

 

(11.2

)

(13.1

)

15

 

(38.9

)

(44.1

)

12

 

Income from operations before taxes

 

4.8

 

109.0

 

(96

)

207.4

 

434.4

 

(52

)

Provision (benefit) for income taxes

 

(5.1

)

(66.5

)

 

 

57.5

 

49.0

 

 

 

Income from continuing operations

 

$

9.9

 

$

175.5

 

(94

)

$

149.9

 

$

385.4

 

(61

)

 

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.

16




LP’s decking business, the manufacturing facilities of which are located in Selma, Alabama and Meridian, Idaho, is currently operating in a highly competitive and fragmented market and is currently incurring operating losses.  The management team for this business is currently focused on market research to better understand how to meet the needs of decking customers.  Additionally, LP has internal resources focused on improving the manufacturing process to lower costs, improve efficiencies and improve the consistency of quality metrics.  The results of these improvement efforts will be applied to our marketing and production programs in 2007.  However, should these efforts not lead to the expected improvements in operating results, LP may be required to recognize an impairment charge related to this business.  The net book value of the property, plant and equipment employed in this business was approximately $40 million at September 30, 2006.

In addition, LP owns a sawmill in Quebec, Canada.  Management is not currently operating this facility, primarily due to market conditions.  This facility shares resources, including wood supply and certain infrastructure, with a nearby OSB facility.  Because of these shared resources, LP has evaluated the sawmill and OSB facility as one operation for purposes of impairment analysis.  Should LP be able to separate some or all of the shared resources, LP may be required to evaluate the sawmill separately for impairment purposes, which may result in a future impairment charge.  The net book value of the property, plant and equipment at the sawmill was approximately $7 million at September 30, 2006.

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 it operates. LP maintains reserves for these various contingencies as follows:

Dollar amounts in millions

 

September 30, 2006

 

December 31, 2005

 

 

 

 

 

 

 

Environmental reserves

 

$

8.0

 

$

10.1

 

Hardboard siding reserves

 

23.6

 

31.0

 

Other reserves

 

1.5

 

2.3

 

Total contingency reserves

 

33.1

 

43.4

 

Current portion of contingency reserves

 

(12.0

)

(12.0

)

Long-term portion of contingency reserves

 

$

21.1

 

$

31.4

 

 

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 the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2005.

NOTE 14 – 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 month periods ended September 30, 2006 and 2005. The net periodic pension cost included the following components:

17




 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

Dollar amounts in millions

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

2.5

 

$

2.5

 

$

7.5

 

$

7.5

 

Interest cost

 

3.9

 

3.7

 

11.7

 

11.1

 

Expected return on plan assets

 

(4.6

)

(3.9

)

(13.8

)

(11.7

)

Amortization of prior service cost and transition assets

 

0.3

 

0.2

 

0.9

 

0.6

 

Recognized net actuarial loss

 

1.9

 

1.4

 

5.7

 

4.2

 

Net periodic pension cost

 

$

4.0

 

$

3.9

 

$

12.0

 

$

11.7

 

 

Through September 30, 2006, LP recognized $12.0 million of pension expense for all of LP’s defined benefit plans. LP presently anticipates recognizing an additional $4.0 million of pension expense in the remainder of 2006 for a total of $16.0 million.

Through September 30, 2006, LP made $19 million of pension contributions for all of LP’s defined benefit plans. LP presently anticipates making up to $1 million of additional pension contributions for the plans during the remainder of 2006 for a total of $19 to $20 million.

NOTE 15 – 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 LP’s Annual Report on Form 10-K for the year ended December 31, 2005 for further discussion of LP’s guarantees and indemnifications.

Additionally, LP provides warranties on the sale of most of its products and records an accrual for estimated future claims.  Such accruals are based upon historical experience and management’s estimate of the level of future claims.  The activity in warranty reserves for the first nine months of 2006 and 2005 are summarized in the following table: 

Dollar amounts in millions

 

September 30, 2006

 

September 30, 2005

 

 

 

 

 

 

 

Beginning balance, December 31,

 

$

32.3

 

$

22.2

 

Accrued to expense

 

3.7

 

4.5

 

Payments made

 

(5.3

)

(3.9

)

Total warranty reserves

 

30.7

 

22.8

 

Current portion of warranty reserves

 

(7.0

)

(7.0

)

Long-term portion of warranty reserves

 

$

23.7

 

$

15.8

 

 

The current portion of the warranty reserve is included in the caption “Accounts payable and accrued liabilities” and the long-term portion is included in the caption “Other long-term liabilities” on LP’s Condensed Consolidated Balance Sheets.

NOTE 16 - RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertain tax positions.  FIN 48 provides a two-step process using a recognition threshold and measurement attribute to evaluate a tax position taken or expected to be taken in a tax return.  Guidance is also provided for derecognition, classification and disclosure of uncertain tax positions.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  LP is currently evaluating the impact of adopting FIN 48 on its financial position and results of operations.

18




In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”). The scope of EITF 06-3 includes sales, use, value added and some excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer.  EITF 06-3 states that a company should disclose its accounting policy (i.e., gross or net presentation) regarding the presentation of taxes within its scope, and if significant, these disclosures should be applied retrospectively to the financial statements for all periods presented.  EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006.  LP is currently evaluating the impact of adopting EITF 06-3 on its disclosures.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, provides guidance on how to measure fair value under GAAP, and expands fair value measurement disclosures.  SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and is effective for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years.  LP is currently evaluating the impact of adopting SFAS 157 on its financial position, results of operations and disclosures.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”).  SFAS 158 requires that a company recognize the overfunded or underfunded status of all of its defined benefit postretirement plans as assets and/or liabilities on its statement of financial position, and also recognize as other comprehensive income, net of tax, the gains or losses and prior service costs that arise during the period but are not recognized as components of net periodic benefit cost.  SFAS 158 also requires additional disclosures in the notes to the financial statements.  In addition, SFAS 158 requires that a company measure the defined benefit plan assets and liabilities as of its year-end statement of financial position.  SFAS 158 requires prospective application and is effective for fiscal years ending after December 15, 2006, except for the measurement date requirement, which is effective for fiscal years ending after December 15, 2008.  Presently, LP uses an October 31 measurement date for its defined benefit pension and other postretirement plans.  LP is currently evaluating the impact of adopting SFAS 158 on its financial position and disclosures, however, based on the funded status of the company’s defined benefit pension and other postretirement plans as of October 31, 2005 (the most recent measurement date for which data is available), LP would have been required to decrease its pension assets and increase its pension liabilities, which would have resulted in an estimated additional other comprehensive loss of $18 million, net of taxes, in its consolidated balance sheet as of December 31, 2005.  The actual impact of adopting SFAS 158 may differ significantly based on the market values of plan assets at the measurement date as well as the assumptions used in measuring plan liabilities.  Changes in these values and assumptions since LP’s last measurement date could increase or decrease the expected impact of adopting SFAS 158 on its financial position as of December 31, 2006.

In September 2006, the FASB issued FASB Staff Position AUG AIR-1, “Accounting for Planned Major Maintenance Activities” (“FSP AUG AIR-1”).  FSP AUG AIR-1 prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim reporting periods.  Permitted methods include direct expensing, built-in overhaul and deferral.  FSP AUG AIR-1 is effective for fiscal years beginning after December 16, 2006, and retrospective application should be used for all periods presented unless it is impractical to do so.  LP is currently evaluating the impact of adopting FSP AUG AIR-1 on its financial position and results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”).  SAB 108 states that registrants should use both a balance sheet approach and an income statement approach when quantifying the materiality of a misstatement, and allows registrants to record a one-time cumulative effect adjustment to beginning of year retained earnings to correct for misstatements that were not deemed material under the registrant’s prior approach.  SAB 108 is effective for fiscal years ending after November 15, 2006.  LP is currently evaluating the impact of adopting SAB 108 on its financial position and results of operations.

19




Item 2.                    Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

Our products are used primarily in new home construction, repair and remodeling, and manufactured housing.  We also market and sell our products in light industrial and commercial construction and we have a modest export business for some of our specialty building products. Our manufacturing facilities are primarily located in the U.S. and Canada, but we also 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 55% of sales during the nine-month period ended September 30, 2006 and almost 60% of sales in the nine-month period ended September 30, 2005.

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.  However, industry analysts have predicted that the expectation of new capacity coupled with lower new housing activity will likely lead to continued lower pricing for the next eighteen months. During the first nine months of 2006, commodity OSB prices were significantly lower as compared to the same period in the prior year. In response to current market conditions, we plan to take downtime at many of our facilities in our OSB, EWP, Siding and Decking businesses during the fourth quarter of 2006.  The amount of downtime may vary depending on actual market conditions, but we expect that it will exceed the amount of downtime taken during the fourth quarter of 2005 and each of the first three quarters of 2006.

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, 2005.

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, 2005. The discussion of each of the policies outlines the specific accounting treatment related to each of these accounting areas.  While all of these are important to understand when reading our financial statements, there are certain 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 $3.9 million higher if the LIFO inventories were valued at average cost as of September 30, 2006.

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.

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 2006, 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 c