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Louisiana-Pacific 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
Quarterly Report on Form 10-Q

 

 

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, 2009

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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filers” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Smaller reporting company  ¨    Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 124,546,204 shares of Common Stock, $1 par value, outstanding as of November 3, 2009.

Except as otherwise specified and unless the context otherwise requires, references to “LP”, the “Company”, “we”,

“us”, and “our” refer to Louisiana-Pacific Corporation and its subsidiaries.

 

 

 


ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

 

   

changes in general economic conditions;

 

   

changes in the cost and availability of capital;

 

   

changes in the level of home construction activity;

 

   

changes in competitive conditions and prices for our products;

 

   

changes in the relationship between supply of and demand for building products;

 

   

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

 

   

changes in the cost 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, Brazilian real and the Chilean peso;

 

   

prolonged illiquidity in the market for auction rate securities held by us for investment;

 

   

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

 

   

changes in tax laws, and interpretations thereof;

 

   

changes in circumstances giving rise to environmental liabilities or expenditures;

 

   

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

 

   

acts of 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.

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,
 
     2009     2008     2009     2008  

Net sales

   $ 308.8      $ 389.6      $ 779.6      $ 1,126.0   
                                

Operating costs and expenses:

        

Cost of sales

     271.4        382.2        729.1        1,130.0   

Depreciation, amortization and cost of timber harvested

     22.2        27.0        60.2        80.4   

Selling and administrative

     26.1        36.6        82.5        115.8   

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

     (1.2     9.8        (2.1     9.5   

Other operating credits and charges, net

     (1.6     1.6        (7.3     67.7   
                                

Total operating costs and expenses

     316.9        457.2        862.4        1,403.4   
                                

Loss from operations

     (8.1     (67.6     (82.8     (277.4
                                

Non-operating income (expense):

        

Foreign currency exchange gain

     1.0        2.3        10.3        6.6   

Gain (loss) on early debt extinguishment

     (0.2     —          0.4        —     

Other than temporary investment impairment

     (0.1     (88.7     (1.8     (91.2

Interest expense, net of capitalized interest

     (20.4     (12.4     (53.3     (36.3

Investment income

     7.4        8.1        20.1        31.5   
                                

Total non-operating expense

     (12.3     (90.7     (24.3     (89.4
                                

Loss before taxes and equity in loss of unconsolidated affiliates

     (20.4     (158.3     (107.1     (366.8

Benefit for income taxes

     (10.5     (61.0     (45.7     (153.7

Equity in loss of unconsolidated affiliates

     2.8        3.1        8.8        12.6   
                                

Loss from continuing operations

     (12.7     (100.4     (70.2     (225.7
                                

Discontinued operations:

        

Loss from discontinued operations before income taxes

     (0.4     (17.4     (4.8     (20.5

Income tax benefit

     (0.2     (6.7     (1.9     (7.9
                                

Loss from discontinued operations

     (0.2     (10.7     (2.9     (12.6
                                

Net loss

     (12.9     (111.1     (73.1     (238.3

Less: Net loss attributed to noncontrolling interest

     (0.4     —          (0.8     —     
                                

Net loss attributed to Louisiana-Pacific Corporation

   $ (12.5   $ (111.1   $ (72.3   $ (238.3
                                

Loss per share of common stock (basic and diluted):

        

Loss from continuing operations

   $ (0.12   $ (0.98   $ (0.67   $ (2.19

Loss from discontinued operations

     —          (0.10     (0.03     (0.13
                                

Net loss per share

   $ (0.12   $ (1.08   $ (0.70   $ (2.32
                                

Average shares of stock outstanding - basic and diluted

     103.4        102.9        103.2        102.9   
                                

Amounts attributed to LP Corporation common shareholders:

        

Loss from continuing operations, net of tax

   $ (12.3   $ (100.4   $ (69.4   $ (225.7

Loss from discontinued operations, net of tax

     (0.2     (10.7     (2.9     (12.6
                                
   $ (12.5   $ (111.1   $ (72.3   $ (238.3
                                

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)

 

     September 30,
2009
    December 31,
2008
 

ASSETS

    

Cash and cash equivalents

   $ 439.8      $ 97.7   

Short-term investments

     6.0        21.4   

Receivables, net

     79.6        43.8   

Income tax receivable

     12.2        94.2   

Inventories

     151.7        187.3   

Prepaid expenses and other current assets

     7.7        9.9   

Deferred income taxes

     25.3        25.3   

Current portion of notes receivable from asset sales

     135.1        20.0   

Current assets of discontinued operations

     3.0        3.1   
                

Total current assets

     860.4        502.7   

Timber and timberlands

     50.4        55.6   

Property, plant and equipment

     2,325.8        2,324.6   

Accumulated depreciation

     (1,285.9     (1,250.3
                

Net property, plant and equipment

     1,039.9        1,074.3   

Notes receivable from asset sales

     123.5        238.6   

Long-term investments

     42.3        19.3   

Restricted cash

     39.4        76.7   

Investments in and advances to affiliates

     178.2        186.9   

Deferred debt costs

     16.7        3.3   

Other assets

     27.1        26.3   

Long-term assets of discontinued operations

     5.0        5.0   
                

Total assets

   $ 2,382.9      $ 2,188.7   
                

LIABILITIES AND EQUITY

    

Current portion of long-term debt

   $ 162.6      $ 7.7   

Current portion of limited recourse notes payable

     133.4        20.0   

Short-term notes payable

     0.2        2.0   

Accounts payable and accrued liabilities

     116.9        121.5   

Current portion of deferred tax liabilities

     3.0        4.7   

Current portion of contingency reserves

     10.0        10.0   
                

Total current liabilities

     426.1        165.9   

Long-term debt, excluding current portion:

    

Limited recourse notes payable

     119.9        233.3   

Other long-term debt

     209.6        239.3   
                

Total long-term debt, excluding current portion

     329.5        472.6   

Contingency reserves, excluding current portion

     23.4        30.5   

Other long-term liabilities

     126.9        130.8   

Deferred income taxes

     150.7        187.9   

Redeemable noncontrolling interest

     20.9        18.7   

Stockholders’ equity:

    

Common stock

     138.7        116.9   

Additional paid-in capital

     562.9        441.3   

Retained earnings

     947.2        1,019.5   

Treasury stock

     (286.1     (297.3

Accumulated comprehensive loss

     (57.3     (98.1
                

Total stockholders’ equity

     1,305.4        1,182.3   
                

Total liabilities and equity

   $ 2,382.9      $ 2,188.7   
                

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)

 

     Quarter Ended
September 30,
    Nine Months Ended
Sept. 30,
 
     2009     2008     2009     2008  

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net loss

   $ (12.9   $ (111.1   $ (73.1   $ (238.3

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

        

Depreciation, amortization and cost of timber harvested

     22.2        27.0        60.2        80.4   

Loss of unconsolidated affiliates

     2.8        3.1        8.8        12.6   

Other operating charges and credits, net

     1.1        (43.9     3.9        28.3   

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

     (1.1     9.8        (2.1     9.5   

Other than temporary investment impairment

     0.1        88.7        1.8        91.2   

Stock based compensation expense related to stock plans

     1.5        2.5        5.5        7.4   

Exchange (gain) loss on remeasurement

     2.3        (7.5     (4.7     (16.6

Cash settlement of contingencies

     (1.7     (5.6     (10.7     (15.2

Warranty reserves, net of payment

     (0.9     14.0        (0.9     14.4   

Other adjustments

     (3.0     2.0        (0.2     3.2   

Pension expense (in excess of payments)

     2.9        2.0        6.7        8.2   

Decrease (increase) in receivables

     (1.8     4.0        (33.1     (7.3

Decrease in income tax receivables

     1.2        61.0        75.8        48.8   

Decrease (increase) in inventories

     4.5        (1.1     43.0        9.9   

Decrease (increase) in prepaid expenses

     (2.1     (3.1     2.5        (4.7

Increase (decrease) in accounts payable and accrued liabilities

     (11.1     (20.3     0.6        (27.0

Decrease in deferred income taxes

     (13.8     (57.0     (50.8     (95.4
                                

Net cash provided by (used in) operating activities

     (9.8     (35.5     33.2        (90.6
                                

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Property, plant, and equipment additions

     (2.0     (12.4     (6.7     (88.3

Purchase of a business

     —          (0.8     —          (45.4

Investments in and advances to joint ventures

     2.7        1.5        1.3        (2.7

Proceeds from sale of assets

     2.0        —          7.2        —     

Receipt of proceeds from notes receivable

     —          —          —          54.4   

Cash paid for purchase of investments

     —          (43.1     —          (216.0

Proceeds from sales of investments

     1.4        77.9        22.9        287.2   

(Increase) decrease in restricted cash under letters of credit

     (0.4     —          37.2        (12.0

Other investing activities, net

     0.2        —          0.1        1.1   
                                

Net cash provided by (used in) investing activities

     3.9        23.1        62.0        (21.7
                                

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Borrowing of long term debt

     —          —          281.3        12.0   

Repayment of long term debt

     (13.3     —          (149.6     (53.6

Payment of debt issuance fees

     —          —          (15.5     —     

Net borrowings under revolving credit lines and short term notes payable

     0.2        (4.3     0.2        (16.1

Sales of common stock

     132.3        —          132.3        —     

Payment of cash dividends

     —          —          —          (31.0
                                

Net cash provided by (used in) financing activities

     119.2        (4.3     248.7        (88.7
                                

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     1.8        2.0        (1.8     3.6   
                                

Net increase (decrease) in cash and cash equivalents

     115.1        (14.7     342.1        (197.4

Cash and cash equivalents at beginning of period

     324.7        169.4        97.7        352.1   
                                

Cash and cash equivalents at end of period

   $ 439.8      $ 154.7      $ 439.8      $ 154.7   
                                

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

 

5


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES

(AMOUNTS IN MILLIONS) (UNAUDITED)

 

     Common Stock    Treasury Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Comprehensive
Loss
    Total
Stockholders’

Equity
    Redeemable
Non Controlling
Interest
 
   Shares    Amount    Shares     Amount            

Balance, December 31, 2008

   116.9    $ 116.9    13.6      $ (297.3   $ 441.3      $ 1,019.5      $ (98.1   $ 1,182.3      $ 18.7   

Net loss

   —        —      —          —          —          (72.3     —          (72.3     (0.8

Isuuance of shares for public offering

   20.7      20.7          111.6            132.3     

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

   1.1      1.1    (0.5     11.2        (3.8     —          —          8.5        —     

Amortization of restricted stock grants

   —        —      —          —          1.2        —          —          1.2        —     

Issuance of stock warrants in connection with debt issuance

   —        —      —          —          12.6        —          —          12.6        —     

Other comprehensive income attributed to LP

   —        —      —          —          —          —          40.8        40.8        3.0   
                                                                  

Balance, September 30, 2009

   138.7    $ 138.7    13.1      $ (286.1   $ 562.9      $ 947.2      $ (57.3   $ 1,305.4      $ 20.9   
                                                                  

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

 

6


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES

(AMOUNTS IN MILLIONS) (UNAUDITED)

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Net loss

   $ (12.9   $ (111.1   $ (73.1   $ (238.3
                                

Other comprehensive income (loss), net of tax

        

Foreign currency translation adjustments

     5.5        (10.3     21.9        (11.3

Unrealized gain on derivative instruments

     0.7        0.1        0.8        0.5   

Unrealized gain on marketable securities

     10.6        34.5        19.8        18.8   

Defined benefit pension plans:

        

Amortization of prior service cost

     —          0.2        —          0.6   

Amortization of net loss

     0.4        0.5        1.3        1.4   

Exchange gain on remeasurement

     —          0.2        —          0.4   
                                

Other comprehensive income, net of tax

     17.2        25.2        43.8        10.4   
                                

Comprehensive income (loss), net of tax

     4.3        (85.9     (29.3     (227.9

Net income attributable to noncontrolling interest

     0.4        —          0.8        —     

Foreign currency translation adjustments attributed to noncontrolling interest

     (1.6     —          (3.0     —     
                                

Comprehensive income (loss) attributed to LP, net of tax

   $ 3.1      $ (85.9   $ (31.5   $ (227.9
                                

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 referred to in Note 10) necessary to present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of LP and its subsidiaries for the interim periods presented. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. For those consolidated subsidiaries in which LP’s ownership interest is less than 100%, the outside shareholders’ interests are shown as noncontrolling interest. 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, 2008.

NOTE 2 – STOCK-BASED COMPENSATION

For the quarters ended September 30, 2009 and 2008, the total compensation expense related to LP’s stock-based compensation plans was $1.5 million and $2.5 million. For the nine month periods ended September 30, 2009 and 2008, the total compensation expense related to all of LP’s stock-based compensation plans was $5.5 million and $7.4 million. At September 30, 2009, 7,603,275 shares were available under the current stock award plans for stock-based awards. For the nine month period ended September 30, 2009, 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 1.76%; an expected volatility factor for the market price of the Company’s common stock of 49.8% (based upon historical volatility over the expected life); a dividend yield of 0.0%; and an expected life of 5 years (based upon historical experience). For the nine month period ended September 30, 2008, 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 2.97%; an expected volatility factor for the market price of the Company’s common stock of 30.2% (based upon historical volatility over the expected life); a dividend yield of 4.0%; and an expected life of 5 years (based upon historical experience). The weighted-average fair value of each option or stock settled stock appreciation right (SSARs) granted during the nine month period ended September 30, 2009 and September 30, 2008 was $1.00 and $2.85.

NOTE 3 – INVESTMENTS

Short-term and long-term investments held by LP are debt securities designated as available for sale and are reported at fair market value using the specific identification method. The following table summarizes unrealized gains and losses related to these investments as of September 30, 2009 and December 31, 2008:

 

Dollar amounts in millions

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value

September 30, 2009

           

Corporate obligations

   $ 6.0    $ —      $ —      $ 6.0

Auction rate securities

     10.6      31.7      —        42.3
                           

Total marketable securities

   $ 16.6    $ 31.7    $ —      $ 48.3
                           

December 31, 2008

           

Corporate obligations

   $ 28.9    $ —      $ 0.5    $ 28.4

Auction rate securities

     12.3      —        —        12.3
                           

Total marketable securities

   $ 41.2    $ —      $ 0.5    $ 40.7
                           

 

8


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

As of September 30, 2009, LP had $42.3 million ($151.8 million, par value) of principal invested in auction rate securities (ARS). The ARS held by LP are securities with long-term nominal maturities for which the interest rates were historically reset through a Dutch auction each month. These auctions historically have provided a liquid market for these securities. Since the auctions began failing in August 2007, interest rates have been reset at stipulated rates. LP’s investments in ARS represent interests in collateralized debt obligations supported by pools of residential and commercial mortgages, credit linked notes and bank trust preferred notes.

The ARS investments held by the Company all had ratings consistent with the Company’s investment policy guidelines at the time of purchase, the ARS investments held by the Company all had AAA or equivalent credit ratings (except for one corporate ARS rated AA). With the liquidity issues experienced in global credit and capital markets, the ARS held by LP at September 30, 2009 have experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of purchase orders. As of September 30, 2009, all but one of LP’s ARS securities continue to pay interest according to their stated terms. One of the investments has been accelerated resulting in LP receiving no further interest payments on this security unless and until a more senior tranche is paid in full. This investment was fully written off as of September 30, 2009.

The estimated market value of the Company’s ARS holdings at September 30, 2009 was $42.3 million, which reflects a $109.5 million adjustment to the par value of $151.8 million. Based upon LP’s evaluation of the structure of LP’s ARS holdings and current market estimates of fair value from issuing banks, LP recorded other-than-temporary impairments of $0.1 million ($0.1 million after tax) and $1.8 million ($1.1 million after tax) in the third quarter and first nine months of 2009, respectively, that were recorded as non-operating income (expense). During the third quarter and first nine months of 2009, LP recorded an unrealized gain on its ARS of $17.3 million ($10.8 million after tax) and $31.8 million ($19.8 million after tax) in other comprehensive income.

LP reviews its marketable securities routinely for other-than-temporary impairment. The primary factors LP used to determine if an impairment charge must be recorded, because a decline in value of the security is other than temporary, include (i) whether the fair value of the investment is significantly below its cost basis, (ii) the financial condition of the issuer of the security (including its credit rating) and the underlying collateral, (iii) the length of time that the cost of the security has exceeded its fair value and (iv) LP’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value.

NOTE 4 – FAIR VALUE MEASUREMENTS

Effective January 1, 2008, LP adopted guidance now codified as Financial Accounting Standard Board (FASB) Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurements and Disclosures” (ASC 820), for financial assets and liabilities and any other assets and liabilities carried at fair value. This pronouncement defines fair value (FV), provides guidance on how to measure FV under generally accepted accounting principles, and expands FV measurement disclosures. LP’s adoption of ASC 820 did not have a material impact on its consolidated financial position and results of operations.

ASC 820 defines FV as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a FV hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Under this standard, LP is required to classify these financial assets and liabilities into two groups: recurring – measured on a periodic basis and non-recurring – measured on an as needed basis.

ASC 820 describes three levels of inputs that may be used to measure fair value:

 

Level 1    Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2    Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data.
Level 3    Valuations based on models where significant inputs are not observable. Unobservable inputs are used when little or no market data is available and reflect the Company’s own assumptions about the assumptions market participants would use.

 

9


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Assets measured at fair value on a recurring basis are summarized in the following table.

 

Dollar amounts in millions

   September 30,
2009
   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)

Available for sale securities

   $ 48.3    $ —      $ 6.0    $ 42.3

Trading securities

     2.2      2.2      —        —  
                           

Total

   $ 50.5    $ 2.2    $ 6.0    $ 42.3
                           

Available for sale securities measured at fair value are recorded in cash and cash equivalents, short-term investments, long-term investments and restricted cash on LP’s condensed consolidated balance sheets. Included in available for sale securities are money market funds, U.S. government agency securities, commercial paper, corporate debt obligations and auction rate securities.

The values of government agency securities, commercial paper and corporate obligations are determined by evaluations based on observable market information from broker or dealer quotations, which represent Level 2 inputs.

Due to the lack of observable market quotes on LP’s auction rate securities (ARS) portfolio, LP evaluates the structure of its ARS holdings and current market estimates of fair value, including fair value estimates from issuing banks that rely exclusively on Level 3 inputs. These inputs include those that are based on expected cash flow streams and collateral values, including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of LP’s ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact LP’s valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity.

Trading securities consist of rabbi trust and grantor trust financial assets which are recorded in other assets in LP’s condensed consolidated balance sheets. The rabbi trust holds the assets of the Louisiana-Pacific Corporation 2004 Executive Deferred Compensation Plan (EDC), a non-qualified deferred compensation plan which allows certain management employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds. The assets of the rabbi trust are invested in mutual funds and are reported at fair value based on active market quotes, which represent Level 1 inputs.

 

10


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period.

 

Dollar amounts in millions

   Available for sale
securities
 

Balance at January 1, 2009

   $ 12.3   

Total realized/unrealized gains (losses)

  

Included in other-than-temporary investment impairment

     (1.8

Included in investment income

     —     

Included in other comprehensive income

     31.8   
        

Balance at September 30, 2009

   $ 42.3   
        

The amount of total losses for the period included in net loss attributable to the fair value of changes in assets still held at the reporting date

   $ (1.8
        

Carrying amounts reported on the balance sheet for cash, cash equivalents, receivables and accounts payable approximate fair value due to the short-term maturity of these instruments.

NOTE 5 – 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, stock settled stock appreciation rights (SSARs), restricted stock units, warrants and restricted common stock.

The Earnings Per Share Topic of the FASB ASC requires that employee equity share options, non-vested shares, warrants 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 share amounts

   Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
   2009     2008     2009     2008  

Numerator:

        

Income attributed to LP common shares:

        

Loss from continuing operations

   $ (12.3   $ (100.4   $ (69.4   $ (225.7

Loss from discontinued operations

     (0.2     (10.7     (2.9     (12.6
                                

Net loss

   $ (12.5   $ (111.1   $ (72.3   $ (238.3
                                

Denominator:

        

Basic - weighted average common shares outstanding

     103.4        102.9        103.2        102.9   

Dilutive effect of stock plans

     —          —          —          —     
                                

Diluted shares outstanding

     103.4        102.9        103.2        102.9   
                                

Basic and diluted earnings per share:

        

Loss from continuing operations

   $ (0.12   $ (0.98   $ (0.67   $ (2.19

Loss from discontinued operations

     —          (0.10     (0.03     (0.13
                                

Net loss per share

   $ (0.12   $ (1.08   $ (0.70   $ (2.32
                                

 

11


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Stock options, warrants and SSARs to purchase approximately 19.6 million shares and 14.3 million shares for the third quarter and nine months ended September 30, 2009 were considered anti-dilutive for purposes of LP’s earnings per share calculation due to LP’s net loss position in continuing operations. Stock options and SSARs to purchase approximately 5.3 million shares and 5.0 million shares for the third quarter and nine months ended September 30, 2008 were considered anti-dilutive for purposes of LP’s earnings per share calculation due to LP’s net loss position in continuing operations.

NOTE 6 – RECEIVABLES

Receivables consist of the following:

 

Dollar amounts in millions

   September 30,
2009
    December 31,
2008
 

Trade receivables

   $ 60.8      $ 27.4   

Interest receivables

     6.6        2.8   

Other receivables

     13.8        14.8   

Allowance for doubtful accounts

     (1.6     (1.2
                

Total

   $ 79.6      $ 43.8   
                

Other receivables at September 30, 2009 and December 31, 2008 primarily consist of short-term notes receivable, settlements, Canadian sales tax receivables and other items.

NOTE 7 – 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):

 

Dollar amounts in millions

   September 30,
2009
    December 31,
2008
 

Logs

   $ 16.0      $ 34.7   

Other raw materials

     21.5        23.9   

Finished products

     107.3        122.6   

Supplies

     8.7        7.9   

LIFO reserve

     (1.8     (1.8
                

Total

   $ 151.7      $ 187.3   
                

Inventory included in current assets of discontinued operations

    

Other raw materials

   $ 0.2      $ 0.2   

Finished products

     2.7        2.8   

Supplies

     0.1        0.1   
                

Total

   $ 3.0      $ 3.1   
                

NOTE 8 – BUSINESSES HELD FOR SALE AND DIVESTITURES

At September 30, 2009 and 2008, LP’s discontinued operations included its decking operations and residual charges from previously discontinued operations.

 

12


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The assets of the discontinued operations included in the accompanying condensed consolidated balance sheets as of September 30, 2009 and December 31, 2008 are as follows:

 

Dollar amounts in millions

   September 30,
2009
    December 31,
2008
 

Inventories

   $ 3.0      $ 3.1   
                

Property, plant and equipment

     11.8        11.9   

Accumulated depreciation

     (6.8     (6.9
                

Net, property, plant and equipment

     5.0        5.0   
                

Total assets of discontinued operations

   $ 8.0      $ 8.1   
                

NOTE 9 – INCOME TAXES

Accounting standards require that LP account for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. This method also requires the recognition of future tax benefits, such as net operating loss carry forwards and other tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are recorded as necessary to reduce deferred tax assets to the amount thereof that is more likely than not to be realized. The likelihood of realizing deferred tax assets is evaluated by, among other things, estimating future taxable income to which the deferred tax assets may be applied and assessing the impact of tax planning strategies.

For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate, by income component, to year-to-date income or loss at the end of each quarter, then adding or subtracting the impact of changes in reserve requirements or statutory tax rates, 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. Losses and resulting income tax benefits for the respective periods are shown below.

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 

Dollars in millions

   2009     2008     2009     2008  

Continuing operations

   $ (23.2   $ (161.4   $ (115.9   $ (379.4

Discontinued operations

     (0.4     (17.4     (4.8     (20.5
                                
     (23.6     (178.8     (120.7     (399.9

Total tax benefit

     (10.7     (67.7     (47.6     (161.6
                                

Net loss

   $ (12.9   $ (111.1   $ (73.1   $ (238.3
                                

For the third quarter and first nine months of 2009, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to the Company’s foreign debt structure, state income taxes and the effect of foreign tax rates. For the third quarter and first nine months of 2008, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to the Company’s foreign debt structure and state income taxes.

 

13


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The components and associated estimated effective income tax rates applied to the third quarter and nine month periods ended September 30, 2009 and 2008 are as follows:

 

     Quarter Ended September 30,  
     2009     2008  

Dollars in millions

   Tax Benefit     Tax Rate     Tax Benefit     Tax Rate  

Continuing operations

   $ (10.5   45   $ (61.0   38

Discontinued operations

     (0.2   38     (6.7   39
                    
   $ (10.7   45   $ (67.7   38
                    
      Nine Months Ended September 30,  
      2009     2008  
      Tax Benefit     Tax Rate     Tax Benefit     Tax Rate  

Continuing operations

   $ (45.7   39   $ (153.7   41

Discontinued operations

     (1.9   39     (7.9   39
                    
   $ (47.6   39   $ (161.6   40
                    

LP and its domestic subsidiaries are subject to U.S. federal income tax as well as income taxes of multiple state jurisdictions. LP’s foreign subsidiaries are subject to income tax in Canada, Brazil and Chile. Federal income tax examinations for the years through 2006 have been effectively settled. LP remains subject to state and local tax examinations for the tax years 2003 through 2007. LP’s Canadian returns have been audited and effectively settled through 2004. LP has utilized all of its available net operating loss carry backs in both the U.S. and Canada; therefore any 2009 tax losses will result in deductible net operating loss carry forwards to future tax periods for which long-term deferred tax assets will be established.

As of September 30, 2009, LP expects that its U.S. and Canadian long term deferred tax assets at the end of the year, including those associated with the carry forward of estimated 2009 net operating losses, will not exceed its deferred tax liabilities. LP has considered the timing and nature of the sources of future taxable income related to its deferred tax liabilities, and has determined that no valuation allowances will be required in relation to the expected deferred tax assets. The annual tax rate applied in determining tax expense for the period ended September 30, 2009 therefore reflects no impact of such a valuation allowance.

If LP were to determine that it would not be able to realize a portion of an existing net deferred tax asset for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period in which such determination was made. Conversely, if it were to make a determination that it is more likely than not that an existing deferred tax asset for which there is currently a valuation allowance would be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded in the period in which such determination was made.

 

14


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 10 – OTHER OPERATING CREDITS AND CHARGES, NET

The major components of “Other operating credits and charges, net” in the Consolidated Statements of Income for the third quarter and nine month periods ended September 30, 2009 and 2008 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

   2009     2008     2009     2008  

Severance

   $ (0.4   $ (1.6   $ (0.9   $ (1.6

Anti-trust litigation settlement

     —          —          —          (48.0

Gain on insurance recovery

     2.0        —          10.4        5.8   

Insurance settlement

     —          —          —          9.4   

Loss on facility explosion

     —          —          —          (5.3

Additions to environmental contingency reserves, net

     —          —          (2.6     —     

Additions to product related contigency reserves

     —          —          —          (26.8

Construction related legal reserves

     —          —          0.4        (1.2
                                
   $ 1.6      $ (1.6   $ 7.3      $ (67.7
                                

In the first quarter of 2009, LP recorded a net gain of $4.3 million associated with reimbursements of legal expenses associated with an environmental litigation matter and a loss $0.5 million for severance obligations associated with LP’s “right sizing” initiatives.

In the second quarter of 2009, LP recorded a further gain of $4.1 million associated with reimbursement of legal expenses associated with an environmental litigation matter, a net loss of $2.6 million associated with environmental reserves for two sites which LP no longer operates and a gain of $0.4 million associated with a contractor default on a construction project.

In the third quarter of 2009, LP recorded $2.0 gain on an insurance recovery associated with a facility explosion that occurred in the second quarter of 2008 and a loss of $0.4 million for severance obligations associated with LP’s “right sizing” initiatives.

In the first quarter of 2008, LP recorded a net gain of $4.0 million associated with product related warranty reserves and insurance settlements associated with LP’s hardboard class action suit and other associated hardboard siding liabilities.

In the second quarter of 2008, LP recorded a loss of $24.3 million associated with product related contingency reserves in connection with LP’s settlement of a hardboard class action suit and a gain of $8.7 million associated with expected insurance recoveries associated with this suit; a loss of $48 million associated with LP’s settlement of a product related anti-trust litigation matter; a loss of $5.3 million associated with a facility explosion and a loss of $1.2 million associated with a contractor default on a construction project.

In the third quarter of 2008, LP recorded a loss of $1.6 million for severance obligations associated with the indefinite curtailment of two of its OSB mills.

NOTE 11 – 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,
2009
   December 31,
2008

Investments accounted for under the equity method

   $ 133.7    $ 142.4

Investments accounted for under the cost method

     44.5      44.5
             

Total

   $ 178.2    $ 186.9
             

 

15


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

At September 30, 2009, 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
AbitibiBowater – 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 AbitibiBowater-LP entity and purchases products for resale from the AbitibiBowater-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, 2009 and 2008, LP sold $2.1 million and $3.2 million of products to AbitibiBowater-LP and purchased $11.7 million and $17.6 million of I-joist from AbitibiBowater-LP. LP also purchased $17.8 million and $24.8 million of OSB from Canfor-LP during the quarters ended September 30, 2009 and 2008. For the nine months ended September 30, 2009 and 2008, LP sold $4.8 million and $6.6 million of products to AbitibiBowater-LP and purchased $26.0 million and $35.3 million of I-joist from AbitibiBowater-LP. LP also purchased $36.3 million and $66.9 million of OSB from Canfor-LP for the nine months ended September 30, 2009 and 2008.

NOTE 12 – LEGAL AND ENVIRONMENTAL MATTERS

Certain environmental matters and legal proceedings are discussed below.

Environmental Matters

LP is involved in a number of environmental proceedings and activities, and it may be wholly or partially responsible for known or unknown contamination existing at a number of other sites at which LP has conducted operations or disposed of wastes. Based on the information currently available, LP believes that any fines, penalties or other costs or losses resulting from these matters will not have a material adverse effect on our financial position, results of operations, cash flows or liquidity.

Siding Matters

On October 15, 2002, a jury returned a verdict of $29.6 million against LP in a Minnesota State Court action entitled Lester Building Systems, a division of Butler Manufacturing Company, and Lester’s of Minnesota, Inc. v. Louisiana-Pacific Corporation and Canton Lumber Company. On December 13, 2002, the United States District Court for the District of Oregon, which maintains jurisdiction over a previously settled nationwide class action suit involving OSB siding manufactured by LP and installed prior to January 1, 1996, permanently enjoined the Minnesota state trial court from entering judgment against LP with respect to $11.2 million of the verdict that related to siding that was subject to the nationwide OSB siding settlement. LP satisfied this verdict, less the enjoined amount, during the second quarter of 2004. Lester’s appealed the District Court’s injunction to the Ninth Circuit Court of Appeals and, on October 24, 2005, the Court of Appeals vacated the District Court’s injunction. As a result of this decision, the injunction was lifted and the state court judgment of $11.2 million was entered on December 22, 2006. On February 5, 2008, the Minnesota State Court of Appeals reversed the $11.2 million judgment entered against LP on December 22, 2006. On March 5, 2009, the Minnesota State Supreme Court affirmed the Minnesota State Court of Appeals’ decision. LP believes the Minnesota State Supreme Court’s decision concludes the matter.

Antitrust Litigation

LP was named as one of a number of defendants in multiple class action complaints filed on or after February 26, 2006 in the United States District Court for the Eastern District of Pennsylvania. These complaints were dismissed or consolidated into two complaints under one caption: In Re OSB Anti-Trust Litigation, Master File No. 06-CV-

 

16


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

00826 (PD). The first complaint is a consolidated amended class action complaint filed on March 31, 2006 on behalf of plaintiffs who directly purchased OSB from the defendants from May 1, 2002 through the date the complaint was filed (the direct purchaser complaint). The second complaint is a consolidated amended class action complaint, filed on June 15, 2006, on behalf of plaintiffs who indirectly purchased OSB from the defendants from May 1, 2002 through the date the complaint was filed (the indirect purchaser complaint). The plaintiffs in both amended and consolidated complaints described above moved for and received class certification and sought damages alleged to have resulted from a conspiracy among the defendants to fix, raise, maintain and stabilize the prices at which OSB is sold in the United States, in violation of Section 1 of the Sherman Act, 15 U.S.C. §1 and similar remedies under individual state anti-trust, competition and consumer protection laws. LP believed that the claims asserted were without merit, but after being ordered to settlement conference by the judge, LP decided that in order to limit the risks and costs associated with a prolonged trial schedule; it would settle the direct and indirect lawsuits. These settlements were accrued and paid in 2008.

As part of the class action process, individual purchasers are able to opt-out of the class action claims and pursue their own suit. On December 1, 2008, LP was named, in an opt-out suit, as one of a number of defendants in Bailey Lumber & Supply and 84 Lumber Company v. Georgia-Pacific Corporation et. al. (Civil Action No. 1:08cv1394) filed in the United States District Court for the Southern District of Mississippi Southern Division. The plaintiffs in this opt-out case seek treble damages alleged to have resulted from a conspiracy among the defendants to fix, raise, maintain and stabilize the prices at which OSB and Plywood are sold in the United States during the period of 2002 into 2006, in violation of Section 1 of the Sherman Act, 15 U.S.C. §1, together with costs and attorneys’ fees. LP believes these allegations are without merit and intends to vigorously defend this suit.

Although the complaint in this opt-out case does not specify the amount of damages sought, a damages model subsequently filed by the plaintiffs suggests that they may be seeking damages in a range from $149 million to $174 million (or $447 million to $524 million if trebled). LP has not increased its reserves for this opt-out case as a result of the filing of the damages model and believes that its reserves are adequate.

ARS litigation

On July 31, 2009, LP filed suit the In The United States District Court For The Northern District Of California captioned., Louisiana Pacific Corporation v. Money Market 1 Institutional Investment Dealer; Merrill Lynch & CO., Inc.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; And Deutsche Bank Securities Inc. (Civil Action No.09cv3529). This matter arose out of LP’s acquisition of certain ARS structured and underwritten by Merrill Lynch and Deutsche Bank with an approximate par value of $145.9 million. In the lawsuit, LP alleges that the defendants made misrepresentations and omissions of material facts in connection with the issuance of and the auctions for the ARS which constitute a violation of both state and federal securities laws, as well as common law fraud. LP seeks recovery of compensatory damages, rescission of the purchase of the securities at par value, consequential damages, punitive damages, attorneys’ fees and any other damages the court deems appropriate under the circumstances.

Other Proceedings

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

NOTE 13 – LONG TERM DEBT

On March 10, 2009, LP issued and sold 375,000 Units consisting of (1) $375,000,000 principal amount at maturity of 13% Senior Secured Notes due 2017 and (2) warrants to purchase 18,395,963 shares of its common stock at an exercise price of $1.39 per share, subject to adjustment in certain circumstances and to mandatory cashless exercise provisions. The units were issued at a discount to the face principal amount resulting in aggregate gross proceeds of $281.3 million. The warrants were valued using a Black-Scholes option pricing model with a resulting an initial allocation of the aggregate proceeds from the Units attributable to the warrants of $12.7 million. The following assumptions were utilized to value the warrants: expected life of 8 years; expected volatility of 53%; and risk free rate of 2.6%. The effective interest rate of this debt is 19.1% (or 19.7% including the warrants). Simultaneous with the closing of the unit transaction, LP used a portion of the proceeds to retire $126.6 million aggregate principal

 

17


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

amount of LP’s 8.875% Senior Notes due 2010 for $126.0 million. Transaction costs associated with this offering were $15.5 million (including costs associated with LP’s new credit facility described below) and are included as deferred debt costs on LP Balance Sheet. The agreements governing our debt restrict our ability to pay dividends on our common stock. Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. The fair market value of this debt as of September 30, 2009 based upon market information was $380.6 million as compared to a book value of $272.4 million.

Under the terms of the indenture related to the 13% Senior Secured Notes due 2017, LP is permitted, with the net proceeds of certain equity offerings, to redeem up to 35% of the aggregate principal amount at maturity of the outstanding Notes at a redemption price equal to 113% of their accreted value, plus accrued and unpaid interest. On September 30, 2009 (in connection with the completion of the offering of common stock discussed at Note 14), LP issued an irrevocable notice to the holders of the Notes of such a redemption. On October 30, 2009, LP redeemed 35% of the outstanding Notes ($131.3 million principal amount at maturity) at a price of $858.14 per $1,000 of principal amount at maturity or $112.6 million, plus accrued and unpaid interest. In connection with this transaction, LP will record a non-cash charge of approximately $20.9 million associated with the loss on early debt extinguishment and write off of a portion of the original transaction costs.

On March 10, 2009, LP entered into a new credit facility, which provides for a committed asset-based borrowing capacity of up to $100 million, with a sublimit for letters of credit. The credit facility will end in September of 2012 unless we fail to repay, defease or reserve for our 8.875% Senior Notes due in 2010 of which $60.2 million remains outstanding at September 30, 2009 by February 15, 2010, as planned, in which case the credit facility’s term will end on February 15, 2010. The availability of credit under the credit facility is subject to a borrowing base, which is calculated based on certain percentages of accounts receivable and inventory and at any given time may limit the amount of borrowings and letters of credit otherwise available under the facility. In addition, the credit facility contains a covenant requiring LP to maintain a fixed charge coverage ratio of at least 1.1 to 1.0 at any time that the excess of (1) the lesser of the commitments plus $20 million or the borrowing base minus (2) obligations outstanding under the credit facility plus certain of LP’s past due trade payables falls below $50 million. At September 30, 2009, LP had $68.8 million of unused commitments under the credit facility, resulting from the borrowing base of $83.2 million less $14.4 million of outstanding letters of credit. Because LP’s fixed charge coverage ratio on September 30, 2009 was less than 1.1 to 1.0, LP was effectively precluded from utilizing $50 million of the credit available after giving effect to the borrowing base limitation.

During the third quarter of 2009, LP paid $13.5 million to retire $13.3 million principal amount of LP’s 8.875% Senior Notes due 2010. As of September 30, 2009, based upon market information, the fair value of the $60.2 million of these notes which remain outstanding was $62.0 million.

NOTE 14 – COMMON STOCK

On September 29, 2009, LP completed a public offering of 20,700,000 shares of common stock, which included the exercise of the overallotment option of 2,700,000 shares, at a price of $6.75, raising $139.7 million before offering costs. In connection with the offering, LP paid $7.0 million in underwriting discounts and commissions and approximately $0.4 million in expenses.

As part of the unit issuance described in Note 13 above, LP issued warrants to purchase 18,395,963 shares of LP common stock at an exercise price of $1.39 per share subject to mandatory cashless exercise provisions. During the third quarter of 2009, warrant exercises resulted in the issuance of 1,064,396 million shares. At September 30, 2009 the remaining outstanding warrants were exercisable to purchase approximately 17,071,453 shares at an exercise price of $1.39 per share subject to mandatory cashless exercise provisions.

 

18


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 15 – 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, 2008.

 

      Quarter Ended
September 30,
    Nine Months Ended
September 30,
 

Dollar amounts in millions

   2009     2008     2009     2008  

Net sales:

        

OSB

   $ 122.5      $ 183.3      $ 292.5      $ 512.5   

Siding

     111.3        117.0        287.7        347.7   

Engineered Wood Products

     47.8        63.4        113.6        189.2   

Other

     27.2        25.9        85.8        76.6   
                                
   $ 308.8      $ 389.6      $ 779.6      $ 1,126.0   
                                

Operating profit (loss):

        

OSB

   $ (6.0   $ (27.7   $ (48.6   $ (124.3

Siding

     16.1        4.6        24.8        13.8   

Engineered Wood Products

     (6.3     (11.0     (24.1     (28.3

Other

     0.2        (2.5     2.3        (5.2

Other operating credits and charges, net

     1.6        (1.6     7.3        (67.7

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

     1.2        (9.8     2.1        (9.5

General corporate and other expenses, net

     (17.7     (22.7     (55.4     (68.8

Foreign currency gain (losses)

     1.0        2.3        10.3        6.6   

Gain (loss) on early debt extinguishment

     (0.2     —          0.4        —     

Other than temporary investment impairment

     (0.1     (88.7     (1.8     (91.2

Investment income

     7.4        8.1        20.1        31.5   

Interest expense, net of capitalized interest

     (20.4     (12.4     (53.3     (36.3
                                

Loss from operations before taxes

     (23.2     (161.4     (115.9     (379.4

Benefit for income taxes

     (10.5     (61.0     (45.7     (153.7
                                

Loss from continuing operations

   $ (12.7   $ (100.4   $ (70.2   $ (225.7
                                

NOTE 16 – POTENTIAL IMPAIRMENTS

LP continues to review certain operations and investments for potential impairments. LP’s management currently believes it has adequate support for the carrying value of each of these operations and investments based upon the anticipated cash flows that result from estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures. As of September 30, 2009, the undiscounted cash flows for the facilities indefinitely curtailed support the conclusion that no impairment is necessary for those facilities. However, should demand and pricing for the relevant products continue to remain at levels significantly below cycle average demand and 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.

 

19


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 17 – CONTINGENCY RESERVES

LP is involved in various legal proceedings incidental to its 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,
2009
    December 31,
2008
 

Environmental reserves

   $ 9.4      $ 6.5   

Hardboard siding reserves

     22.4        31.2   

Other reserves

     1.6        2.8   
                

Total contingency reserves

     33.4        40.5   

Current portion of contingency reserves

     (10.0     (10.0
                

Long-term portion of contingency reserves

   $ 23.4      $ 30.5   
                

Hardboard Siding Reserves

LP has established reserves relating to certain liabilities associated with a settlement agreement resulting from a nationwide class action lawsuit involving hardboard siding manufactured or sold by corporations acquired by LP in 1999 and installed prior to May 15, 2000 which 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, 2008. LP believes that the reserve balance for this settlement at September 30, 2009 will be adequate to cover future payments to claimants and related administrative costs.

The activity in the portion of LP’s loss contingency reserves relating to hardboard siding contingencies for the first nine months of 2009 and 2008 is summarized in the following table.

 

Dollar amounts in millions

   September
30, 2009
    September
30, 2008
 

Beginning balance, December 31,

   $ 31.2      $ 12.8   

Accrued to expense

     1.6        18.2   

Payments made for claims

     (7.5     (9.3

Payments made for administrative costs

     (2.9     (1.5
                

Ending balance

   $ 22.4      $ 20.2   
                

Environmental reserves

LP is involved in a number of environmental proceedings and activities, and may be wholly or partially responsible for known or unknown contamination existing at a number of other sites at which it has conducted operations or disposed of wastes.

LP maintains a reserve for undiscounted estimated environmental loss contingencies. This reserve is primarily for estimated future costs of remediation of hazardous or toxic substances at numerous sites currently or previously owned by the Company. LP’s estimates of its environmental loss contingencies are based on various assumptions and judgments, the specific nature of which varies in light of the particular facts and circumstances surrounding each environmental loss contingency. These estimates typically reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and/or monitoring activities and the probable cost of these activities. Due to the numerous uncertainties and variables associated with these assumptions and judgments, and the effects of changes in governmental regulation and environmental technologies, both the precision and reliability of the resulting estimates of the related contingencies are subject to substantial uncertainties. LP regularly monitors its estimated exposure to environmental loss contingencies and, as additional information becomes known, may change its estimates significantly. However, no estimate of the range of any such change can be made at this time.

LP’s estimates of its environmental loss contingencies do not reflect potential future recoveries from insurance carriers or previous owners of certain sites except to the extent that recovery may from time to time be deemed probable as a result of agreements to payment terms.

 

20


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The activity in LP’s reserve for estimated environmental loss contingency reserves for the first nine months of 2009 and 2008 is summarized in the following table.

 

Dollar amounts in millions

   September 30,
2009
    September 30,
2008
 

Beginning balance, December 31,

   $ 6.5      $ 9.4   

Adjusted to expense (income) during the period

     3.3        (0.2

Payments made

     (0.4     (2.1
                

Ending balance

   $ 9.4      $ 7.1   
                

During the first nine months of 2009 and 2008, LP adjusted its reserves at a number of sites to reflect current estimates of remediation costs.

NOTE 18 – DEFINED BENEFIT PENSION PLANS

The following table sets forth the net periodic pension cost for LP’s defined benefit pension plans during the third quarter and nine month periods ended September 30, 2009 and 2008. The net periodic pension cost included the following components:

 

Dollar amounts in millions

   Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
   2009     2008     2009     2008  

Service cost

   $ 1.7      $ 2.4      $ 5.1      $ 7.3   

Interest cost

     4.1        4.4        12.3        13.3   

Expected return on plan assets

     (4.4     (5.1     (13.2     (15.6

Amortization of prior service cost

     0.1        0.3        0.3        0.9   

Amortization of net loss

     1.0        0.6        3.0        1.9   
                                

Net periodic pension cost

   $ 2.5      $ 2.6      $ 7.5      $ 7.8   
                                

Through September 30, 2009, LP recognized $7.5 million of pension expense for all of LP’s defined benefit plans. LP presently anticipates recognizing an additional $3.0 million of pension expense in the remainder of 2009 for a total of $10.5 million.

Through September 30, 2009, LP made approximately $0.4 million in contributions to its defined benefit plans. LP presently anticipates making an additional approximately $0.6 million of pension contributions to the plans during the remainder of 2009.

NOTE 19 – 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 23 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2008 for further discussion of LP’s guarantees and indemnifications.

 

21


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 nine months of 2009 and 2008 is summarized in the following table:

 

Dollar amounts in millions

   September 30,
2009
    September 30,
2008
 

Beginning balance, December 31,

   $ 33.7      $ 26.2   

Accrued to expense

     5.8        19.7   

Payments made

     (6.3     (5.5
                

Total warranty reserves

     33.2        40.4   

Current portion of warranty reserves

     (7.0     (7.0
                

Long-term portion of warranty reserves

   $ 26.2      $ 33.4   
                

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 Condensed Consolidated Balance Sheets.

During the third quarter of 2008, LP increased the warranty reserves relating to its discontinued composite decking products. The additional reserves reflect revised estimates of future claim payments based upon a significant increase in decking warranty claims related to a specific operation and specific time period. During the fourth quarter of 2008, based upon further investigation, LP established a voluntary recall of these specific products. During the second quarter of 2009, LP established a formal recall program under the Consumer Products Safety Board requirements for this product. No additional reserve increase was required in connection with the establishment of the formal program. LP continues to monitor warranty and other claims associated with these products and with the recall program (see Note 12- Legal and Environmental Matters – Other Proceedings) and believes as of September 30, 2009 that the reserves associated with these matters are adequate.

During the second quarter of 2009, LP increased the warranty reserve related to its discontinued vinyl siding products based upon an increase in warranty claims related to a specific vinyl product. The additional reserves reflect revised estimates of future claims.

LP believes that the warranty reserve balance at September 30, 2009 is adequate to cover future warranty payments. However, it is possible that additional charges may be required.

NOTE 20 – RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued guidance now codified under ASC Topic 820, “Fair Value Measurements and Disclosures” (ASC 820). This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of ASC 820 were applied prospectively to LP’s fair value measurements and disclosures as of January 1, 2008 with respect to recurring financial assets and liabilities and January 1, 2009 with respect to nonrecurring nonfinancial assets and liabilities, and did not have a material effect on LP’s consolidated financial statements.

In December 2007, the FASB issued guidance now codified under ASC Topic 810-10 “Consolidation – Overall” (ASC 810-10). ASC 810-10 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810-10 requires that under most circumstances noncontrolling interests in subsidiaries be reported in the equity section of the controlling company’s balance sheet. It also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. ASC 810-10 is effective on a prospective basis for annual periods beginning after December 15, 2008, except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented. LP adopted this statement as of January 1, 2009, and it did not have a material impact on LP’s consolidated financial statements.

In December 2007, the FASB issued guidance now codified under ASC Topic 805 “Business Combinations” (ASC 805). ASC 805 addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. ASC 805 also establishes expanded disclosure requirements for business combinations. ASC 805 is effective for annual periods beginning after December 15, 2008 and should be applied prospectively for all business combinations entered into after the date of adoption.

 

22


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In March 2008, the FASB issued guidance now codified under ASC Topic 815-10 “Derivatives and Hedging – Overall” (ASC 815-10). ASC 815-10 amends and expands the disclosure requirements of previous standards to provide a better understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and their effect on an entity’s financial position, financial performance, and cash flows. ASC 815-10 is effective for fiscal years beginning after November 15, 2008. LP adopted this statement as of January 1, 2009 and it did not have a material effect on LP’s consolidated financial statements.

In December 2008, the FASB issued guidance now codified under ASC Topic 715-20 “Compensation - Retirement Benefits” (ASC 715-20). ASC 715-20 amends Statement of Financial Accounting Standards “SFAS” 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. ASC 715-20-65-2 is effective for fiscal years ending after December 15, 2009. LP is currently evaluating the impact of adopting this standard on its consolidated financial statement disclosures.

In April 2009, the FASB issued guidance now codified under ASC Topic 820-10 “Fair Value Measurements and Disclosures – Overall” (ASC 820-10) . ASC 820-10 provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. This standard also includes guidance on identifying circumstances that indicate a transaction is not orderly. If a market is determined to be inactive and market price is reflective of a distressed price then an alternative method of pricing can be used, such as a present value technique to estimate fair value. ASC 820-10 identifies factors to be considered when determining whether or not a market is inactive. ASC 820-10 is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively. LP adopted this statement as of April 1, 2009, and it did not have a material effect on LP’s consolidated financial statements.

In April 2009, the FASB issued guidance now codified under ASC Topic 825-10 “Financial Instruments - Overall” (ASC 825-10), to require disclosures about fair value of financial instruments in interim and annual reporting periods. ASC 825-10 is effective for interim reporting periods ending after June 15, 2009. LP adopted these statements in the second quarter of 2009.

In April 2009, the FASB issued guidance now codified under ASC Topic 320-10 “Investments - Debt and Equity Securities – Overall” (ASC 320-10) which amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. ASC 320-10 is effective for interim reporting periods ending after June 15, 2009. LP adopted these statements as of April 1, 2009 and they did not have a material effect on LP’s consolidated financial statements.

In May 2009, the FASB issued guidance now codified under ASC Topic 855, “Subsequent Events,” which sets forth the period for which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events after the balance sheet date in its financial statements and the disclosures required of events occurring after the balance sheet date. LP adopted this standard in the second quarter of 2009 and it did not have a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets-An Amendment of FASB No. 140”, and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R), which have not yet been codified in the ASC. Under SFAS No. 166, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes, and formerly qualifying special-purpose entities need to be evaluated for consolidation. SFAS No. 167 requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest gives it a controlling financial interest. SFAS 166 and 167 are effective for the first annual reporting period beginning after November 15, 2009 (including interim periods within the first annual reporting period). LP is currently evaluating the impact of adopting SFAS 166 and 167 on its consolidated financial statements.

 

23


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In June 2009, the FASB issued guidance now codified under ASC Topic 105, “Generally Accepted Accounting Principles” (ASC 105), as the single source of authoritative nongovernmental U.S. GAAP. ASC 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature to a particular topic in one place. All existing accounting standards documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. These provisions of FASB ASC Topics are effective for interim and annual periods ending after September 15, 2009 and, accordingly, are effective for LP’s current fiscal reporting period. The adoption of this pronouncement did not have an impact on LP’s financial condition or results of operations, but will impact our financial reporting process by eliminating all references to pre-codified standards. On the effective date of this pronouncement, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.

NOTE 21 – SUBSEQUENT EVENTS

LP has evaluated events subsequent to September 30, 2009 through November 4, 2009. During this period, LP did complete the redemption of a portion of its Senior Notes due in 2017 as described in Note 13 above. Additionally, LP entered into a contract to sublease a portion of its administrative headquarters which will result in LP recording, in the fourth quarter of 2009, an additional estimated non-cash charge of $0.7 million.

 

24


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

GENERAL

Our products are used primarily in new home construction, repair and remodeling, and manufactured housing. We also market and sell our products in light industrial and commercial construction and we have a modest export business. Our manufacturing facilities are primarily located in the U.S. and Canada, but we also operate two facilities in Chile and have a 75% ownership interest in a Brazilian facility.

To serve these markets, we operate in three segments: Oriented Strand Board (OSB), Siding, and Engineered Wood Products (EWP).

Demand for our products correlates to a significant degree to the level of residential construction activity in North America, which historically has been characterized by significant cyclicality. The U.S. Department of Census reported that actual single and multi-family housing starts in the first nine months of 2009 were about 43% lower than the first nine months of 2008. We believe that the reduced level of building is due to the increase in the inventory of unoccupied homes for sale coupled with a much more restrictive mortgage market. Additionally, the current recession and related job losses, the reduction in home values and the large amount of variable rate mortgages that have reset at higher rates of interest has increased the number of foreclosures, which adds to the stock of homes for sale. Building activity is unlikely to improve until the number of homes available for sale is reduced, foreclosure activity subsidies, and the level of unemployment stabilizes and housing prices stop declining.

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.

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, 2008 and to “About Forward-Looking Statements” and “Risk Factors” in this report.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

Presented in Note 1 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2008 is a discussion of our significant accounting policies and significant accounting estimates and judgments. The discussion of each of the policies and estimates outlines the specific accounting treatment related to each of these accounting areas.

Accounting Policies

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 $1.8 million higher if the LIFO inventories were valued at average cost as of September 30, 2009.

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.

 

25


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 2009, these significant accounting estimates and judgments include:

Auction Rate Securities: Auction rate securities represent interests in collateralized debt obligations, a portion of which are collateralized by pools of residential and commercial mortgages, interest-bearing corporate debt obligations, dividend-yielding preferred stock or other instruments. Liquidity for these auction rate securities historically was provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 7, 28, 35 or 90 days. Because of the short interest rate reset period, we have historically recorded auction rate securities in current available-for-sale securities. As of September 30, 2009, we had auction rate securities with a par value of $151.8 million that have experienced multiple failed auctions as the amount of securities for sale exceeded the amount of purchase orders. We have recorded cumulative other-than-temporary impairments aggregating $141.3 million on these securities through September 30, 2009. In addition, through the third quarter of 2009, we have recorded gross unrealized gains through Other Comprehensive Income of $31.8 million. Auction rate securities with a fair value of $42.3 million are included in the accompanying consolidated financial statements under the caption “long-term investments”.

Our estimates of the valuation of our current holdings of auction rate securities are based upon our evaluation of the structure of our auction rate securities and current market estimates of fair value, including fair value estimates from issuing banks. In accordance with the Investment Topic of the FASB ASC we review several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time a security is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and the underlying collateral, and (iv) our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Due to the numerous variables associated with these judgments, both the precision and reliability of the resulting estimates of the related valuation allowance are subject to substantial uncertainties. We regularly monitor our estimated exposure to these investments and, as additional information becomes known, may change our estimates significantly.

Legal Contingencies. Our estimates of loss contingencies for legal proceedings are based on various judgments and assumptions regarding the potential resolution or disposition of the underlying claims and associated costs. In making judgments and assumptions regarding legal contingencies for ongoing class action settlements, we consider, among other things, discernible trends in the rate of claims asserted and related damage estimates and information obtained through consultation with statisticians and economists, including statistical 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 loss contingencies for environmental matters are based on various judgments and assumptions. These estimates typically reflect judgments and assumptions relating to the probable nature, magnitude and timing of required investigation, remediation and/or monitoring activities and the probable cost of these activities, and in some cases reflect judgments and assumptions relating to the obligation or willingness and ability of third parties to bear a proportionate or allocated share of the cost of these activities, including third parties who purchased assets from us subject to environmental liabilities. We consider the ability of third parties to pay their apportioned cost when developing our estimates. In making these judgments and assumptions related to the development of our loss contingencies, we consider, among other things, the activity to date at particular sites, information obtained through consultation with applicable regulatory authorities and third-party consultants and contractors and our historical experience at other sites that are judged to be comparable. Due to the numerous variables associated with these judgments and assumptions, and the effects of changes in governmental regulation and environmental technologies, both the precision and reliability of the resulting estimates of the related contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to environmental loss contingencies and, as additional information becomes known, may change our estimates significantly. At September 30, 2009, we excluded from our estimates approximately $1.0 million of potential environmental liabilities that we estimate will be allocated to third parties pursuant to existing and anticipated future cost sharing arrangements.

 

26


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 or specialty 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, which is generally based upon discounted future cash flows. Assets to be disposed of are written down to their estimated fair value, less estimated selling costs. Consequently, a determination to dispose of particular assets can require us to estimate the net sales proceeds expected to be realized upon such disposition, which may be less than the estimated undiscounted future net cash flows associated with such assets prior to such determination, and thus require an impairment charge. In situations where we have experience in selling assets of a similar nature, we may estimate net sales proceeds on the basis of that experience. In other situations, we hire independent appraisers to estimate net sales proceeds. Due to the numerous variables associated with our judgments and assumptions relating to the valuation of assets in these circumstances, and the effects of changes in circumstances affecting these valuations, both the precision and reliability of the resulting estimates of the related impairment charges are subject to substantial uncertainties and, as additional information becomes known, we may change our estimates significantly.

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

Judgment is also applied in determining whether deferred tax assets will be realized in full or in part. When we consider it to be more likely than not that all or some portion of a deferred tax asset will not be realized, a valuation allowance is established for the amount of the deferred tax asset that is estimated not to be realizable. As of September 30, 2009, we had established valuation allowances against certain deferred tax assets, primarily related to state and certain foreign carryovers of net operating losses, credits and foreign capital loss. 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.

Pension Plans. Most of our U.S. employees and some 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 15 of the Notes to the financial statements included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008.

 

27


Workers’ Compensation. We are self-insured for workers’ compensation in most U.S. states. We account for these plans in accordance with accounting principles generally accepted in the U.S, which require us to make actuarial assumptions that are used to calculate the related assets, liabilities and expenses recorded in our financial statements. While we believe we have a reasonable basis for these assumptions, which include assumptions regarding rates at which future values should be discounted to determine present values, expected future health care costs and other matters. The amounts of our liabilities and related expenses recorded in our financial statements would differ if we used other assumptions.

NON-GAAP FINANCIAL MEASURES

In evaluating our business, we utilize several non-GAAP financial measures. A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so excluded or included under applicable GAAP guidance. In this report on Form 10-Q, we disclose continuing earnings before interest, taxes, depreciation and amortization (“EBITDA from continuing operations”) which is a non-GAAP financial measure. Additionally, we disclose Adjusted EBITDA from continuing operations which further adjusts EBITDA from continuing operations to exclude stock based compensation expense, (gain) loss on sales or impairment of long lived assets, other operating charges and credits, other than temporary investment impairment and early debt extinguishment. Both EBITDA from continuing operations and adjusted EBITDA from continuing operations are not a substitute for the GAAP measure of net income or operating cash flows or other GAAP measures of operating performance or liquidity.

We have included EBITDA from continuing operations and Adjusted EBITDA from continuing operations in this report on Form 10-Q because we use as an important supplemental measures of our performance and believe that they are frequently used by securities analysts, investors and other interested persons in the evaluation of companies in our industry, some of which present EBITDA when reporting their results. We use EBITDA from continuing operations and Adjusted EBITDA from contuing operations to evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates. In addition, the instruments governing our indebtedness use EBITDA (with additional adjustments) to measure our compliance with covenants such as interest coverage and debt incurrence. It should be noted that companies calculate EBITDA differently and, therefore, our EBITDA measures may not be comparable to EBITDA reported by other companies. Our EBITDA measures have material limitations as performance measures because they exclude interest expense, income tax (benefit) expense, depreciation and amortization which are necessary to operate our business or which we otherwise incurred or experienced in connection with the operation of our business.

 

28


The following table represents significant items by operating segment and reconciles results from continuing operations to EBITDA from continuing operations and Adjusted EBITDA from continuing operations:

 

(Dollar amounts in millions)

   OSB     Siding    EWP     Other     Corporate     Total  

Quarter Ended September 30, 2009

             

Sales

   $ 122.5      $ 111.3    $ 47.8      $ 27.2      $ —        $ 308.8   
                                               

Depreciation and amortization

     10.3        5.1      3.2        2.9        0.7        22.2   

Cost of sales and selling and administative

     116.3        90.1      50.9        23.2        17.0        297.5   

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

              (1.2     (1.2

Other operating credits and charges, net

              (1.6     (1.6
                                               

Total operating costs

     126.6        95.2      54.1        26.1        14.9        316.9   
                                               

Income (loss) from operations

     (4.1     16.1      (6.3     1.1        (14.9     (8.1

Total non-operating income (expense)

              (12.3     (12.3

Income (loss) before income taxes and equity in earnings of unconsolidated affiliates

     (4.1     16.1      (6.3     1.1        (27.2     (20.4

Provision (benefit) for income taxes

              (10.5     (10.5

Equity in (income) loss of unconsolidated affiliates

     1.9        —        —          0.9        —          2.8   
                                               

Income (loss) from continuing operations

   $ (6.0   $ 16.1    $ (6.3   $ 0.2      $ (16.7   $ (12.7
                                               

Reconciliation of loss from continuing operations to adjusted EBITDA from continuing operations

             

Income (loss) from continuing operations

   $ (6.0   $ 16.1    $ (6.3   $ 0.2      $ (16.7   $ (12.7

Income tax benefit

              (10.5     (10.5

Investment income

              (7.4     (7.4

Interest expense, net of capitalized interest

              20.4        20.4   

Depreciation and amortization

     10.3        5.1      3.2        2.9        0.7        22.2   
                                               

EBITDA from continuing operations

   $ 4.3      $ 21.2    $ (3.1   $ 3.1      $ (13.5   $ 12.0   
                                               

Stock based compensation expense

   $ 0.1      $ 0.1    $ 0.1        $ 1.2      $ 1.5   

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

              (1.2     (1.2

Other operating credits and charges, net

              (1.6     (1.6

Other than temporary asset impairment

              0.1        0.1   

Early debt extinguishment

              0.2        0.2   
                                               

Adjusted EBITDA from continuing operations

   $ 4.4      $ 21.3    $ (3.0   $ 3.1      $ (14.8   $ 11.0   
                                               

Quarter Ended September 30, 2008

             

Sales

   $ 183.3      $ 117.0    $ 63.4      $ 25.9      $ —        $ 389.6   
                                               

Depreciation and amortization

     13.3        5.2      4.4        2.6        1.5        27.0   

Cost of sales and selling and administative

     196.0        107.2      70.3        24.1        21.2        418.8   

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

              9.8        9.8   

Other operating credits and charges, net

              1.6        1.6   
                                               

Total operating costs

     209.3        112.4      74.7        26.7        34.1        457.2   
                                               

Loss from operations

     (26.0     4.6      (11.3     (0.8     (34.1     (67.6

Total non-operating income (expense)

              (90.7     (90.7

Income (loss) before income taxes and equity in earnings of unconsolidated affiliates

     (26.0     4.6      (11.3     (0.8     (124.8     (158.3

Provision (benefit) for income taxes

              (61.0     (61.0

Equity in (income) loss of unconsolidated affiliates

     1.7           (0.3     1.7        —          3.1   
                                               

Income (loss) from continuing operations

   $ (27.7   $ 4.6    $ (11.0   $ (2.5   $ (63.8   $ (100.4
                                               

Reconciliation of loss from continuing operations to adjusted EBITDA from continuing operations

             

Income (loss) from continuing operations

   $ (27.7   $ 4.6    $ (11.0   $ (2.5   $ (63.8   $ (100.4

Income tax benefit

              (61.0     (61.0

Investment income

              (8.1     (8.1

Interest expense, net of capitalized interest

              12.4        12.4   

Depreciation and amortization

     13.3        5.2      4.4        2.6        1.5        27.0   
                                               

EBITDA from continuing operations

   $ (14.4   $ 9.8    $ (6.6   $ 0.1      $ (119.0   $ (130.1
                                               

Stock based compensation expense

   $ 0.4      $ 0.2    $ 0.1      $ —        $ 1.8      $ 2.5   

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

              9.8        9.8   

Other operating credits and charges, net

              1.6        1.6   

Other than temporary asset impairment

              88.7        88.7   

Early debt extinguishment

              —          —     
                                               

Adjusted EBITDA from continuing operations

   $ (14.0   $ 10.0    $ (6.5   $ 0.1      $ (17.1   $ (27.5
                                               

 

29


(Dollar amounts in millions)

   OSB     Siding    EWP     Other     Corporate     Total  

Nine months Ended September 30, 2009

             

Sales

   $ 292.5      $ 287.7    $ 113.6      $ 85.8      $ —        $ 779.6   
                                               

Depreciation and amortization

     26.3        14.1      9.1        8.0        2.7        60.2   

Cost of sales and selling and administative

     308.3        248.8      128.2        73.6        52.7        811.6   

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

              (2.1     (2.1

Other operating credits and charges, net

              (7.3     (7.3
                                               

Total operating costs

     334.6        262.9      137.3        81.6        46.0        862.4   
                                               

Income (loss) from operations

     (42.1     24.8      (23.7     4.2        (46.0     (82.8

Total non-operating income (expense)

              (24.3     (24.3

Income (loss) before income taxes and equity in earnings of unconsolidated affiliates

     (42.1     24.8      (23.7     4.2        (70.3     (107.1

Provision (benefit) for income taxes

              (45.7     (45.7

Equity in (income) loss of unconsolidated affiliates

     6.5           0.4        1.9          8.8   
                                               

Income (loss) from continuing operations

   $ (48.6   $ 24.8    $ (24.1   $ 2.3      $ (24.6   $ (70.2
                                               

Reconciliation of loss from continuing operations to adjusted EBITDA from continuing operations

             

Income (loss) from continuing operations

   $ (48.6   $ 24.8    $ (24.1   $ 2.3      $ (24.6     (70.2

Income tax expense

              (45.7     (45.7

Investment income

              (20.1     (20.1

Interest expense, net of capitalized interest

              53.3        53.3   

Depreciation and amortization

     26.3        14.1      9.1        8.0        2.7        60.2   
                                               

EBITDA from continuing operations

   $ (22.3   $ 38.9    $ (15.0   $ 10.3      $ (34.4   $ (22.5
                                               

Stock based compensation expense

   $ 0.5      $ 0.4    $ 0.4      $ —        $ 4.2      $ 5.5   

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

              (2.1     (2.1

Other operating credits and charges, net

              (7.3     (7.3

Other than temporary asset impairment

              1.8        1.8   

Early debt extinguishment

              (0.4     (0.4
                                               

Adjusted EBITDA from continuing operations

   $ (21.8   $ 39.3    $ (14.6   $ 10.3      $ (38.2   $ (25.0
                                               

Nine months Ended September 30, 2008

             

Sales

   $ 512.5      $ 347.7    $ 189.2      $ 76.6      $ —        $ 1,126.0   
                                               

Depreciation and amortization

     40.6        16.6      11.9        7.1        4.2        80.4   

Cost of sales and selling and administative

     587.1        317.3      205.6        71.2        64.6        1,245.8   

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

              9.5        9.5   

Other operating credits and charges, net

              67.7        67.7   
                                               

Total operating costs

     627.7        333.9      217.5        78.3        146.0        1,403.4   
                                               

Loss from operations

     (115.2     13.8      (28.3     (1.7     (146.0     (277.4

Total non-operating income (expense)

              (89.4     (89.4

Income (loss) before income taxes and equity in earnings of unconsolidated affiliates

     (115.2     13.8      (28.3     (1.7     (235.4     (366.8

Provision (benefit) for income taxes

              (153.7     (153.7

Equity in (income) loss of unconsolidated affiliates

     9.1             3.5          12.6   
                                               

Income (loss) from continuing operations

   $ (124.3   $ 13.8    $ (28.3   $ (5.2   $ (81.7   $ (225.7
                                               

Reconciliation of loss from continuing operations to adjusted EBITDA from continuing operations

             

Income (loss) from continuing operations

   $ (124.3   $ 13.8    $ (28.3   $ (5.2   $ (81.7     (225.7

Income tax expense

              (153.7     (153.7

Investment income

              (31.5     (31.5

Interest expense, net of capitalized interest

              36.3        36.3   

Depreciation and amortization

     40.6        16.6      11.9        7.1        4.2        80.4   
                                               

EBITDA from continuing operations

   $ (83.7   $ 30.4    $ (16.4   $ 1.9      $ (226.4   $ (294.2
                                               

Stock based compensation expense

   $ 1.0      $ 0.5    $ 0.5      $ —        $ 5.3      $ 7.3   

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

              9.5        9.5   

Other operating credits and charges, net

              67.7        67.7   

Other than temporary asset impairment

              91.2        91.2   

Early debt extinguishment

              —          —     
                                               

Adjusted EBITDA from continuing operations

   $ (82.7   $ 30.9    $ (15.9   $ 1.9      $ (52.7   $ (118.5
                                               

 

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RESULTS OF OPERATIONS

(Dollar amounts in tables in millions, except per share amounts)

Our net loss for the third quarter of 2009 was $12.5 million, or $0.12 per diluted share, on sales of $308.8 million, compared to net loss for the third quarter of 2008 of $111.1 million, or $1.08 per diluted share, on sales of $389.6 million. For the third quarter of 2009, loss from continuing operations was $12.7 million, or $0.12 per diluted share, compared to loss from continuing operations of $100.4 million, or $0.98 per diluted share, for the third quarter of 2008.

Our net loss for the nine months ended September 30, 2009 was $72.3 million, or $0.70 per diluted share, on sales of $779.6 million, compared to net loss for the nine months ended September 30, 2008 of $238.3 million, or $2.32 per diluted share, on sales of $1.1 billion. For the nine months ended September 30, 2009, loss from continuing operations was $70.2 million, or $0.67 per diluted share, compared to loss from continuing operations of $225.7 million, or $2.19 per diluted share, for the nine months ended September 30, 2008.

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, losses, depreciation, amortization and cost of timber harvested and EBITDA from continuing operations for this segment are as follows:

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     Change     2009     2008     Change  

Net sales

   $ 122.5      $ 183.3      (33 %)    $ 292.5      $ 512.5      (43 %) 

Operating losses

     (6.0     (27.7   78     (48.6     (124.3   61

Depreciation, amortization and cost of timber harvested

     10.3        13.3      23     26.3        40.6      35

Adjusted EBITDA from continuing operations

     4.4        (14.0   131     (21.8     (82.7   74

Percent changes in average sales prices and unit shipments for the quarter and nine months ended September 30, 2009 compared to the quarter and nine months ended September 30, 2008 are as follows:

 

     Quarter Ended
September 30, 2009
versus 2008
    Nine Months Ended
September 30, 2009
versus 2008
 
     Average Net
Selling Price
    Unit
Shipments
    Average Net
Selling Price
    Unit
Shipments
 

Commodity OSB

   (6 %)    (26 %)    (1 %)    (41 %) 

OSB prices declined for the third quarter of 2009 as compared to the corresponding period of 2008. The weakened price as compared to cycle average pricing is due to dramatically lower demand from housing activity. The decrease in selling price unfavorably impacted net sales and operating losses by approximately $8 million for the quarter as compared to the corresponding period of 2008. As compared to the corresponding period of 2008, the decline in sales volume was primarily due to lower demand caused by dramatically reduced housing starts. To balance our supply and demand, we indefinitely curtailed four of our twelve OSB mills as well as implemented other production curtailments at our other mills.

OSB prices remained relatively flat in the nine month period ended September 30, 2009 as compared to the corresponding period of 2008. Sales volumes during this period were reduced due to lower production as a result of the curtailments mentioned above.

 

31


Compared to the third quarter and first nine months of 2008, the primary factors for decreased operating losses were reductions in operating costs due to reduced sales volumes, lower prices on petroleum based raw materials used in manufacturing and a decrease in our Canadian dollar denominated manufacturing costs. The Canadian dollar has weakened compared to both the third quarter and first nine months of 2008, which caused our Canadian production costs stated in U.S. dollars to decrease.

SIDING

Our siding segment produces and markets wood-based siding and related accessories and interior hardboard products, together with commodity OSB products from one mill. In the second quarter of 2009, we ceased production of interior hardboard products.

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

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008    Change     2009    2008    Change  

Net sales

   $ 111.3    $ 117.0    (5 %)    $ 287.7    $ 347.7    (17 %) 

Operating profits

     16.1      4.6    250     24.8      13.8    80

Depreciation, amortization and cost of timber harvested

     5.1      5.2    2     14.1      16.6    15

Adjusted EBITDA from continuing operations

     21.3      10.0    113     39.3      30.9    27

Sales in this segment by product line are as follows:

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008    Change     2009    2008    Change  

SmartSide Siding

   $ 91.8    $ 91.5    0   $ 225.4    $ 259.9    (13 %) 

Commodity OSB

     6.7    $ 8.0    (16 %)      20.9    $ 25.0    (16 %) 

Canexel siding and other hardboard related products

     12.8    $ 17.5    (27 %)      41.4    $ 62.8    (34 %) 
                                

Total

   $ 111.3    $ 117.0    (5 %)    $ 287.7    $ 347.7    (17 %) 
                                

Percent changes in average sales prices and unit shipments for the quarter and nine month period ended September 30, 2009 compared to the quarter and nine month period ended September 30, 2008 are as follows:

 

     Quarter Ended
September 30,
2009 versus 2008
    Nine Months Ended
September 30,
2009 versus 2008
 
     Average Net
Selling Price
    Unit
Shipments
    Average Net
Selling Price
    Unit
Shipments
 

SmartSide Siding

   2   (1 %)    3   (14 %) 

Commodity OSB

   (9 %)    (3 %)    (1 %)    (15 %) 

Canexel siding and other hardboard related products

   5   (24 %)    (10 %)    (24 %) 

For the third quarter of 2009 compared to the corresponding period in 2008, sales volumes for our SmartSide products are flat while we are showing significant declines in our Canexel product line. Housing starts are dramatically lower, however our SmartSide business in the third quarter was able to offset these declines through improvements in the repair and remodel markets which offset the dramatic reductions in the housing starts. The decline in our Canexel sales is related to LP’s decision to exit our doorskin and 16’ siding business in early 2009. For the nine month period ended September 30, 2009 compared to the corresponding period in 2008, sales volumes declined significantly in both siding lines due to dramatically reduced housing starts in both the U.S. and Canada. Sales prices in our SmartSide siding product line for the quarter and nine month period ended September 30, 2009 as compared to the corresponding periods of 2008 changed due to product mix with specific product prices remaining

 

32


generally constant. In our Canexel product line, sales prices decreased in the third quarter and nine month period ended September 30, 2009 as compared to the corresponding periods of 2008 due to the impact of the weakening Canadian dollar as a majority of these sales are made in Canada as well as the changing product mix as we exited the doorskin and 16’ siding lines.

Overall, the improvement in operating results for our siding segment for the third quarter and first nine months of 2009 compared to the corresponding periods of 2008 was primarily due to reductions in the cost of petroleum-based raw materials, optimized production scheduling and efficiencies in other manufacturing costs.

ENGINEERED WOOD PRODUCTS

Our engineered wood products (EWP) segment manufactures and distributes laminated veneer lumber (LVL), I-Joists, laminated strand lumber (LSL) (which began production in the first half of 2008) and other related products. This segment also includes the sale of I-Joist and LVL products produced by the AbitibiBowater JV or under a contract manufacturing arrangement.

Segment sales, losses, depreciation, amortization and cost of timber harvested and EBITDA from continuing operations for this segment are as follows:

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     Change     2009     2008     Change  

Net sales

   $ 47.8      $ 63.4      (25 %)    $ 113.6      $ 189.2      (40 %) 

Operating losses

     (6.3     (11.0   43  </