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Louisiana-Pacific 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
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 June 30, 2010

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was ,required to submit and post such files).    Yes  ¨    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 ¨   Accelerated filer x   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: 129,212,923 shares of Common Stock, $1 par value, outstanding as of July 29, 2010.

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 of and availability of energy, primarily natural gas, electricity and diesel fuel;

 

   

changes in other significant operating expenses;

 

   

changes in exchange rates between the U.S. dollar and other currencies, particularly the Canadian dollar, EURO, 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
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Net sales

   $ 447.1      $ 267.4      $ 743.7      $ 472.9   
                                

Operating costs and expenses:

        

Cost of sales

     346.3        254.5        614.3        459.8   

Depreciation, amortization and cost of timber harvested

     22.4        18.9        42.8        38.0   

Selling and administrative

     29.0        29.1        58.7        56.4   

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

     (0.1     (1.0     1.2        (0.9

Other operating credits and charges, net

     0.6        (1.9     0.5        (5.7
                                

Total operating costs and expenses

     398.2        299.6        717.5        547.6   
                                

Income (loss) from operations

     48.9        (32.2     26.2        (74.7
                                

Other than temporary investment impairment

     —          (0.8     —          (1.7

Interest expense, net of capitalized interest

     (17.7     (21.9     (34.5     (34.8

Investment income

     4.3        8.3        10.2        14.4   

Foreign currency gains (losses)

     (0.1     6.7        1.4        9.3   

Early debt extinguishment

     —          —          —          0.6   
                                

Non-operating income (expense)

     (13.5     (7.7     (22.9     (12.2
                                

Income (loss) from continuing operations before taxes and equity in losses of unconsolidated affiliates

     35.4        (39.9     3.3        (86.9

Provision (benefit) for income taxes

     12.7        (16.0     2.4        (35.3

Equity in (income) loss of unconsolidated affiliates

     (0.9     3.3        (0.2     5.9   
                                

Income (loss) from continuing operations

     23.6        (27.2     1.1        (57.5
                                

Loss from discontinued operations before taxes

     (2.0     (3.7     (2.3     (4.4

Benefit for income taxes

     (0.8     (1.4     (0.9     (1.7
                                

Loss from discontinued operations

     (1.2     (2.3     (1.4     (2.7
                                

Net income (loss)

     22.4        (29.5     (0.3     (60.2

Less: Net income (loss) attributed to non-controlling interest

     0.1        (0.3     (0.1     (0.5
                                

Net income (loss) attributed to Louisiana-Pacific Corporation

   $ 22.3      $ (29.2   $ (0.2   $ (59.7
                                

Net income (loss) per share of common stock (basic):

        

Income (loss) from continuing operations

   $ 0.18      $ (0.26   $ 0.01      $ (0.55

Loss from discontinued operations

     (0.01     (0.02     (0.01     (0.03
                                

Net income (loss) per share

   $ 0.17      $ (0.28   $ —        $ (0.58
                                

Net income (loss) per share of common stock (diluted):

        

Income (loss) from continuing operations

   $ 0.17      $ (0.26   $ 0.01      $ (0.55

Loss from discontinued operations

     (0.01     (0.02     (0.01     (0.03
                                

Net income (loss) per share

   $ 0.16      $ (0.28   $ —        $ (0.58
                                

Average shares of stock outstanding - basic

     128.5        103.0        127.2        102.8   
                                

Average shares of stock outstanding - diluted

     139.8        103.0        138.2        102.8   
                                

Amounts attributed to LP Corporation common shareholders

        

Income (loss) from continuing operations, net of tax

   $ 23.5      $ (26.9   $ 1.2      $ (57.0

Income (loss) from discontinued operations, net of tax

     (1.2     (2.3     (1.4     (2.7
                                
   $ 22.3      $ (29.2   $ (0.2   $ (59.7
                                

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

 

3


CONDENSED CONSOLIDATED BALANCE SHEETS

LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES

(AMOUNTS IN MILLIONS) (UNAUDITED)

 

     June 30,
2010
    December 31,
2009
 

ASSETS

    

Cash and cash equivalents

   $ 437.1      $ 394.1   

Receivables, net of allowance for doubtful accounts of $1.3 million and $1.2 million at June 30, 2010 and December 31, 2009

     108.6        59.9   

Income tax receivable

     15.3        52.7   

Inventories

     164.2        140.4   

Prepaid expenses and other current assets

     8.1        6.2   

Deferred income taxes

     —          1.4   

Current portion of notes receivable from asset sales

     —          115.1   

Assets held for sale

     66.2        69.1   
                

Total current assets

     799.5        838.9   

Timber and timberlands

     49.0        50.6   

Property, plant and equipment, at cost

     2,078.7        2,081.1   

Accumulated depreciation

     (1,154.8     (1,116.6
                

Net property, plant and equipment

     923.9        964.5   

Notes receivable from asset sales

     533.5        533.5   

Long-term investments

     34.1        26.3   

Restricted cash

     15.6        20.8   

Investments in and advances to affiliates

     132.9        138.5   

Deferred debt costs

     11.6        13.2   

Other assets

     26.2        26.6   

Long-term deferred tax asset

     1.0        7.4   
                

Total assets

   $ 2,527.3      $ 2,620.3   
                

LIABILITIES AND EQUITY

    

Current portion of long-term debt

   $ 60.3      $ 60.3   

Current portion of limited recourse notes payable

     —          113.4   

Short-term notes payable

     —          0.4   

Accounts payable and accrued liabilities

     137.9        123.0   

Current portion deferred taxes

     1.7        —     

Current portion of contingency reserves

     7.0        10.0   
                

Total current liabilities

     206.9        307.1   

Long-term debt, excluding current portion:

     706.1        706.3   

Contingency reserves, excluding current portion

     30.7        30.8   

Other long-term liabilities

     132.2        137.2   

Deferred income taxes

     170.1        164.3   

Redeemable non-controlling interest

     20.6        21.1   

Stockholders’ equity:

    

Common stock

     144.8        139.7   

Additional paid-in capital

     556.4        562.4   

Retained earnings

     901.9        902.1   

Treasury stock

     (279.9     (286.1

Accumulated comprehensive loss

     (62.5     (64.6
                

Total stockholders’ equity

     1,260.7        1,253.5   
                

Total liabilities and stockholders’ equity

   $ 2,527.3      $ 2,620.3   
                

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
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income (loss)

   $ 22.4      $ (29.5   $ (0.3   $ (60.2

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

        

Depreciation, amortization and cost of timber harvested

     22.4        18.9        42.8        38.0   

(Gain) loss of unconsolidated affiliates

     (0.9     3.3        (0.2     5.9   

Other operating charges and credits, net

     2.8        2.1        2.7        2.8   

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

     (0.1     (1.0     1.2        (0.9

Other than temporary investment impairment

     —          0.8        —          1.7   

Stock based compensation expense related to stock plans

     2.2        2.2        5.4        4.0   

Exchange (gain) loss on remeasurement

     (0.3     (1.6     0.2        (7.0

Cash settlement of contingencies

     (1.0     (4.0     (3.4     (9.0

Other adjustments

     1.6        3.9        3.5        2.7   

Pension expense (in excess of payments)

     1.4        2.2        3.4        3.8   

Decrease (increase) in receivables

     (14.3     3.0        (50.7     (31.3

Decrease (increase) in income tax receivables

     (9.7     3.9        37.4        74.6   

Decrease (increase) in inventories

     19.4        37.3        (24.2     38.5   

Decrease (increase) in prepaid expenses

     (5.8     (1.3     (1.6     4.6   

Increase in accounts payable and accrued liabilities

     7.6        15.4        8.6        11.7   

Increase (decrease) in deferred income taxes

     20.0        (14.9     10.8        (37.0
                                

Net cash provided by operating activities

     67.7        40.7        35.6        42.9   
                                

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Property, plant, and equipment additions

     (3.5     (0.8     (5.4     (4.7

Reimbursements from (investments in and advances) to joint ventures

     8.2        2.3        6.1        (1.4

Proceeds from sale of assets

     1.2        5.2        1.2        5.2   

Receipt of proceeds from notes receivable

     115.1        —          115.1        —     

Proceeds from sales of investments

     —          1.9        —          21.5   

Decrease in restricted cash under letters of credit

     5.3        10.8        5.2        37.6   

Other investing activities, net

     (0.4     (0.6     —          —     
                                

Net cash provided by investing activities

     125.9        18.8        122.2        58.2   
                                

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Borrowing of long term debt

     —          —          —          281.3   

Repayment of long term debt

     (113.8     (9.7     (113.8     (136.3

Payment of debt issuance fees

     —          (1.0     —          (15.5
                                

Net cash provided by (used in) financing activities

     (113.8     (10.7     (113.8     129.5   
                                

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     (0.1     (4.0     (1.0     (3.6
                                

Net increase in cash and cash equivalents

     79.7        44.8        43.0        227.0   

Cash and cash equivalents at beginning of period

     357.4        279.9        394.1        97.7   
                                

Cash and cash equivalents at end of period

   $ 437.1      $ 324.7      $ 437.1      $ 324.7   
                                

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, 2009

   139.7    $ 139.7    13.1      $ (286.1   $ 562.4      $ 897.3      $ (64.6   $ 1,248.7      $ 21.1   

Correction of beginning balance (see Note 19)

                 4.8          4.8     
                                

Adjusted balance, December 31, 2009

                 902.1          1,253.5     

Net loss

   —        —      —          —          —          (0.2     —          (0.2     (0.1

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

   —        —      (0.2     6.2        (6.2     —          —          —          —     

Warrants exercised

   5.1      5.1          (5.1         —       

Compensation expense associated with stock awards

   —        —      —          —          5.3        —          —          5.3        —     

Other comprehensive income (loss)

   —        —      —          —          —          —          2.1        2.1        (0.4
                                                                  

Balance, June 30, 2010

   144.8    $ 144.8    12.9      $ (279.9   $ 556.4      $ 901.9      $ (62.5   $ 1,260.7      $ 20.6   
                                                                  

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
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Net income (loss)

   $ 22.4      $ (29.5   $ (0.3   $ (60.2

Other comprehensive income (loss), net of tax

        

Foreign currency translation adjustments

     (2.3     16.5        (4.7     19.4   

Unrealized gain (loss) on derivative instruments

     0.2        0.3        0.1        0.1   

Unrealized gain (loss) on marketable securities

     (1.3     8.9        4.8        9.2   

Defined benefit pension plans:

        

Amortization of prior service cost

     —          —          —          —     

Amortization of net loss

     0.9        0.4        1.5        0.9   
                                

Other comprehensive income, net of tax

     (2.5     26.1        1.7        29.6   
                                

Net loss attributable to noncontrolling interest

     (0.1     0.3        0.1        0.5   

Foreign currency translation adjustments attributed to non-controlling interest

     —          (2.6     0.4        (3.0
                                

Comprehensive income (loss)

   $ 19.8      $ (5.7   $ 1.9      $ (33.1
                                

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 non-controlling interest. The Company determined that there was an error in the Statement of Other Comprehensive Income in the second quarter and six month periods ended June 30, 2009. The impact of this error was to reduce Other Comprehensive Income by $2.6 million and $3.0 million for the quarter and six month periods ended June 30, 2009 and has been corrected in the accompanying financial statements. 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, 2009.

NOTE 2 – STOCK-BASED COMPENSATION

For the quarters ended June 30, 2010 and 2009, the total compensation expense related to LP’s stock-based compensation plans was $2.2 million and $2.2 million. For the six month periods ended June 30, 2010 and 2009, the total compensation expense related to LP’s stock-based compensation plans was $5.4 million and $4.0 million. At June 30, 2010, 5,837,288 shares were available under the current stock award plans for stock-based awards. For the six month period ended June 30, 2010, 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 2.43%; an expected volatility factor for the market price of the Company’s common stock of 59.5% (based upon historical volatility over the expected life); a dividend yield of 0.0%; and an expected life of 5.1 years (based upon historical experience). For the six month period ended June 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). The weighted-average fair value of each option or stock settled stock appreciation right (SSARs) granted during the six month period ended June 30, 2010 and June 30, 2009 was $3.73 and $1.00.

NOTE 3 – FAIR VALUE MEASUREMENTS

LP’s investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant non-observable inputs.

 

8


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Dollar amounts in millions

   June 30, 2010    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

   $ 34.1    $ —      $ —      $ 34.1

Trading securities

     2.3      2.3      —        —  
                           

Total

   $ 36.4    $ 2.3    $ —      $ 34.1
                           

Dollar amounts in millions

   December 31, 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

   $ 26.3    $ —      $ —      $ 26.3

Trading securities

     2.3      2.3      —        —  
                           

Total

   $ 28.6    $ 2.3    $ —      $ 26.3
                           

Available for sale securities measured at fair value as of June 30, 2010 and December 31, 2009 are auction rate securities recorded in long-term investments on LP’s condensed consolidated balance sheets. Due to the lack of observable market quotations on LP’s auction rate securities (ARS) portfolio, LP evaluates the structure of its ARS holdings and current market estimates of fair value, including broker quotations and fair value estimates from issuing banks that rely 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 financial assets which are recorded in other assets in LP’s 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 quotations, which represent Level 1 inputs.

The following table summarizes assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods ended June 30, 2009 and June 30, 2010.

 

9


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Dollar amounts in millions

   Available for sale
securities
 

Balance at December 31, 2008

   $ 12.3   

Total realized/unrealized gains (losses)

  

Included in other-than-temporary investment impairment

     (1.7

Included in other comprehensive income

     14.5   
        

Balance at June 30, 2009

   $ 25.1   
        

The amount of total losses for the period included in net loss attributable to the fair value of changes in assets still held at June 30, 2009

   $ (1.7
        

Balance at December 31, 2009

   $ 26.3   

Total realized/unrealized gains (losses)

  

Included in other comprehensive income

     7.8   
        

Balance at June 30, 2010

   $ 34.1   
        

The amount of total losses for the period included in net loss attributable to the fair value of changes in assets still held at June 30, 2010

   $ —     
        

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

During the six months ended June 30, 2010, LP recorded an impairment charge of $1.1 million to reduce the carrying value of the assets held for sale to the estimated selling price less selling cost. The valuation of these assets was determined using level one inputs under the market approach.

NOTE 4 – EARNINGS PER SHARE

Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings per share are based upon the weighted-average number of shares of common stock outstanding plus all potentially dilutive securities that were assumed to be converted into common shares at the beginning of the period under the treasury stock method. This method requires that the effect of potentially dilutive common stock equivalents (employee stock options, stock settled stock appreciation rights, incentive shares and warrants) be excluded from the calculation of diluted earnings per share for the periods in which losses from continuing operations are reported because the effect is anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share:

 

10


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

      Quarter Ended
June 30,
    Six Months Ended
June 30,
 

Dollar and share amounts in millions, except per share amounts

   2010     2009     2010     2009  

Numerator:

        

Income attributed to LP common shares:

        

Income (loss) from continuing operations

   $ 23.5      $ (26.9   $ 1.2      $ (57.0

Loss from discontinued operations

     (1.2     (2.3     (1.4     (2.7
                                

Net income (loss)

   $ 22.3      $ (29.2   $ (0.2   $ (59.7
                                

Denominator:

        

Basic - weighted average common shares outstanding

     128.5        103.0        127.2        102.8   

Dilutive effect of stock warrants

     9.5        —          9.3        —     

Dilutive effect of stock plans

     1.8        —          1.7        —     
                                

Diluted shares outstanding

     139.8        103.0        138.2        102.8   
                                

Basic earnings per share:

        

Income (loss) from continuing operations

   $ 0.18      $ (0.26   $ 0.01      $ (0.55

Loss from discontinued operations

     (0.01     (0.02     (0.01     (0.03
                                

Net income (loss) per share

   $ 0.17      $ (0.28   $ —        $ (0.58
                                

Diluted earnings per share:

        

Income (loss) from continuing operations

   $ 0.17      $ (0.26   $ 0.01      $ (0.55

Loss from discontinued operations

     (0.01     (0.02     (0.01     (0.03
                                

Net income (loss) per share

   $ 0.16      $ (0.28   $ —        $ (0.58
                                

For the quarter and six month period ended June 30, 2010, stock options and SSARs relating to approximately 5.6 million and 5.4 million shares of LP common stock were considered anti-dilutive or not in-the-money for purpose of LP’s earnings per share calculation. For the quarter and six month period ended June 30, 2009, stock options, stock warrants and SSARs relating to approximately 25.0 million and 17.6 million shares of LP common stock were considered anti-dilutive for purposes of LP’s earnings per share calculation due to LP’s loss position from continuing operations.

NOTE 5 – RECEIVABLES

Receivables consist of the following:

 

Dollar amounts in millions

   June 30, 2010     December 31, 2009  

Trade receivables

   $ 86.7      $ 47.4   

Interest receivables

     1.1        1.9   

Other receivables

     22.1        11.8   

Allowance of doubtful accounts

     (1.3     (1.2
                

Total

   $ 108.6      $ 59.9   
                

Other receivables at June 30, 2010 and December 31, 2009 primarily consist of short-term notes receivable, settlements, Canadian sales tax receivables, receivables from our joint ventures associated with product purchases and other items.

NOTE 6 – INVENTORIES

Inventories are valued at the lower of cost or market. Inventory cost includes materials, labor and operating overhead. The LIFO (last-in, first-out) method is used for certain log inventories with remaining inventories valued

 

11


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

   June 30, 2010     December 31, 2009  

Logs

   $ 19.9      $ 15.3   

Other raw materials

     22.1        18.6   

Finished products

     113.1        98.4   

Supplies

     10.0        9.0   

LIFO reserve

     (0.9     (0.9
                

Total

   $ 164.2      $ 140.4   
                

NOTE 7 – ASSETS HELD FOR SALE

Over the last several years, LP has adopted and implemented plans to sell selected assets in order to improve its operating results. LP is required to classify assets held for sale which are not part of a discontinued business separately on the face of the financial statements outside of “Property, plant and equipment”. As of June 30, 2010 and December 31, 2009, LP included three OSB mills and various non-operating sites in its held for sale category. The current book values of assets held for sale by category is as follows:

 

Dollars in millions

   June 30, 2010     December 31, 2009  

Property, plant and equipment, at cost:

    

Land, land improvements and logging roads, net of road amortization

   $ 13.4      $ 15.9   

Buildings

     24.5        35.7   

Machinery and equipment

     210.9        212.1   
                
     248.8        263.7   

Accumulated depreciation

     (182.6     (194.6
                

Net property, plant and equipment

   $ 66.2      $ 69.1   
                

During the six months ended June 30, 2010, LP recorded an impairment of $1.1 million to reduce the carrying value of these assets to estimated selling price less selling cost.

NOTE 8 – LONG TERM DEBT

LP’s long term debt consists of the following:

 

12


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Dollars in millions

   June 30,
2010
    December 31,
2009
 

Debentures:

    

Senior notes, maturing 2010

   $ 60.0      $ 60.0   

Senior secured notes, maturing 2017

     180.7        178.2   

Bank credit facilities:

    

Chilean team credit facility, maturing 2019, demominated in UF

     36.2        39.0   

Limited recourse notes payable:

    

Senior notes, payable 2012

     7.9        7.9   

Senior notes, payable 2010 - 2018

     112.0        225.4   

Other financing

    

Senior private placement

     368.7        368.7   

Other

     0.9        0.8   
                

Total

     766.4        880.0   

Less: current portion

     (60.3     (173.7
                

Net long-term portion

   $ 706.1      $ 706.3   
                

LP issued $47.9 million of senior notes in 1997 in a private placement to institutional investors. The $7.9 million remaining notes are secured by $10.0 million in notes receivable from Sierra Pacific Industries and mature in 2012. In the event of a default by Sierra Pacific Industries, LP is fully liable for the notes payable.

LP issued $348.6 million of senior debt in 1998 in a private placement to institutional investors. The remaining $112.0 million of these notes ($225.4 million at December 31, 2009) mature in principal amounts of $90.0 million in 2013 and $22.0 million in 2018. The remaining notes are secured by $113.7 million ($228.7 million at December 31, 2009) of notes receivable from Green Diamond Resource Company (Green Diamond). Pursuant to the terms of the notes payable, in the event of a default by Green Diamond, LP would be liable to pay only 10% of the indebtedness represented by the notes payable.

LP issued $368.7 million of senior debt in 2003 in a private placement to unrelated third parties. The notes mature in 2018. The notes are supported by a bank letter of credit. LP’s reimbursement obligations under the letter of credit are secured by $410 million in notes receivable from assets sales. In general, the creditors under this arrangement have no recourse to LP’s assets, other than the notes receivable, However, under certain circumstances, LP may be liable for certain liabilities (including liabilities associated with the marketing or remarketing of the notes payable and reimbursement obligations, which are fully cash collateralized under the letter of credit supporting the notes payable) in an amount not to exceed 10% of the aggregate principle amount of the notes receivable. LP’s maximum exposure in this regard was approximately $41 million as of June 30, 2010 and December 31, 2009.

LP estimates the senior notes maturing in 2010, included in current portion of long-term debt, to have a fair market value of $60 million at June 30, 2010 and $ 62.0 million at December 31, 2009 based upon market quotations as compared to a book value of $60 million at June 30, 2010 and December 31, 2009. LP estimates the senior secured notes maturing in 2017 to have a fair value of $262.0 million as of June 30, 2010 and $263.3 million at December 31, 2009 as compared to a book value of $180.7 million and $ 178.2 million at June 30, 2010 and December 31, 2009.

Additional descriptions of LP’s indebtedness are included in consolidated financial statements and the notes thereto included in LP’s Annual Report on Form 10-K for the year ended December 31, 2009.

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

 

13


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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.

For the first six months of 2010, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to state income taxes, the effect of foreign tax rates, the effect of foreign currency translation, and a discrete adjustment for state income taxes. For the second quarter and first six 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.

The components and associated estimated effective income tax rates applied to the quarter and six month periods ended June 30, 2010 and 2009 are as follows:

 

Dollars in millions

   Quarter Ended June 30,  
     2010     2009  
     Tax Provision (benefit)     Tax Rate     Tax Benefit     Tax Rate  

Continuing operations

   $ 12.7      35   $ (16.0   37

Discontinued operations

     (0.8   39     (1.4   39
                    
   $ 11.9      35   $ (17.4   37
                    
     Six Months Ended June 30,  
     2010     2009  
     Tax Provision (benefit)     Tax Rate     Tax Benefit     Tax Rate  

Continuing operations

   $ 2.4      69   $ (35.3   38

Discontinued operations

     (0.9   39     (1.7   39
                    
   $ 1.5      115   $ (37.0   38
                    

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, Chile, Brazil and Peru. 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 2005 through 2008. LP’s Canadian income tax returns have been audited and effectively settled through 2004.

As of June 30, 2010, LP projects that its deferred tax assets associated with state net operating loss carry forwards may not be fully realized, and has included a partial valuation allowance of $1.3 million in computing its annual effective tax rate estimate used to determine the tax expense for the period ending June 30, 2010.

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 quarter and six month periods ended June 30, 2010 and 2009 are reflected in the table below and are described in the paragraphs following the table:

 

      Quarter Ended June 30,     Six Months Ended June 30,  

Dollar amounts in millions

   2010     2009     2010     2009  

Severance

   $ —        $ —        $ 0.1      $ (0.5

Additions to environmental contingency reserves

       (2.6       (2.6

Construction related legal reserves

     (0.6     0.4        (0.6     0.4   

Gain on insurance recovery

     —          4.1        —          8.4   
                                
   $ (0.6   $ 1.9      $ (0.5   $ 5.7   
                                

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 and a loss $0.5 million associated with severance costs due to 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 on 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 second quarter of 2010, LP recorded a loss of $0.6 million associated with an assessment in connection with one of its indefinitely curtained OSB mills.

NOTE 11 – TRANSACTIONS WITH AFFILIATES

LP has equity investments in AbitibiBowater-LP (a manufacturer of I-joist) and Canfor-LP (a manufacturer of OSB). 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 June 30, 2010 and 2009, LP sold $2.3 million and $1.8 million of products to AbitibiBowater-LP and purchased $13.3 million and $9.3 million of I-joist from AbitibiBowater-LP. LP also purchased $30.5 million and $11.5 million of OSB from Canfor-LP during the quarters ended June 30, 2010 and 2009. For the six months ended June 30, 2010 and 2009, LP sold $4.0 million and $2.7 million of products to AbitibiBowater-LP and purchased $24.0 million and $14.3 million of I-joist from AbitibiBowater-LP. LP also purchased $54.1 million and $18.5 million of OSB from Canfor-LP for the six months ended June 30, 2010 and 2009.

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, management believes that any fines, penalties or other costs or losses resulting from these matters will not have a material adverse effect on the financial position, results of operations, cash flows or liquidity of LP.

Antitrust Litigation

On December 1, 2008, LP was named 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, who opted out of a class action

 

15


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

settlement of substantially identical claims that was implemented in 2008, 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. LP believes that the resolution of this matter will not have a material adverse effect on LP’s financial position, results of operations or cash flows.

ARS litigation

On July 31, 2009, LP filed suit 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 – 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, 2009.

 

16


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Dollar amounts in millions

   Quarter Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Net sales:

        

OSB

   $ 216.9      $ 97.7      $ 333.8      $ 170.0   

Siding

     130.3        103.9        219.9        178.5   

Engineered Wood Products

     55.7        35.9        104.5        65.8   

Other

     47.6        29.9        88.9        58.6   

Less intersegment sales

     (3.4     —          (3.4     —     
                                
   $ 447.1      $ 267.4      $ 743.7      $ 472.9   
                                

Operating profit (loss):

        

OSB

   $ 47.9      $ (18.4   $ 43.4      $ (42.6

Siding

     21.8        6.5        30.3        8.6   

Engineered Wood Products

     (4.4     (8.6     (10.9     (17.8

Other

     3.7        0.6        3.7        2.2   

less intersegment profits

     (0.5     —          (0.5     —     

Other operating credits and charges, net

     (0.6     1.9        (0.5     5.7   

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

     0.1        1.0        (1.2     0.9   

General corporate and other expenses, net

     (18.2     (18.5     (37.9     (37.6

Foreign currency gains (losses)

     (0.1     6.7        1.4        9.3   

Gain on early debt extinguishment

     —          —          —          0.6   

Other than temporary impairment of investments

     —          (0.8     —          (1.7

Investment income

     4.3        8.3        10.2        14.4   

Interest expense, net of capitalized interest

     (17.7     (21.9     (34.5     (34.8
                                

Income (loss) from continuing operations before taxes

     36.3        (43.2     3.5        (92.8

Provision (benefit) for income taxes

     12.7        (16.0     2.4        (35.3
                                

Income (loss) from continuing operations

   $ 23.6      $ (27.2   $ 1.1      $ (57.5
                                

NOTE 14 – 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 June 30, 2010, 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 be 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.

NOTE 15 – CONTINGENCY RESERVES

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

 

17


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Dollar amounts in millions

   June 30,
2010
    December 31,
2009
 

Environmental reserves

   $ 14.6      $ 14.7   

Hardboard siding reserves

     21.4        24.2   

Other reserves

     1.7        1.9   
                

Total contingency reserves

     37.7        40.8   

Current portion of contingency reserves

     (7.0     (10.0
                

Long-term portion of contingency reserves

   $ 30.7      $ 30.8   
                

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, 2009. LP believes that the reserve balance for this settlement at June 30, 2010 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 quarters of 2010 and 2009 are summarized in the following table.

 

Dollar amounts in millions

   June 30, 2010     June 30, 2009  

Beginning balance, December 31,

   $ 24.2      $ 31.2   

Payments made for claims

     (2.0     (4.0

Payments made for administrative costs

     (0.8     (0.7
                

Ending balance

   $ 21.4      $ 26.5   
                

NOTE 16 – DEFINED BENEFIT PENSION PLANS

The following table sets forth the net periodic pension cost for LP’s defined benefit pension plans during the quarter ended June 30, 2010 and 2009. The net periodic pension cost included the following components:

 

     Quarter Ended June 30,     Six Months End June 30,  

Dollar amounts in millions

   2010     2009     2010     2009  

Service cost

   $ 0.7      $ 1.7      $ 1.7      $ 3.4   

Interest cost

     4.4        4.1        9.8        8.2   

Expected return on plan assets

     (4.7     (4.4     (10.7     (8.8

Amortization of prior service cost

     0.1        0.1        0.2        0.2   

Amortization of net loss

     1.2        1.0        2.8        2.0   
                                

Net periodic pension cost

   $ 1.7      $ 2.5      $ 3.8      $ 5.0   
                                

As of January 1, 2010, LP froze future contribution credits to its qualified U.S. defined benefit pension plans. Through June 30, 2010 and 2009, LP recognized $3.8 million and $5.0 million of pension expense, respectively, for all of LP’s defined benefit plans. LP presently anticipates recognizing an additional $2.6 million of pension expense in the remainder of 2010 for a total of $6.4 million.

Through June 30, 2010, LP made no significant pension contributions for LP’s defined benefit plans. LP presently anticipates making approximately $10 to 12 million additional pension contributions for the plans during the remainder of 2010.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 17 – 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, 2009 for further discussion of LP’s guarantees and indemnifications.

Additionally, LP provides warranties on the sale of most of its products and records an accrual for estimated future claims. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The activity in warranty reserves for the second quarter and first six months of 2010 and 2009 are summarized in the following table:

 

Dollar amounts in millions

   Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Beginning balance

   $ 31.9      $ 32.5      $ 32.9      $ 33.7   

Accrued to expense

     2.0        3.6        3.1        4.6   

Payments made

     (3.3     (1.6     (5.4     (3.8
                                

Total warranty reserves

     30.6        34.5        30.6        34.5   

Current portion of warranty reserves

     (10.0     (7.0     (10.0     (7.0
                                

Long-term portion of warranty reserves

   $ 20.6      $ 27.5      $ 20.6      $ 27.5   
                                

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

NOTE 18 – RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued guidance now codified under ASC Topic 860, “Transfers and Servicing” (ASC 860) and ASC Topic 810 “Consolidation”. Under ASC 860, the concept of a qualifying special-purpose entity (QSPE) is no longer relevant for accounting purposes, and formerly qualifying special purpose entities need to be evaluated for consolidation. ASC 810 requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest gives it a controlling financial interest. As of January 1, 2010, LP adopted ASC 860 and 810 and consolidated the former QSPE established in connection with the sale of southern timber and timberlands in 2003. The consolidation of the former QSPE results in adjustments to LP’s consolidated financial statements to increase LP’s assets by $368.1 million, to increase LP’s liabilities by $368.9 million and to reduce LP’s net equity by $0.8 million. Specifically, “Notes receivable from asset sales” increased by $410 million; “Advances to and investments in affiliates” declined by $44.5 million; “Restricted cash” increased $1.6 million; “Deferred debt cost” increased by $0.9 million; “Accounts payable and accrued liabilities” increased by $0.2 million; “Long-term debt” increased by $368.7 million and “Retained earnings” declined of $0.8 million. The retroactive application of ASC 860 and 810 resulted in the recognition of additional net loss for the six months ended June 30, 2009 of $0.2 million.

NOTE 19 – IMMATERIAL RESTATEMENT

During the third quarter of 2009, the Company determined that there was an error in the Statement of Other Comprehensive Income in the second quarter and six month periods ended June 30, 2009. The impact of this error was to reduce Other Comprehensive Income by $2.6 million and $3.0 million for the quarter and six month periods ended June 30, 2009 and has been corrected in the accompanying financial statements.

During the second quarter of 2010, LP identified an error in the calculation of the Equity in income (losses) of affiliates relating to the foreign currency translation of income and losses of LP’s foreign joint ventures. This error was related to foreign currency rates applied to depreciation expense which is included as a component of “Equity in income and losses of unconsolidated affiliates”. As “Equity in income (losses) of unconsolidated affiliates” is a noncash item, this error did not impact net cash provided by (used in) operations in any period. This error resulted in the understatement of “Equity in (income) losses in unconsolidated affiliates” in the amount of $0.6 million, $1.4 million and $1.9 million for the years ended December 31, 2009, December 31, 2008 and December 31, 2007 and the remaining in previous years with an accumulated understatement of the “Investment in and advances to affiliates” in the amounts of $4.8 million and $4.2 million as of December 31, 2009 and December 31, 2008. Since

 

19


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

this adjustment is related to the foreign currency process, there is no impact on LP’s tax provision or related tax accounts.

LP believes the correction of the error is not material to its previously issued historical financial statements. However, given LP’s financial results through the second quarter of 2010, the error would be material to LP’s current results and therefore LP made the decision to correct the error though an immaterial restatement of the previously issued financial statements. The impact on the second quarter and first six months of 2009 is insignificant. The effects of this restatement on the audited Consolidated Balance sheet as previously presented in LP’s Form 10-K as of December 31, 2009 is as follows:

 

     2009
     As reported    Adjusted

Investments in and advances to affiliates

   $ 133.7    $ 138.5
             

Total assets

   $ 2,615.5    $ 2,620.3
             

Retained earnings

   $ 897.3    $ 902.1
             

Total stockholders’ equity

   $ 1,248.7    $ 1,253.5
             

Total liabilities and stockholders’ equity

   $ 2,615.5    $ 2,620.3
             

 

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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 our 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. For the six months of 2010, the U.S. Department of Census reported that actual single and multi-family housing starts were about 14% higher than for the same period of 2009. We believe the improved level of building, while significantly below “normal” levels, is related to the slightly improving U.S. economy and certain housing initiatives by the U.S. government. Our increase in sales is higher than the increase in housing starts due to significant inventory reductions taken by our customers during 2009 in response to the global recession and a subsequent attempt to build inventory in the first two quarters of 2010 due to anticipated seasonal building activity. During the second quarter, OSB prices were much stronger than in previous periods. Building activity is unlikely to improve to “normal” levels until the number of homes available for sale is reduced, foreclosure activity subsides, employment improves and housing prices stabilize further.

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, 2009 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, 2009 is a discussion of our significant accounting policies and significant accounting estimates and judgments. Throughout the preparation of the financial statements, we employ significant judgments in the application of accounting principles and methods. These judgments are primarily related to the assumptions used to arrive at various estimates. For the first six months of 2010, these significant accounting estimates and judgments include:

Auction Rate Securities: Our auction-rate securities represent interests in collateralized debt obligations, a portion of which are supported by pools of residential and commercial mortgages, credit-linked notes, bank trust preferred notes and other securities. Historically, liquidity for these auction-rate securities was typically provided by an auction process that reset the applicable interest rate at pre-determined intervals, usually every 7, 28, 35 or 90 days. As of June 30, 2010, auction-rate securities that we hold had experienced multiple failed auctions as the amount of securities for sale exceeded the amount of purchase orders. Consequently, we have classified $34.1 million ($96.8 million, par value) of auction-rate securities as long-term available-for-sale securities.

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 the issuing banks and indicative pricing from other parties. 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 (iv) our intent and ability to hold the security for a period of time sufficient to allow for any

 

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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 June 30, 2010, 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.

Impairment of Long-Lived Assets. We review the long-lived assets held and used by us (primarily property, plant and equipment and timber and timberlands) for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. We consider the necessity of undertaking such a review at least quarterly, and also when certain events or changes in circumstances occur. Events and changes in circumstances that may necessitate such a review may include, but are not limited to: a significant decrease in the market price of a long-lived asset or group of long-lived assets; a significant adverse change in the extent or manner in which a long-lived asset or group of long-lived assets is being used or in its physical condition; a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or group of long-lived assets, including an adverse action or assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or group of long-lived assets; current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or group of long-lived assets; and a current expectation that, more likely than not, a long-lived asset or group of long-lived assets will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Identifying these events and changes in circumstances, and assessing their impact on the appropriate valuation of the affected assets under accounting principles generally accepted in the U.S., requires us to make judgments, assumptions and estimates.

In general, for assets held and used in our operations, impairments are recognized when the carrying amount of the long-lived asset or groups of long-lived assets is not recoverable and exceeds the fair value of the asset or groups of assets. The carrying amount of a long-lived asset or groups of long-lived assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets or group of assets. The key assumptions in estimating these cash flows relate to future production volumes, pricing of

 

22


commodity or specialty products and future estimates of expenses to be incurred as reflected in our long-range internal planning models. Our assumptions regarding pricing are based upon the average pricing over the commodity cycle (generally five years) due to the inherent volatility of commodity product pricing, and reflect our assessment of information gathered from industry research firms, research reports published by investment analysts and other published forecasts. Our assumptions regarding expenses reflect our expectation that we will continue to reduce production costs to offset inflationary impacts.

When impairment is indicated for assets held and used in our operations, the book values of the affected assets are written down to their estimated fair value, which is generally based upon discounted future cash flows associated with the affected assets. When impairment is indicated for assets to be disposed of, the book values of the affected assets are written down to their estimated fair value, less estimated selling costs. Consequently, a determination to dispose of particular assets can require us to estimate the net sales proceeds expected to be realized upon such disposition, which may be less than the estimated undiscounted future net cash flows associated with such assets prior to such determination, and thus require an impairment charge. In situations where we have experience in selling assets of a similar nature, we may estimate net sales proceeds on the basis of that experience. In other situations, we hire independent appraisers to estimate net sales proceeds.

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

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

Judgment is also applied in determining whether deferred tax assets will be realized in full or in part. When we consider it to be more likely than not that all or some portion of a deferred tax asset will not be realized, a valuation allowance is established for the amount of the deferred tax asset that is estimated not to be realizable. As of June 30, 2010, we had established valuation allowances against certain deferred tax assets, primarily related to state and foreign carryovers of net operating losses, credits and capital losses. We have not established valuation allowances against other deferred tax assets based upon 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 many of our Canadian employees participate in defined benefit pension plans sponsored by LP. We account for the consequences of our sponsorship of these plans in accordance with accounting principles generally accepted in the U.S., which require us to make actuarial assumptions that are used to calculate the related assets, liabilities and expenses recorded in our financial statements. While we believe we have a reasonable basis for these assumptions, which include assumptions regarding long-term rates of return on plan assets, life expectancies, rates of increase in salary levels, rates at which future values should be discounted to determine present values and other matters, the amounts of our pension related assets, liabilities and expenses recorded in our financial statements would differ if we used other assumptions.

Workers’ Compensation. We are self insured for most of our U.S. employees’ workers compensation claims. 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.

 

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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 earnings from continuing operations before interest expense, taxes, depreciation and amortization (“EBITDA from continuing operations”) which is a non-GAAP financial measure. Additionally, we disclose Adjusted EBITDA from continuing operations which further adjusts EBITDA from continuing operations to exclude stock based compensation expense, (gain) loss on sales or impairment of long lived assets, other operating charges and credits, other than temporary investment impairment, early debt extinguishment and investment income. Neither EBITDA from continuing operations nor adjusted EBITDA from continuing operations are a substitute for the GAAP measures of net income or operating cash flows or for any other GAAP measures of operating performance or liquidity.

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

The following table represents significant items by operating segment and reconciles income (loss) from continuing operations to adjusted EBITDA from continuing operations:

 

24


(Dollar amounts in millions)

   OSB     Siding    EWP     Other    Corporate     Total  

Three Months Ended June 30, 2010

              

Sales

   $ 216.9      $ 130.3    $ 55.7      $ 47.6    $ (3.4   $ 447.1   
                                              

Depreciation and amortization

     9.9        5.4      3.7        2.8      0.6        22.4   

Cost of sales and selling and administrative

     161.9        103.1      56.3        39.3      14.7        375.3   

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

               (0.1     (0.1

Other operating credits and charges, net

               0.6        0.6   
                                              

Total operating costs

     171.8        108.5      60.0        42.1      15.8        398.2   
                                              

Income (loss) from operations

     45.1        21.8      (4.3     5.5      (19.2     48.9   

Total non-operating income (expense)

               (13.5     (13.5
                                              

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

     45.1        21.8      (4.3     5.5      (32.7     35.4   

Provision (benefit) for income taxes

               12.7        12.7   

Equity in (income) loss of unconsolidated affiliates

     (2.8        0.1        1.8        (0.9
                                              

Income (loss) from continuing operations

     47.9        21.8      (4.4     3.7      (45.4     23.6   
                                              

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

              

Income (loss) from continuing operations

     47.9        21.8      (4.4     3.7      (45.4     23.6   

Income tax provision (benefit)

               12.7        12.7   

Interest expense, net of capitalized interest

               17.7        17.7   

Depreciation and amortization

     9.9        5.4      3.7        2.8      0.6        22.4   
                                              

EBITDA from continuing operations

     57.8        27.2      (0.7     6.5      (14.4     76.4   
                                              

Stock based compensation expense

     0.2        0.2      0.1        —        1.6        2.1   

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

               (0.1     (0.1

Investment income

               (4.3     (4.3

Other operating credits and charges, net

               0.6        0.6   
                                              

Adjusted EBITDA from continuing operations

   $ 58.0      $ 27.4    $ (0.6   $ 6.5    $ (16.6   $ 74.7   
                                              

Three Months Ended June 30, 2009

              

Sales

   $ 97.7      $ 103.9    $ 35.9      $ 29.9    $ —        $ 267.4   
                                              

Depreciation and amortization

     8.9        4.3      2.9        2.0      0.8        18.9   

Cost of sales and selling and administrative

     105.2        93.1      41.4        26.2      17.7        283.6   

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

               (1.0     (1.0

Other operating credits and charges, net

               (1.9     (1.9
                                              

Total operating costs

     114.1        97.4      44.3        28.2      15.6        299.6   
                                              

Income (loss) from operations

     (16.4     6.5      (8.4     1.7      (15.6     (32.2

Total non-operating income (expense)

               (7.7     (7.7
                                              

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

     (16.4     6.5      (8.4     1.7      (23.3     (39.9

Provision (benefit) for income taxes

               (16.0     (16.0

Equity in (income) loss of unconsolidated affiliates

     2.0           0.2        1.1        3.3   
                                              

Income (loss) from continuing operations

     (18.4     6.5      (8.6     0.6      (7.3     (27.2
                                              

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

              

Income (loss) from continuing operations

     (18.4     6.5      (8.6     0.6      (7.3     (27.2

Income tax benefit

               (16.0     (16.0

Interest expense, net of capitalized interest

               21.9        21.9   

Depreciation and amortization

     8.9        4.3      2.9        2.0      0.8        18.9   
                                              

EBITDA from continuing operations

     (9.5     10.8      (5.7     2.6      (0.6     (2.4
                                              

Stock based compensation expense

     0.2        0.2      0.1        —        1.6        2.1   

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

               (1.0     (1.0

Investment income

               (8.3     (8.3

Other operating credits and charges, net

               (1.9     (1.9

Other than temporary asset impairment

               0.8        0.8   
                                              

Adjusted EBITDA from continuing operations

   $ (9.3   $ 11.0    $ (5.6   $ 2.6    $ (9.4   $ (10.7
                                              

 

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(Dollar amounts in millions)

   OSB     Siding    EWP     Other    Corporate     Total  

Six Months Ended June 30, 2010

              

Sales

   $ 333.8      $ 219.9    $ 104.5      $ 88.9    $ (3.4   $ 743.7   
                                              

Depreciation and amortization

     18.5        10.5      7.1        5.5      1.2        42.8   

Cost of sales and selling and administrative

     275.1        179.1      108.0        77.0      33.8        673.0   

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

               1.2        1.2   

Other operating credits and charges, net

               0.5        0.5   
                                              

Total operating costs

     293.6        189.6      115.1        82.5      36.7        717.5   
                                              

Income (loss) from operations

     40.2        30.3      (10.6     6.4      (40.1     26.2   

Total non-operating income (expense)

               (22.9     (22.9
                                              

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

     40.2        30.3      (10.6     6.4      (63.0     3.3   

Provision (benefit) for income taxes

               2.4        2.4   

Equity in (income) loss of unconsolidated affiliates

     (3.2        0.3        2.7        (0.2
                                              

Income (loss) from continuing operations

     43.4        30.3      (10.9     3.7      (65.4     1.1   
                                              

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

              

Income (loss) from continuing operations

     43.4        30.3      (10.9     3.7      (65.4     1.1   

Provision (benefit) for income taxes

               2.4        2.4   

Interest expense, net of capitalized interest

               34.5        34.5   

Depreciation and amortization

     18.5        10.5      7.1        5.5      1.2        42.8   
                                              

EBITDA from continuing operations

     61.9        40.8      (3.8     9.2      (27.3     80.8   
                                              

Stock based compensation expense

     0.5        0.3      0.3        —        4.2        5.3   

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

               1.2        1.2   

Investment income

               (10.2     (10.2

Other operating credits and charges, net

               0.5        0.5   
                                              

Adjusted EBITDA from continuing operations

   $ 62.4      $ 41.1    $ (3.5   $ 9.2    $ (31.6   $ 77.6   
                                              

Six Months Ended June 30, 2009

              

Sales

   $ 170.0      $ 178.5    $ 65.8      $ 58.6    $ —          472.9   
                                              

Depreciation and amortization

     16.0        9.0      5.9        5.1      2.0        38.0   

Cost of sales and selling and administrative

     192.1        160.9      77.3        50.3      35.6        516.2   

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

               (0.9     (0.9

Other operating credits and charges, net

               (5.7     (5.7
                                              

Total operating costs

     208.1        169.9      83.2        55.4      31.0        547.6   
                                              

Income (loss) from operations

     (38.1     8.6      (17.4     3.2      (31.0     (74.7

Total non-operating income (expense)

               (12.2     (12.2
                                              

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

     (38.1     8.6      (17.4     3.2      (43.2     (86.9

Provision (benefit) for income taxes

               (35.3     (35.3

Equity in (income) loss of unconsolidated affiliates

     4.5           0.4        1.0        5.9   
                                              

Income (loss) from continuing operations

     (42.6     8.6      (17.8     2.2      (7.9     (57.5
                                              

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

              

Income (loss) from continuing operations

     (42.6     8.6      (17.8     2.2      (7.9     (57.5

Provision (benefit) for income taxes

               (35.3     (35.3

Interest expense, net of capitalized interest

               34.8        34.8   

Depreciation and amortization

     16.0        9.0      5.9        5.1      2.0        38.0   
                                              

EBITDA from continuing operations

     (26.6     17.6      (11.9     7.3      (6.4     (20.0
                                              

Stock based compensation expense

     0.4        0.3      0.3        —        3.0        4.0   

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

               (0.9     (0.9

(Gain) on early debt extinguishment

               (0.6     (0.6

Investment income

               (14.4     (14.4

Other operating credits and charges, net

               (5.7     (5.7

Other than temporary asset impairment

               1.7        1.7   
                                              

Adjusted EBITDA from continuing operations

   $ (26.2   $ 17.9    $ (11.6   $ 7.3    $ (23.3   $ (35.9
                                              

 

26


RESULTS OF OPERATIONS

(Dollar amounts in millions, except per share amounts)

Our net income attributable to LP for the second quarter of 2010 was $22.3 million, or $0.16 per diluted share, on sales of $447.1 million, compared to a net loss attributable to LP for the second quarter of 2009 of $29.2 million, or $0.28 per diluted share, on sales of $267.4 million. For the second quarter of 2010, income from continuing operations was $23.6 million, or $0.17 per diluted share, compared to a loss from continuing operations of $27.2 million, or $0.26 per diluted share, for the second quarter of 2009.

Our net loss attributable to LP for the first six months of 2010 was $0.2 million, or $0.00 per diluted share, on sales of $743.7 million, compared to a net loss attributable to LP for the same period of 2009 of $59.7 million, or $0.58 per diluted share, on sales of $472.9 million. For the first six months of 2010, income from continuing operations was $1.1 million, or $0.01 per diluted share, compared to a loss from continuing operations of $57.5 million, or $0.55 per diluted share, for the first six months of 2009.

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, operating income (losses), and adjusted EBITDA from continuing operations for this segment are as follows:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2010    2009     Change     2010    2009     Change  

Net sales

   $ 216.9    $ 97.7      122   $ 333.8    $ 170.0      96

Operating income (losses)

     47.9      (18.4   360     43.4      (42.6   202

Adjusted EBITDA from continuing operations

     58.0      (9.3   724     62.4      (26.2   338

Percent changes in average sales prices and unit shipments for the quarter and six months ended June 30, 2010 compared to the quarter and six months ended June 30, 2009 are as follows:

 

     Quarter Ended June 30,
2010 versus 2009
    Six Months Ended June 30,
2010 versus 2009
 
     Average Net
Selling Price
    Unit
Shipments
    Average Net
Selling Price
    Unit
Shipments
 

Commodity OSB

   78   24   54   28

For both the quarter and the six month period ended June 30, 2010, OSB prices increased compared to the corresponding periods of 2009. The increase in OSB prices was likely due to tightening of the gap between supply and demand based upon currently operating facilities across the industry as well as raw material shortages due to weather related issues. The increase in selling price favorably impacted net sales and operating losses by approximately $72 million for the quarter and $87 million for the six month period as compared to the corresponding periods of 2009. As compared to the corresponding periods of 2009, the increase in sales volume was primarily due to increased demand as well as inventory restocking by our customers after dramatic declines in 2009. To balance supply and demand, we continue to have two of our ten OSB mills curtailed.

 

27


Compared to the second quarter and first six months of 2009, the primary factor that led to improved operating results was the increase in commodity OSB sales prices. This increase was offset by an increase in our Canadian dollar denominated manufacturing costs and certain raw materials. The Canadian dollar has strengthened significantly from the corresponding periods of 2009, which causes our Canadian production costs stated in U.S. dollars to increase.

SIDING

Our siding segment produces and markets wood-based siding and related accessories, together with commodity OSB products from one mill.

Segment sales, operating profits and adjusted EBITDA from continuing operations for this segment are as follows:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2010    2009    Change     2010    2009    Change  

Net sales

   $ 130.3    $ 103.9    25   $ 219.9    $ 178.5    23

Operating profits

     21.8      6.5    235     30.3      8.6    252

Adjusted EBITDA from continuing operations

     27.4      11.0    149     41.1      17.9    130

Sales in this segment by product line are as follows:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2010    2009    Change     2010    2009    Change  

SmartSide Siding

   $ 100.4    $ 82.8    21   $ 166.7    $ 134.7    24

Commodity OSB

     13.7      7.1    93     21.8      14.2    54

Canexel siding and other hardboard related products

     16.2      14.0    16     31.4      29.6    6
                                

Total

   $ 130.3    $ 103.9    25   $ 219.9    $ 178.5    23
                                

Percent changes in average sales prices and unit shipments for the quarter and six months ended June 30, 2010 compared to the quarter and six months ended June 30, 2009 are as follows:

 

     Quarter Ended June  30,
2010 versus 2009
    Six Months Ended June 30,
2010 versus 2009
 
     Average Net
Selling Price
    Unit
Shipments
    Average Net
Selling Price
    Unit
Shipments
 

SmartSide Siding

   2   19   2   23

Commodity OSB

   87   2   55   (1 %) 

Canexel siding and other hardboard related products

   23   (3 %)    22   (12 %) 

For the second quarter and first six months of 2010 compared to the corresponding periods in 2009, sales volumes increased significantly in our SmartSide siding line due to improvement in both retail sales and housing starts as well as an inventory build in the sales channels. In our Canexel siding lines, sales volumes declined due to the curtailment of certain production lines. Sales prices in our SmartSide siding product line for the quarter and six month period ended June 30, 2010 as compared to the corresponding periods of 2009 changed slightly due to product mix with specific product prices remaining generally constant. In our Canexel product line, sales prices increased in the second quarter and first six months as compared to the corresponding period of 2009 due to the impact of the strengthening Canadian dollar as a majority of these sales are made in Canada. Sales prices increased in our commodity OSB products as discussed in the OSB segment above.

 

28


Overall, the improvement in operating results for our siding segment for the second quarter and first six months of 2010 compared to the same periods of 2009 was primarily due to increased sales volumes and improvements in OSB pricing.

ENGINEERED WOOD PRODUCTS

Our engineered wood products (EWP) segment manufactures and distributes laminated veneer lumber (LVL), I-Joists, laminated strand lumber (LSL) and other related products. This segment also includes the sale of I-Joist and LVL products produced by the AbitibiBowater-LP or under an exclusive sales arrangement.

Segment sales, operating losses and adjusted EBITDA from continuing operations for this segment are as follows:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2010     2009     Change     2010     2009     Change  

Net sales

   $ 55.7      $ 35.9      55   $ 104.5      $ 65.8      59

Operating losses

     (4.4     (8.6   49     (10.9     (17.8   39

Adjusted EBITDA from continuing operations

     (0.6     (5.6   89     (3.5     (11.6   70

Sales in this segment by product line are as follows:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2010    2009    Change     2010    2009    Change  

LVL/LSL

   $ 27.5    $ 17.3    59   $ 49.5    $ 27.4    81

I-Joist

     22.1      15.7    41     40.7      25.4    60

Related products

     6.1      2.9    110     14.3      13.0    10
                                

Total

   $ 55.7    $ 35.9    55   $ 104.5    $ 65.8    59
                                

Percent changes in average sales prices and unit shipments for the quarter and six months ended June 30, 2010 compared to the quarter and six months ended June 30, 2009 are as follows:

 

     Quarter Ended June 30,
2010 versus 2009
    Six Months Ended June  30,
2010 versus 2009
 
     Average Net
Selling Price
    Unit
Shipments
    Average Net
Selling Price
    Unit
Shipments
 

LVL/LSL

   7   46   6   46

I-Joist

   7   29   4   52

During the second quarter and first six months of 2010 compared to the corresponding periods of 2009, we saw increases in sales volumes in both LVL/LSL and I-Joist due to increased housing demand as well as customer inventory increases. Net average selling prices increased in I-Joist due to price adjustments implemented in the early part of the second quarter of 2010 and increases in LVL/LSL due to changes in product mix. Our focus in the EWP segment continues to be on reductions in conversion costs, better geographic manufacturing and distribution, and maintaining key customer relationships. Included in this segment is a plywood operation, which primarily produces plywood as a by-product from the LVL production process.

For the second quarter and first six months of 2010 compared to the corresponding periods of 2009, the results of operations for EWP improved due to higher sales volume and prices and improvements in our LSL facility, which were partially offset by higher raw material costs.

OTHER PRODUCTS

Our other products category includes a moulding business, Chilean and Brazilian operations, export sales and a joint venture that produces and sells cellulose insulation. This category also includes remaining timber and timberlands and other minor products, services and operations closed prior to January 1, 2002.

 

29


Segment sales, operating profits and adjusted EBITDA from continuing operations for this category are as follows:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2010    2009    Change     2010    2009    Change  

Net sales

   $ 47.6    $ 29.9    59   $ 88.9    $ 58.6    52

Operating profits

     3.7      0.6    517     3.7      2.2    68

Adjusted EBITDA from continuing operations

     6.5      2.6    150     9.2      7.3    26

Sales in this segment by product line are as follows:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2010    2009    Change     2010    2009    Change  

Moulding

   $ 7.6    $ 7.3    4   $ 16.8    $ 15.2    11

Chilean operations

     25.8      12.1    113     44.0      23.7    86

Brazilian operations

     11.0      8.0    38     21.9      14.7    49

Other

     3.2      2.5    28     6.2      5.0    24
                                

Total

   $ 47.6    $ 29.9    59   $ 88.9    $ 58.6    52
                                

For the second quarter and first six months of 2010 compared to the corresponding periods of 2009, sales in our moulding operation were higher due to increased retail demand and sales in Chilean and Brazilian operations increased as we continued to penetrate local markets, in response to the rebuilding efforts resulting from the Chilean earthquake.

Overall, operating results associated with these activities were positively impacted by improvements in our Chilean and Brazilian operations and the performance of our U.S. Greenfiber joint venture.

GENERAL CORPORATE AND OTHER EXPENSE, NET

For the second quarter of 2010 compared to the corresponding period of 2009, general corporate expenses and overall selling and administrative have remained relatively flat. For the first six months of 2010 compared to the corresponding period of 2009, general corporate expenses were flat and overall selling and administrative expenses increased by 4 percent. General corporate and other expenses primarily consist of corporate overhead such as wages and benefits for corporate and sales personnel, professional fees, insurance and other expenses. Overall selling and administrative expenses increased in the first six months of 2010 as compared to the first six months of 2010 due to several one-time benefits received in the first quarter of 2009 which did not occur in the first quarter of 2010 as well as increases in marketing and sales based upon the increased demand across product lines.

INTEREST EXPENSE AND INVESTMENT INCOME

Investment income in the second quarter and first six months of 2010 was lower compared to the corresponding periods of 2009 due to lower returns on investments, including both interest and market valuations. Interest expense was lower in the second quarter of 2010 due to our repurchase in the third quarter of 2009 of some of our debt that was issued in the first quarter of 2009. Interest expense for the six month period ended June 30, 2010 compared to the same period of 2009 was relatively flat.

INCOME TAXES

Accounting standards require that we 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.

 

30


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.

For the first six months of 2010, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to our continuing operations relate to state income taxes, the effect of foreign tax rates, the effect of foreign currency translation, and a discrete adjustment for state income taxes. For the second quarter and first six months of 2009, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to our continuing operations relate to the Company’s foreign debt structure, state income taxes and the effect of foreign tax rates.

The components and associated estimated effective income tax rates applied to the quarter and six month period ended June 30, 2010 and 2009 are as follows:

 

Dollars in millions

   Quarter Ended June 30,  
   2010     2009  
   Tax Provision     Tax Rate     Tax Benefit     Tax Rate  

Continuing operations

   $ 12.7      35   $ (16.0   37

Discontinued operations

     (0.8