Louisiana-Pacific Corp 10-Q for FY2020 Q3
Louisiana-Pacific Corp (LPX)
10-Q
2020-11-04
For: 2020-09-30
View Original
Added on
April 11, 2026
About this 10-Q
Louisiana-Pacific Corp filed this 10-Q on November 4, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $795M
- up 31.8% from $603M a year earlier
- Net income
- $177M
- up 8750.0% from net income of $2M a year earlier
- Diluted EPS
- $1.57
- up 7750.0% from $0.02 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2020
Commission File Number 1-7107
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (615) 986 - 5600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | o |
Emerging growth company | o | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 109,323,821 shares of Common Stock, $1 par value, outstanding as of October 30, 2020.
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 (the Exchange Act) 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 quarterly report on Form 10-Q contains, and other reports and documents filed by us with the Securities and Exchange Commission (SEC) may contain, forward-looking statements. These statements are 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,” "project," “potential,” “continue,” "likely," 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:
• | impacts from public health issues (including global pandemics, such as the COVID-19 pandemic) on the economy, demand for our products or our operations, including the actions and recommendations of governmental authorities to contain such public health issues; |
• | changes in governmental fiscal and monetary policies, including tariffs, and levels of employment; |
• | changes in general economic conditions, including impacts from the COVID-19 pandemic; |
• | changes in the cost and availability of capital; |
• | changes in the level of home construction and repair activity; |
• | changes in competitive conditions and prices for our products; |
• | changes in the relationship between supply of and demand for building products; |
• | changes in the financial or business conditions of third-party wholesale distributors and dealers; |
• | changes in the relationship between supply of and demand for raw materials, including wood fiber and resins, used in manufacturing our products; |
• | changes in the cost of and availability of energy, primarily natural gas, electricity, and diesel fuel; |
• | changes in the cost of and availability of transportation; |
• | difficulties in the launch or production ramp-up of newly introduced products; |
• | unplanned interruptions to our manufacturing operations, such as explosions, fires, inclement weather, natural disasters, accidents, equipment failures, labor disruptions, transportation interruptions, supply interruptions, public health issues (including pandemics and quarantines), riots, civil insurrection or social unrest, looting, protests, strikes and street demonstrations; |
• | changes in other significant operating expenses; |
• | changes in currency values and exchange rates between the U.S. dollar and other currencies, particularly the Canadian dollar, Brazilian real and Chilean peso; |
• | changes in general and industry-specific environmental laws and regulations; |
• | changes in tax laws, and interpretations thereof; |
• | changes in circumstances giving rise to environmental liabilities or expenditures; |
• | warranty costs exceeding our warranty reserves; |
• | challenge or exploitation of our intellectual property or other proprietary information by others in the industry; |
• | changes in the funding requirements of our defined benefit pension plans; |
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• | the resolution of existing and future product-related litigation and other legal proceedings; |
• | the amount and timing of any repurchases of our common stock and the payment of dividends on our common stock, which will depend on market and business conditions and other considerations; and |
• | acts of public authorities, war, civil unrest, natural disasters, fire, floods, earthquakes, inclement weather and other matters beyond our control. |
In addition to the foregoing and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in the reports and other documents filed by us with the SEC that warn of risks or uncertainties associated with future results, events, or circumstances identify important factors that could cause actual results, events, and circumstances to differ materially from those reflected in the forward-looking statements.
ABOUT THIRD-PARTY INFORMATION
In this quarterly report on Form 10-Q, 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.
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PART I - FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
Condensed Consolidated Statements of Income
Dollar amounts in millions, except per share amounts
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net sales | $ | $ | $ | $ | |||||||||||
Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Gross profit | |||||||||||||||
Selling, general, and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Loss on impairment | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other operating credits and charges, net | ( | ) | ( | ) | ( | ) | |||||||||
Income from operations | |||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Investment income | |||||||||||||||
Other non-operating items | ( | ) | |||||||||||||
Income before income taxes | |||||||||||||||
Provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net income | $ | $ | $ | $ | |||||||||||
Net loss attributed to noncontrolling interest | |||||||||||||||
Net income attributed to LP | $ | $ | $ | $ | |||||||||||
Basic net income per share of common stock: | |||||||||||||||
Net income per share - basic | $ | $ | $ | $ | |||||||||||
Diluted net income per share of common stock: | |||||||||||||||
Net income per share - diluted | $ | $ | $ | $ | |||||||||||
Average shares of common stock used to compute net income per share: | |||||||||||||||
Basic | |||||||||||||||
Diluted | |||||||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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Condensed Consolidated Statements of Comprehensive Income
Dollar amounts in millions
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Other comprehensive income, net of tax | |||||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | |||||||||
Unrealized gains on securities, net of reversals | ( | ) | ( | ) | |||||||||||
Amortization of pension and post-retirement prior service costs and net loss | |||||||||||||||
Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ( | ) | |||||||||
Comprehensive income | ( | ) | |||||||||||||
Comprehensive loss associated with noncontrolling interest | |||||||||||||||
Comprehensive income attributed to LP | $ | $ | ( | ) | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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Condensed Consolidated Balance Sheets
Dollar amounts in millions
(Unaudited)
September 30, 2020 | December 31, 2019 | ||||||
ASSETS | |||||||
Cash and cash equivalents | $ | $ | |||||
Receivables, net of allowance for doubtful accounts of $2 million and $1 million at September 30, 2020, and December 31, 2019, respectively | |||||||
Inventories | |||||||
Prepaid expenses and other current assets | |||||||
Total current assets | |||||||
Timber and timberlands | |||||||
Property, plant, and equipment, net | |||||||
Operating lease assets | |||||||
Goodwill and other intangible assets | |||||||
Investments in and advances to affiliates | |||||||
Restricted cash | |||||||
Other assets | |||||||
Total assets | $ | $ | |||||
LIABILITIES AND EQUITY | |||||||
Accounts payable and accrued liabilities | |||||||
Other current liabilities | |||||||
Total current liabilities | |||||||
Long-term debt | |||||||
Deferred income taxes | |||||||
Non-current operating lease liabilities | |||||||
Other long-term liabilities | |||||||
Total liabilities | |||||||
Redeemable noncontrolling interest | |||||||
Stockholders’ equity: | |||||||
Common stock, $1 par value, 200,000,000 shares authorized; 128,740,037 and 111,401,497 shares issued and outstanding, respectively, as of September 30, 2020; and 129,665,899 and 111,945,021 shares issued and outstanding, respectively, as of December 31, 2019 | |||||||
Additional paid-in capital | |||||||
Retained earnings | |||||||
Treasury stock, 17,338,540 shares and 17,720,878 shares, at cost as of September 30, 2020, and December 31, 2019, respectively | ( | ) | ( | ) | |||
Accumulated comprehensive loss | ( | ) | ( | ) | |||
Total stockholders’ equity | |||||||
Total liabilities and stockholders’ equity | $ | $ | |||||
6
Condensed Consolidated Statements of Cash Flows
Dollar amounts in millions
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Adjustments to net income: | |||||||||||||||
Depreciation and amortization | |||||||||||||||
Loss on impairment | |||||||||||||||
Gain on acquisition | ( | ) | |||||||||||||
Deferred taxes | |||||||||||||||
Other adjustments, net | |||||||||||||||
Changes in assets and liabilities (net of acquisitions and divestitures): | |||||||||||||||
Receivables | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Prepaid expenses and other current assets | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Inventories | |||||||||||||||
Accounts payable and accrued liabilities | ( | ) | ( | ) | |||||||||||
Income taxes payable, net of receivables | ( | ) | ( | ) | |||||||||||
Net cash provided by operating activities | |||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||
Property, plant, and equipment additions | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Investments in unconsolidated affiliate | ( | ) | ( | ) | |||||||||||
Proceeds from business divestiture | — | ||||||||||||||
Redemption of insurance cash surrender value | |||||||||||||||
Cash acquired in acquisition | |||||||||||||||
Other investing activities | ( | ) | ( | ) | |||||||||||
Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||
Repayment of long-term debt | ( | ) | ( | ) | |||||||||||
Borrowing of long-term debt | |||||||||||||||
Payment of cash dividends | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Purchase of stock | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other financing activities | ( | ) | ( | ) | ( | ) | |||||||||
Net cash used in financing activities | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
EFFECT OF EXCHANGE RATE ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ( | ) | ( | ) | |||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ) | ( | ) | |||||||||||
Cash, cash equivalents, and restricted cash at beginning of period | |||||||||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | $ | $ | $ | |||||||||||
Supplemental cash flow information: | |||||||||||||||
Cash paid for income taxes, net of cash received | $ | $ | $ | $ | |||||||||||
Cash paid for interest, net of cash received | $ | $ | $ | $ | |||||||||||
Unpaid capital expenditures | $ | $ | $ | $ | |||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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Condensed Consolidated Statements of Stockholders' Equity
Dollar and share amounts in millions, except per share amounts
(Unaudited)
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance, December 31, 2019 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Net income attributed to LP | — | — | — | — | — | — | |||||||||||||||||||||||
Dividends paid ($0.145 per share) | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||
Issuance of shares under stock plans | — | — | ( | ) | — | — | |||||||||||||||||||||||
Taxes paid related to net settlement of stock-based awards | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||
Compensation expense associated with stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||
Balance, March 31, 2020 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Net income attributed to LP | — | — | — | — | — | — | |||||||||||||||||||||||
Dividends paid ($0.145 per share) | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||
Issuance of shares under stock plans | — | — | ( | ) | ( | ) | — | — | |||||||||||||||||||||
Compensation expense associated with stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
Noncontrolling interest redemption value adjustment | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | |||||||||||||||||||||||
Balance, June 30, 2020 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Net income attributed to LP | — | — | — | — | — | — | |||||||||||||||||||||||
Dividends paid ($0.145 per share) | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||
Issuance of shares under stock plans | — | — | ( | ) | — | — | |||||||||||||||||||||||
Purchase of stock | ( | ) | ( | ) | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||
Compensation expense associated with stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | |||||||||||||||||||||||
Balance, September 30, 2020 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
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Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance, December 31, 2018 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Net income attributed to LP | — | — | — | — | — | — | |||||||||||||||||||||||
Dividends paid ($0.135 per share) | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||
Issuance of shares under stock plans | — | — | ( | ) | — | — | |||||||||||||||||||||||
Taxes paid related to net settlement of stock-based awards | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||
Purchase of stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | — | ( | ) | ||||||||||||||||
Compensation expense associated with stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | |||||||||||||||||||||||
Balance, March 31, 2019 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Net income attributed to LP | — | — | — | — | — | — | |||||||||||||||||||||||
Dividends paid ($0.135 per share) | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||
Issuance of shares under stock plans | — | — | ( | ) | — | — | |||||||||||||||||||||||
Compensation expense associated with stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||
Balance, June 30, 2019 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Net income attributed to LP | — | — | — | — | — | — | |||||||||||||||||||||||
Dividends paid ($0.135 per share) | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||
Issuance of shares under stock plans | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||
Purchase of stock | ( | ) | ( | ) | ( | ) | — | ( | ) | ||||||||||||||||||||
Compensation expense associated with stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||
Balance, September 30, 2019 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND BASIS FOR PRESENTATION
Nature of Operations
Louisiana-Pacific Corporation and our subsidiaries is a leading provider of high-performance building solutions serving the new home construction, repair and remodeling, and outdoor structures markets. In addition to our U.S. operations, the Company also maintains manufacturing facilities in Canada, Chile, and Brazil through foreign subsidiaries and joint ventures. The principal customers for our building solutions are retailers, wholesalers, and homebuilding and industrial businesses in North America and South America, with limited sales to Asia, Australia, and Europe. References to "LP," "the Company," "we," "our," and "us" refer to Louisiana-Pacific Corporation and its consolidated subsidiaries as a whole.
Basis for Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. These Condensed Consolidated Financial Statements and Notes hereto should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 13, 2020 (2019 Annual Report on Form 10-K). Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. All dollar amounts are shown in millions except per share.
COVID-19 Impact
In March 2020, the World Health Organization (WHO) characterized the outbreak of COVID-19 as a global pandemic. In response to this declaration and the rapid global spread of COVID-19, national, state, and local governments have taken extraordinary, wide-ranging actions to contain the outbreak and spread of COVID-19, including quarantines, "stay-at-home" orders, and similar mandates imposing varying degrees of restrictions on social and commercial activity to promote social distancing. We are continuing to follow national, state, and local guidelines, while also continuing to provide our products to support critical infrastructure needs. Activity in the markets in which we serve has continued to improve since the first quarter of 2020 and we expect that improvement trend to continue through the fourth quarter; however, as a result of increasing rates of COVID-19, the demand in most markets remains uncertain.
The pandemic and the resulting containment did not materially impact our results for the three and nine months ended September 30, 2020. However, the duration of the COVID-19 pandemic, the actions to contain the pandemic and mitigate its impacts, and the effects on our operations remain unpredictable and cannot be reasonably estimated.
As of September 30, 2020, there were no outstanding amounts borrowed under our Amended Credit Facility and we had $420 million of cash and cash equivalents. In response to the current business environment as impacted by COVID-19, we took precautionary measures and adjusted our operational needs, including a significant reduction in capital spending, during the first and second quarters of 2020. We have continued to evaluate the effects of the COVID-19 pandemic and will make appropriate operating adjustments in the future, as necessary.
As a result of the economic and business impact of COVID-19, we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of goodwill, intangibles, long-lived assets, accounts receivable, and inventory, which could have a material adverse effect on our financial position and results of operations.
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Recently Adopted Accounting Policies
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This ASU sets forth a "current expected credit loss" (CECL) model, which requires the measurement of all expected credit losses for financial instruments or other assets (e.g., trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. The Company adopted ASU 2016-13 on January 1, 2020. This adoption did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). The standard simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. The Company adopted ASU 2017-14 on January 1, 2020. This adoption did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). The standard amends ASC 820 to add and remove disclosure requirements related to fair value measurement. The Company adopted ASU 2018-13 on January 1, 2020. This adoption did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (Subtopic 350-40). The standard provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The Company adopted ASU 2018-15 on January 1, 2020, using the prospective transition method. This adoption did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Accounting Standards Issued But Not Yet Adopted
In August 2018, the FASB issued ASU 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The amended guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The adoption of this guidance will modify our disclosures but is not expected to have a material effect on our Consolidated Financial Statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by, among other things, eliminating certain existing exceptions related to the general approach in ASC 740 relating to franchise taxes, reducing complexity in the interim-period accounting for year-to-date loss limitations and changes in tax laws, and clarifying the accounting for transactions outside of business combination that result in a step-up in the tax basis of goodwill. The transition requirements are primarily prospective, and the effective date is for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of the new guidance on our Condensed Consolidated Financial Statements.
The following table presents our reportable segment revenues, disaggregated by revenue source. We disaggregate revenue from contracts with customers into major product lines. We have determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. During the nine months ended September 30, 2020, LP CanExel®
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prefinished siding was reclassified from Siding to Other, reflecting changes in organizational structure and, accordingly, the information that the chief operating decision maker uses to evaluate performance and allocate resources to our business segments. All prior periods presented have been adjusted for comparability.
As noted in the segment reporting information in Note 18 below, our reportable segments are Siding, Oriented Strand Board (OSB), Engineered Wood Products (EWP), and South America.
Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||
By product type and family: | Siding | OSB | EWP | South America | Other | Inter-segment | Total | ||||||||||||||||||||
Value-add | |||||||||||||||||||||||||||
SmartSide® | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Fiber siding | |||||||||||||||||||||||||||
CanExel® siding | |||||||||||||||||||||||||||
OSB - Structural Solutions | |||||||||||||||||||||||||||
LVL | |||||||||||||||||||||||||||
LSL | |||||||||||||||||||||||||||
I-Joist | |||||||||||||||||||||||||||
Commodity | |||||||||||||||||||||||||||
OSB - commodity | |||||||||||||||||||||||||||
Plywood | |||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||
Other products | |||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
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Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||
By product type and family: | Siding | OSB | EWP | South America | Other | Inter-segment | Total | ||||||||||||||||||||
Value-add | |||||||||||||||||||||||||||
SmartSide® | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Fiber siding | |||||||||||||||||||||||||||
CanExel® siding | |||||||||||||||||||||||||||
OSB - Structural Solutions | |||||||||||||||||||||||||||
LVL | |||||||||||||||||||||||||||
LSL | |||||||||||||||||||||||||||
I-Joist | |||||||||||||||||||||||||||
Commodity | |||||||||||||||||||||||||||
OSB - commodity | |||||||||||||||||||||||||||
Plywood | |||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||
Other products | |||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||
By product type and family: | Siding | OSB | EWP | South America | Other | Inter-segment | Total | ||||||||||||||||||||
Value-add | |||||||||||||||||||||||||||
SmartSide® | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Fiber siding | |||||||||||||||||||||||||||
CanExel® siding | |||||||||||||||||||||||||||
OSB - Structural Solutions | |||||||||||||||||||||||||||
LVL | |||||||||||||||||||||||||||
LSL | |||||||||||||||||||||||||||
I-Joist | |||||||||||||||||||||||||||
Commodity | |||||||||||||||||||||||||||
OSB - commodity | ( | ) | |||||||||||||||||||||||||
Plywood | |||||||||||||||||||||||||||
( | ) | ||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||
Other products | |||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
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Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||
By product type and family: | Siding | OSB | EWP | South America | Other | Inter-segment | Total | ||||||||||||||||||||
Value-add | |||||||||||||||||||||||||||
SmartSide® | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Fiber siding | |||||||||||||||||||||||||||
CanExel® siding | |||||||||||||||||||||||||||
OSB - Structural Solutions | |||||||||||||||||||||||||||
LVL | |||||||||||||||||||||||||||
LSL | |||||||||||||||||||||||||||
I-Joist | |||||||||||||||||||||||||||
Commodity | |||||||||||||||||||||||||||
OSB - commodity | ( | ) | |||||||||||||||||||||||||
Plywood | |||||||||||||||||||||||||||
( | ) | ||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||
Other products | |||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Revenue is recognized when obligations under the terms of a contract (purchase orders) with our customers are satisfied; generally, this occurs with the transfer of control of our products. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. The shipping cost incurred by us to deliver products to our customers is recorded in cost of sales. The expected costs associated with our warranties continue to be recognized as an expense when the products are sold. We recognize revenue as of a point in time.
Our businesses routinely incur customer program costs to obtain favorable product placement, to promote sales of products and to maintain competitive pricing. Customer program costs and incentives, including rebates and promotion and volume allowances, are accounted for as deductions from net sales at the time the program is initiated. These reductions of revenue are recorded at the time of sale or the implementation of the program based on management’s best estimates. Estimates are based on historical and projected experience for each type of program or customer. Volume allowances are accrued based on management’s estimates of customer volume achievement and other factors incorporated into customer agreements, such as new product purchases, store sell-through, and merchandising support. Management adjusts accruals when circumstances indicate (typically as a result of a change in volume expectations).
We ship some of our products to customers' distribution centers on a consignment basis. We retain title to our products stored at the distribution centers. As our products are removed from the distribution centers by retailers and shipped to retailers’ stores, title passes from us to the retailers. At that time, we invoice the retailers and recognize revenue for these consignment transactions. We do not offer a right of return for products shipped to the retailers’ stores from the distribution centers.
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NOTE 3. EARNINGS PER SHARE
Basic earnings per share is based upon the weighted-average number of shares of common stock outstanding. Diluted earnings per share is 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 (stock options, stock-settled appreciation rights (SSARs), restricted stock units, and performance stock units) be excluded from the calculation of diluted earnings per share for the periods in which losses are reported because the effect is anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income attributed to LP | |||||||||||||||
Weighted average common shares outstanding - basic | |||||||||||||||
Dilutive effect of employee stock plans | |||||||||||||||
Shares used for diluted earnings per share | |||||||||||||||
Earnings per share: | |||||||||||||||
Basic earnings | $ | $ | $ | $ | |||||||||||
Diluted earnings | $ | $ | $ | $ | |||||||||||
NOTE 4. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We are required to classify these financial assets and liabilities into two groups: (i) recurring—measured on a periodic basis and (ii) non-recurring—measured on an as-needed basis.
During the nine months ended September 30, 2020, we sold our auction rate securities (ARS) and recognized a $3 million gain on available for sale securities, which is included in investment income in the Condensed Consolidated Statements of Income. Available for sale securities were $5 million as of December 31, 2019.
Trading securities consist of rabbi trust financial assets, which are recorded in other assets in our Condensed Consolidated Balance Sheets. 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 assets of the rabbi trust were $4 million at September 30, 2020, and December 31, 2019.
We estimated our 4.875% Senior Notes due in 2024 (2024 Senior Notes) to have a fair value of $360 million as of September 30, 2020, based upon market quotations. Our 2024 Senior Notes and other long-term debt are categorized as Level 1 in the U.S. GAAP fair value hierarchy. Fair values are based on trading activity among the Company’s lenders and the average bid and ask price as determined using published rates.
There were no outstanding amounts borrowed under our Amended Credit Facility as of September 30, 2020.
Carrying amounts reported on the balance sheet for cash and cash equivalents, accounts receivables, and accounts payable approximate fair value due to the short-term maturity of these items. During the three and nine months ended September 30, 2020, and 2019, no adjustments were recognized associated with the fair value of these assets.
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NOTE 5. RECEIVABLES
Receivables consisted of the following:
September 30, 2020 | December 31, 2019 | ||||||
Trade receivables | $ | $ | |||||
Income tax receivable | |||||||
Other receivables | |||||||
Allowance for doubtful accounts | ( | ) | ( | ) | |||
Total | $ | $ | |||||
Trade receivables are primarily generated by sales of our products to our wholesale and retail customers. Other receivables as of September 30, 2020, and December 31, 2019, primarily consist of sales tax receivables, vendor rebates, a receivable associated with an affiliate, and other miscellaneous receivables.
NOTE 6. INVENTORIES
Inventories are valued at the lower of cost or net realizable value. Inventory cost includes materials, labor, and operating overhead. The major types of inventories are as follows (work in process is not material and is included in Semi-finished inventory below):
September 30, 2020 | December 31, 2019 | ||||||
Logs | $ | $ | |||||
Other raw materials | |||||||
Semi-finished inventory | |||||||
Finished products | |||||||
Total | $ | $ | |||||
NOTE 7. DIVESTITURES
In February 2020, the Company entered into a joint agreement with Maibec, Inc. (Maibec) to sell LP’s East River facility located in Nova Scotia, Canada (the East River facility), as well as the assets and brand rights for CanExel®, the fiber-based prefinished siding product manufactured at that facility. In June 2020, we completed the sale to Maibec for a total purchase price of $ 17 million, $15 million of which was paid in cash in connection with the closing and $2 million of which is payable under a promissory note due in three equal annual installments beginning in June 2021. The current portion is included in prepaid expenses and other current assets and the long-term portion is included in other assets within the Condensed Consolidated Balance Sheet. We recognized a gain on sale of $2 million for the nine month period ended September 30, 2020, within other operating credits and charges, net in the Condensed Consolidated Statements of Income.
The total net carrying value of assets related to the East River facility and CanExel® at the date of sale was $14 million, consisting primarily of approximately $10 million and $5 million of inventories and property, plant, and equipment, net, respectively.
The Condensed Consolidated Statements of Income for the nine months ended September 30, 2020, include net sales of $14 million, related to the divested East River facility and assets and brand rights for CanExel®. The Condensed Consolidated Statements of Income for the nine months ended September 30, 2019, include net sales of $38 million, related to the East River facility.
NOTE 8. GOODWILL AND OTHER INTANGIBLES
Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment by applying a fair value based test on an annual basis or more frequently if circumstances indicate a potential impairment. The Company’s annual assessment date is October 1.
During the second quarter of 2020, we performed an interim evaluation of impairment on the goodwill associated with our off-site construction operation Entekra Holdings, LLC (Entekra) due in part to the impacts of the COVID-19 pandemic on this reporting unit. As a result, we recognized a non-cash impairment charge of $5 million for the nine month period ended September 30, 2020, within loss on impairment in the Condensed Consolidated Statements of Income. We applied a discounted cash flow model in which cash flows are projected using internal forecasts over future periods, plus a terminal value, and were discounted to present value using a risk-adjusted rate of return. The cash flow forecasts included estimates of growth rates based on our current views of the long-term outlook of the reporting unit and may materially differ from actual results. The discount rate assumptions were based on an assessment of the risk inherent in the future cash flows of each reporting unit using industry, peer group, and company-specific information.
Changes in goodwill and other intangible assets as of September 30, 2020, are provided in the following table:
Timber licenses1 | Goodwill | Developed Technology | Trademark | |||||||||
Beginning balance December 31, 2019 | $ | $ | $ | $ | ||||||||
Acquisition | ||||||||||||
Impairment charge | — | ( | ) | — | — | |||||||
Amortization | ( | ) | — | ( | ) | |||||||
Ending balance September 30, 2020 | $ | $ | $ | $ | ||||||||
1Timber licenses are included in Timber and timberlands on the Condensed Consolidated Balance Sheets.
NOTE 9. REDEEMABLE NONCONTROLLING INTEREST
Redeemable noncontrolling interest is interest in subsidiaries that is redeemable outside of our control either for cash or other assets. These interests are classified as mezzanine equity and measured at the greater of estimated redemption value or carrying value at the end of each reporting period. Net loss attributed to noncontrolling interest is recorded in the Condensed Consolidated Statements of Income. Any adjustments to the redemption value of redeemable
16
noncontrolling interest are recognized in either net income or through accumulated paid-in capital, depending on the nature of the underlying security (preferred or common units).
The components of redeemable noncontrolling interest are as follows:
Dollar amounts in millions | |||
Beginning balance December 31, 2019 | $ | ||
Purchase of redeemable common and preferred stock | — | ||
Adjustment to redemption value (through accumulated paid in capital) | |||
Net loss attributable to noncontrolling interest | ( | ) | |
Impairment charge attributed to noncontrolling interest | ( | ) | |
Ending balance September 30, 2020 | $ | ||
NOTE 10. LONG TERM DEBT
The following table summarizes our outstanding debt:
September 30, 2020 | December 31, 2019 | |||||||
2024 Senior Notes | $ | $ | ||||||
Amended Credit Facility | ||||||||
Financing leases | ||||||||
Unamortized debt costs | ( | ) | ( | ) | ||||
Total | ||||||||
Less: current portion | ||||||||
Long-term portion | $ | $ | ||||||
In March 2020, we borrowed $350 million under our revolving credit facility dated as of June 27, 2019 (the Credit Facility) with American AgCredit, PCA, as administrative agent and CoBank, ACB, as a letter of credit issuer, as a precautionary measure, to ensure funds were available to meet our obligations for a substantial period of time in response to the COVID-19 pandemic. On May 1, 2020, we entered into an amendment to our the Credit Facility to provide a total capacity of $550 million and on May 27, 2020, we entered into a second amendment to the Credit Facility (as amended, the Amended Credit Facility), which modified certain representations and warranties included in the Credit Facility related to the impacts of the ongoing COVID-19 pandemic on the Company’s business, operations or financial conditions as more particularly set forth in the second amendment.
The Amended Credit Facility provides for revolving credit facilities in the aggregate principal amount of up to $550 million, with a $60 million sub-limit for letters of credit. The initial $350 million revolving facility provided pursuant to the Credit Facility (Revolving A Loan) terminates, and all loans made thereunder become due, on June 27, 2024. The incremental $200 million revolving facility provided pursuant to the Amended Credit Facility in May 2020 (Revolving B Loan) terminates, and all loans made thereunder become due, on May 1, 2023. Certain of LP’s existing and future wholly-owned domestic subsidiaries may guaranty our obligations under the Amended Credit Facility and, subject to certain limited exceptions, provide security through a lien on substantially all the personal property of these subsidiaries. We repaid the $350 million in June 2020 and there were no outstanding amounts borrowed under the Amended Credit Facility as of September 30, 2020.
Revolving borrowings under the Amended Credit Facility accrue interest, at our option, at either a “base rate” plus a margin of 0.875 % to 2.000 % for Revolving A Loans and 1.125 % to 2.250 % for Revolving B Loans or LIBOR plus a margin of 1.875 % to 3.000 % for Revolving A Loans and 2.125 % to 3.250 % for Revolving B Loans. The Amended Credit Facility also includes an unused commitment fee, due quarterly, ranging from 0.3 % to 0.6 % for both Revolving A Loans and Revolving B Loans. The applicable margins and fees within these ranges are based on our ratio of
17
consolidated EBITDA to cash interest charges. The “base rate” is the highest of (i) the Federal funds rate plus 0.5%, (ii) the U.S. prime rate, and (iii) one-month LIBOR plus 1.0%.
The Amended Credit Facility contains various restrictive covenants and customary events of default, the occurrence of which could result in the acceleration of our obligation to repay the indebtedness outstanding thereunder. The Amended Credit Facility also contains financial covenants that require us and our consolidated subsidiaries to have, as of the end of each quarter, (i) a capitalization ratio (i.e., funded debt less unrestricted cash to total capitalization) of no more than 57.5 % and (ii) a minimum consolidated net worth of at least $475 million plus 70 % of consolidated net income after December 31, 2019, without a deduction for net losses.
In September 2016, we issued $350 million aggregate principal amount of the 2024 Senior Notes, which mature on September 15, 2024. We may, at our option on one or more occasions, redeem all or any portion of these notes at the redemption prices set forth in the indenture governing the 2024 Senior Notes, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. The indenture governing the 2024 Senior Notes contains certain covenants that, among other things, limit our ability to grant liens to secure indebtedness, engage in sale and leaseback transactions and merge or consolidate or sell all or substantially all our assets. If we are subject to a "change of control," as defined in the indenture, we are required to offer to repurchase the 2024 Senior Notes at a purchase price equal to 101 % of the principal amount thereof plus accrued and unpaid interest, if any, thereon to, but not including, the date of purchase. The indenture governing the 2024 Senior Notes contains customary events of default, including failure to make required payments on the 2024 Senior Notes, failure to comply with certain agreements or covenants contained in the indenture, failure to pay or acceleration of certain other indebtedness and certain events of bankruptcy and insolvency. An event of default in the indenture allows either the indenture trustee or the holders of at least 25 % in aggregate principal amount of the then-outstanding 2024 Senior Notes to accelerate, or in certain cases, automatically causes the acceleration of, the amounts due under the 2024 Senior Notes.
In March 2020, LP entered into a letter of credit facility agreement (Letter of Credit Facility) with Bank of America, N.A., which provides for the funding of letters of credit up to an aggregate outstanding amount of $20 million, which may be secured by certain cash collateral of LP. The Letter of Credit Facility includes an unused commitment fee, due quarterly, ranging from 0.50% to 1.875% of the daily available amount to be drawn on each letter of credit issued under the Letter of Credit Facility. The Letter of Credit Facility is subject to similar affirmative, negative, and financial covenants as those set forth in the Amended Credit Facility, including capitalization ratio and minimum net worth covenants.
As of September 30, 2020, we were in compliance with all financial covenants under the Amended Credit Facility.
NOTE 11. INCOME TAXES
For interim periods, we recognize income tax expense by applying the estimated annual effective income tax rate to year-to-date results unless this method does not result in a reliable estimate of year-to-date income tax expense. Each period, the income tax accrual is adjusted to the latest estimate, and the difference from the previously accrued year-to-date balance is adjusted to the current quarter. Changes in profitability estimates in various jurisdictions will impact our quarterly effective income tax rates.
The tax provision for income taxes for the nine months ended September 30, 2020, reflected an estimated annual tax rate of 26%, compared with 30% for the nine months ended September 30, 2019. The effective tax rate, including discrete items, for the three months ended September 30, 2020, was 25% compared to 85% for the comparable period in 2019. The effective tax rate, including discrete items, for the nine months ended September 30, 2020, was 27 % compared to 23 % for the comparable period in 2019. The increase in the year to date effective tax rate was primarily due to the effect of discrete items discussed below.
18
NOTE 12. COMMITMENTS AND CONTINGENCIES
We maintain reserves for various contingent liabilities as follows:
September 30, 2020 | December 31, 2019 | ||||||
Environmental reserves | $ | $ | |||||
Other reserves | |||||||
Total contingencies | |||||||
Current portion (included in other current liabilities) | ( | ) | ( | ) | |||
Long-term portion (included in other long-term liabilities) | $ | $ | |||||
Estimates of our loss contingencies are based on various assumptions and judgments. Due to the numerous uncertainties and variables associated with these assumptions and judgments, 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 contingencies and, as additional information becomes known, may change our estimates significantly. While no estimate of the range of any such change can be made at this time, the amount that we may ultimately pay in connection with these matters could materially exceed, in either the near term or the longer term, the amounts accrued to date. Our estimates of our loss contingencies do not reflect potential future recoveries from insurance carriers except to the extent that recovery may, from time to time, be deemed probable as a result of an insurer’s agreement to payment terms.
Environmental Matters
We maintain a reserve for undiscounted estimated environmental loss contingencies. This reserve is primarily for estimated future costs of remediation of hazardous or toxic substances at numerous sites currently or previously owned by the Company. Our estimates of our environmental loss contingencies are based on various assumptions and judgments, the specific nature of which varies considering the particular facts and circumstances surrounding each environmental loss contingency. These estimates typically reflect assumptions and judgments as to the probable nature, magnitude and timing of the required investigation, remediation and/or monitoring activities and the probable cost of these activities, and in some cases reflect assumptions and judgments as to the obligation or willingness and ability of third parties to bear a proportionate or allocated share of the cost of these activities. Due to the numerous uncertainties and variables associated with these assumptions and judgments, and the effects of changes in governmental regulation and environmental technologies, both the precision and reliability of the resulting estimates of the related contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to environmental loss contingencies and, as additional information becomes known, may change our estimates significantly. During the three and nine months ended September 30, 2020, we recognized a charge of $2 million related to additional estimated environmental costs to be paid by a third party associated with a non-operating site.
Other Proceedings
We and our subsidiaries are parties to other legal proceedings. Based on the information currently available, management believes the resolution of such proceedings will not have a material adverse effect on our financial position, results of operations, cash flows, or liquidity.
NOTE 13. IMPAIRMENT OF LONG-LIVED ASSETS
We review the carrying values of our long-lived assets for potential impairments and believe we have adequate support for the carrying value of our long-lived assets. If demand and pricing for our products fall to levels significantly below cycle average demand and pricing, or should we decide to invest capital in alternative projects, or should changes occur related to our wood supply for our mills, it is possible that future impairment charges will be required. As of September 30, 2020, we believe the current impacts of the COVID-19 pandemic did not warrant an impairment of our long-lived
19
assets. However, future changes in the long-term effects of the COVID-19 pandemic on the demand and pricing of our products may result in future impairment charges, including curtailed facilities.
We also review from time to time potential dispositions of various assets, considering current and anticipated economic and industry conditions, our strategic plan, and other relevant factors. 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, we may be required to record impairment charges in connection with decisions to dispose of assets.
NOTE 14. PRODUCT WARRANTIES
We offer warranties on the sale of most of our products and record 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 three and nine months ended September 30, 2020, and 2019, is summarized in the following table:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Beginning balance | $ | $ | $ | $ | |||||||||||
Accrued to expense | |||||||||||||||
Reduced to other operating credits and charges | ( | ) | |||||||||||||
Payments made | ( | ) | ( | ) | ( | ) | |||||||||
Total warranty reserves | |||||||||||||||
Current portion of warranty reserves (included in other current liabilities) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Long-term portion of warranty reserves (included in other long-term liabilities) | $ | $ | $ | $ | |||||||||||
NOTE 15. DEFINED BENEFIT PENSION PLANS
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||
Other components of net periodic pension cost1: | |||||||||||||||
Interest cost | |||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Amortization of prior service cost | |||||||||||||||
Amortization of net loss | |||||||||||||||
Net periodic pension cost | $ | $ | $ | $ | |||||||||||
NOTE 16. ACCUMULATED COMPREHENSIVE INCOME (LOSS)
Other comprehensive income activity, net of tax, is provided in the following table for the three and nine months ended September 30, 2020, and 2019:
20
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Pension1 | |||||||||||||||
Balance at beginning of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Amounts reclassified from accumulated other comprehensive loss to income 2 | |||||||||||||||
Total other comprehensive income | |||||||||||||||
Balance at end of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Translation Adjustments | |||||||||||||||
Balance at beginning of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Translation adjustments | ( | ) | ( | ) | ( | ) | |||||||||
Balance at end of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other | |||||||||||||||
Balance at beginning of period | |||||||||||||||
Unrealized gains on securities, net of reversals | ( | ) | ( | ) | |||||||||||
Balance at end of period | |||||||||||||||
Accumulated other comprehensive loss, end of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
1 Amounts are presented net of tax.
NOTE 17. OTHER OPERATING AND NON-OPERATING INCOME
Other operating credits and charges, net
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Reorganization charges | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Canadian wage subsidies | |||||||||||||||
Product-line discontinuance charges | ( | ) | |||||||||||||
Environmental costs | ( | ) | ( | ) | |||||||||||
Severance and other charges associated with curtailment | ( | ) | ( | ) | |||||||||||
Adjustment to product-related warranty reserves | |||||||||||||||
Other | |||||||||||||||
$ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
During the three and nine months ended September 30, 2020, we recognized a charge of $2 million related to additional estimated environmental costs to be paid by a third party associated with a non-operating site. We incurred severance and other charges of $1 million and $5 million for the three and nine months ended September 30, 2020, respectively, related to certain reorganizations and product-line discontinuance. We received $5 million and $9 million of Canadian wage subsidies during the three and nine months ended September 30, 2020, respectively. Additionally, we recorded a recovery of $1 million and charges of $9 million for the three and nine months ended September 30, 2020, respectively, related to the discontinuance of our fiber product (primarily related to fiber inventory adjustments to net realizable values).
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During the nine months ended September 30, 2019, we reduced our product-related warranty reserves by $4 million. Additionally, we recorded a charge of $3 million and $8 million for the three and nine months ended September 30, 2019, respectively, related to severance associated with certain reorganizations within the corporate office and severance and other charges associated with planned curtailments.
Non-operating income
Non-operating income is comprised of the following components:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Interest expense | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Amortization of debt charges | ( | ) | ( | ) | ||||||||||||
Capitalized interest, net of reversals | ( | ) | ||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Interest income | ||||||||||||||||
Gain on sale of auction rate securities | ||||||||||||||||
SERP market adjustments | ( | ) | ||||||||||||||
Investment income | ||||||||||||||||
Net periodic pension cost, excluding service cost | ( | ) | ( | ) | ( | ) | ||||||||||
Gain on acquisition of controlling interest | ||||||||||||||||
Foreign currency gain (loss) | ( | ) | ||||||||||||||
Other non-operating items | $ | $ | ( | ) | $ | $ | ||||||||||
NOTE 18. SELECTED SEGMENT DATA
We operate in four segments: Siding, OSB, EWP, and South America. Our business units have been aggregated into these four segments based upon the similarity of economic characteristics, customers, and distribution methods. Our 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. Our LP CanExel® prefinished siding was reclassified from Siding to Other during the nine months ended September 30, 2020, reflecting changes in organizational structure and, accordingly, the information that the chief operating decision maker uses to evaluate performances and allocate resources to the segments. All prior periods presented have been adjusted for comparability.
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We evaluate the performance of our business segments based on net sales and Adjusted EBITDA. Accordingly, our chief operating decision maker evaluates performance and allocates resources based primarily on net sales and Adjusted EBITDA for our business segments. Adjusted EBITDA is a non-GAAP financial measure and is defined as income attributed to LP before interest expense, provision for income taxes, depreciation and amortization, and excludes stock-based compensation expense, loss on impairment attributed to LP, product-line discontinuance charges, other operating credits and charges, net, loss on early debt extinguishment, investment income, and other non-operating items.
Information about our product segments is as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net sales | |||||||||||||||
Siding | $ | $ | $ | $ | |||||||||||
OSB | |||||||||||||||
EWP | |||||||||||||||
South America | |||||||||||||||
Other | |||||||||||||||
Intersegment sales | ( | ) | ( | ) | |||||||||||
Total sales | $ | $ | $ | $ | |||||||||||
PROFIT BY SEGMENT | |||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Add (deduct): | |||||||||||||||
Net loss attributed to noncontrolling interest | |||||||||||||||
Income attributed to LP | |||||||||||||||
Provision for income taxes | |||||||||||||||
Depreciation and amortization | |||||||||||||||
Stock-based compensation expense | |||||||||||||||
Loss on impairment attributed to LP | |||||||||||||||
Other operating credits and charges, net | ( | ) | ( | ) | |||||||||||
Product-line discontinuance charges | ( | ) | |||||||||||||
Interest expense | |||||||||||||||
Investment income | ( | ) | ( | ) | ( | ) | |||||||||
Other non-operating items | ( | ) | ( | ) | |||||||||||
Adjusted EBITDA | $ | $ | $ | $ | |||||||||||
Siding | $ | $ | $ | $ | |||||||||||
OSB | ( | ) | |||||||||||||
EWP | |||||||||||||||
South America | |||||||||||||||
Other | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Corporate | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Adjusted EBITDA | $ | $ | $ | $ | |||||||||||
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NOTE 19. SUBSEQUENT EVENTS
In the first quarter of 2020, the Board of Directors authorized the repurchase of $200 million of LP’s common stock, and during the nine months ended September 30, 2020, LP paid $29 million for 0.9 million shares of its common stock under this authorization. From September 30, 2020, to November 4, 2020, LP has paid $71 million for 2.3 million shares of its common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes and other financial information appearing elsewhere in this quarterly report on Form 10-Q. The following discussion includes statements that are forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to our management.
Impact of COVID-19
The COVID-19 pandemic did not materially impact our results of operations for the three and nine months ended September 30, 2020, but continues to have a significant adverse effect on many sectors of the economy and the overall financial condition in the U.S. LP is continuing to follow national, state and local health and safety guidelines while it operates to provide LP products to support critical infrastructure needs. Employees able to work from home have continued to do so. LP has rigorous cleaning and social distancing protocols as outlined by the Centers for Disease Control and Prevention (CDC). LP is running full mill operating schedules as of September 30, 2020. However, the duration of the COVID-19 pandemic, the actions to contain the pandemic and mitigate its impacts, and the effects on our operations cannot be reasonably estimated.
As of September 30, 2020, there were no outstanding amounts borrowed under our Amended Credit Facility and we had $420 million of cash and cash equivalents. In response to the current business environment as impacted by COVID-19, we took precautionary measures and adjusted our operational needs, including a significant reduction in capital spending, during the first and second quarters of 2020. We have continued to evaluate the effects of the COVID-19 pandemic and will make appropriate operating adjustments in the future, as necessary.
General
We are a leading provider of high-performance building solutions serving the new home construction, repair and remodeling, and outdoor structures markets. We also market and sell our products to primarily retail home centers, wholesalers, distributors, and homebuilding and industrial businesses. Our manufacturing facilities are primarily located in the U.S. and Canada, and we also operate two facilities in Chile and one facility in Brazil.
To serve these markets, we operate in four segments: Siding, OSB, EWP, and South America.
Demand for our Building Products
Demand for our products correlates positively with new home construction and repair and remodeling activity in North America, which historically have been characterized by significant cyclicality. The COVID-19 pandemic did not have an adverse impact on the new home construction or repair and remodel activity during the third quarter of 2020.
The U.S. Department of Census reported on October 20, 2020, that actual single housing starts were 15% higher in the third quarter of 2020 as compared to the same period in 2019. Repair and remodeling activity is difficult to reasonably measure, but many indications, including the substantial increase in LP’s retail sales, suggest that it grew significantly in the third quarter of 2020.
While we expect demand for new home construction and repair and remodel activity to continue to be impacted by the COVID-19 pandemic, its impact on our results of operations, cash flows, financial position, and the related financial impacts cannot be reasonably estimated at this time.
Supply and Demand for OSB
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OSB is sold as a commodity for which sales prices fluctuate daily based on market factors over which we have little or no control. We cannot predict whether the prices of our OSB products will remain at current levels or increase or decrease in the future.
For additional factors affecting our results, refer to the Overview within our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2019 Annual Report on Form 10-K, and to “About Forward-Looking Statements” and “Risk Factors” in this quarterly report on Form 10-Q.
Critical Accounting Policies and Significant Estimates
Note 1 of the Notes to the Consolidated Financial Statements included in our 2019 Annual Report on Form 10-K 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.
While there have been no changes in the application of principles, methods, and assumptions used to determine our significant estimates, we may be required to revise certain accounting estimates and judgments related to the economic and business impact of the COVID-19 pandemic, such as, but not limited to, those related to the valuation of goodwill, intangibles, long-lived assets, accounts receivable, and inventory, which could have a material adverse effect on our financial position and results of operations.
Non-GAAP Financial Measures and Other Key Performance Indicators
In evaluating our business, we utilize non-GAAP financial measures that fall within the meaning of SEC Regulation G and Regulation S-K Item 10(e), which we believe provide users of the financial information with additional meaningful comparison to prior reported results. Non-GAAP financial measures do not have standardized definitions and are not defined by U.S. GAAP. In this quarterly report on Form 10-Q, we disclose income attributed to LP before interest expense, provision for income taxes, depreciation and amortization, and exclude stock-based compensation expense, loss on impairment attributed to LP, product-line discontinuance charges, other operating credits and charges, net, loss on early debt extinguishment, investment income, and other non-operating items (Adjusted EBITDA) which is a non-GAAP financial measure. We have included Adjusted EBITDA in this report because we view it as an important supplemental measure of our performance and believe that it is frequently used by interested persons in the evaluation of companies that have different financing and capital structures and/or tax rates. We also disclose income attributed to LP, which excludes loss on impairment attributed to LP, product-line discontinuance charges, interest outside of normal operations, other operating credits and charges, net, gain (loss) on acquisition, and adjusts for a normalized tax rate (Adjusted Income). We also disclose Adjusted Diluted EPS, calculated as Adjusted Income divided by diluted shares outstanding. We believe that Adjusted Diluted EPS and Adjusted Income are useful measures for evaluating our ability to generate earnings and that providing this measure should allow interested persons to more readily compare the earnings for past and future periods.
Neither Adjusted EBITDA, Adjusted Income, nor Adjusted Diluted EPS is a substitute for the U.S. GAAP measure of net income or for any other U.S. GAAP measures of operating performance. It should be noted that other companies may present similarly-titled measures differently and therefore, as presented by us, these measures may not be comparable to similarly-titled measures reported by other companies. Adjusted EBITDA, Adjusted Income, and Adjusted Diluted EPS have material limitations as performance measures because they exclude items that are actually incurred or experienced in connection with the operations of our business.
The following table presents significant items by operating segment and reconciles Net income to Adjusted EBITDA:
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Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income | $ | 177 | $ | 1 | $ | 241 | $ | 42 | |||||||
Add (deduct): | |||||||||||||||
Net loss attributed to noncontrolling interest | — | 1 | 2 | 3 | |||||||||||
Income attributed to LP | 177 | 2 | 243 | 46 | |||||||||||
Provision for income taxes | 60 | 3 | 88 | 13 | |||||||||||
Depreciation and amortization | 28 | 29 | 84 | 89 | |||||||||||
Stock-based compensation expense | 5 | 2 | 8 | 6 | |||||||||||
Loss on impairment attributed to LP | 1 | 5 | 15 | 6 | |||||||||||
Other operating credits and charges, net | (2 | ) | 3 | (4 | ) | 2 | |||||||||
Product-line discontinuance charges | (1 | ) | — | 9 | — | ||||||||||
Interest expense | 5 | 6 | 17 | 14 | |||||||||||
Investment income | — | (2 | ) | (3 | ) | (9 | ) | ||||||||
Other non-operating items | — | 1 | (4 | ) | (8 | ) | |||||||||
Adjusted EBITDA | $ | 273 | $ | 49 | $ | 453 | $ | 160 | |||||||
Siding | $ | 76 | $ | 44 | $ | 169 | $ | 128 | |||||||
OSB | 189 | (1 | ) | 270 | 4 | ||||||||||
EWP | 9 | 6 | 21 | 22 | |||||||||||
South America | 11 | 7 | 29 | 27 | |||||||||||
Other | (5 | ) | (1 | ) | (13 | ) | (1 | ) | |||||||
Corporate | (7 | ) | (6 | ) | (23 | ) | (20 | ) | |||||||
Adjusted EBITDA | $ | 273 | $ | 49 | $ | 453 | $ | 160 | |||||||
The following table provides the reconciliation of Net income to Adjusted Income:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income | $ | 177 | $ | 1 | $ | 241 | $ | 42 | |||||||
Add (deduct): | |||||||||||||||
Net loss attributed to noncontrolling interest | — | 1 | 2 | 3 | |||||||||||
Income attributed to LP | 177 | 2 | 243 | 46 | |||||||||||
Loss on impairment attributed to LP | 1 | 5 | 15 | 6 | |||||||||||
Other operating credits and charges, net | (2 | ) | 3 | (4 | ) | 2 | |||||||||
Product-line discontinuance | (1 | ) | — | 9 | — | ||||||||||
Gain on acquisition of controlling interest | — | — | — | (14 | ) | ||||||||||
Reported tax provision | 60 | 3 | 88 | 13 | |||||||||||
Adjusted income before tax | 235 | 13 | 351 | 53 | |||||||||||
Normalized tax provision at 25% | (59 | ) | (3 | ) | (88 | ) | (13 | ) | |||||||
Adjusted Income | $ | 176 | $ | 10 | $ | 263 | $ | 40 | |||||||
Diluted shares outstanding | 113 | 122 | 113 | 126 | |||||||||||
Adjusted Diluted EPS | $ | 1.56 | $ | 0.08 | $ | 2.32 | $ | 0.32 | |||||||
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In addition, management monitors certain key performance indicators to evaluate our business performance, which include our Overall Equipment Effectiveness (OEE) and our sales volume relative to housing starts, as provided by reports from the U.S. Department of Census. These key performance indicators are further described on page 38 of this quarterly report on Form 10-Q and are incorporated herein by reference.
Results of Operations
Our results of operations are separately discussed below for each of our segments, as well as for the “Other” category, which comprises other products that are not individually significant. See Note 18 of the Notes to the Condensed Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-Q for further information regarding our segments.
SIDING
The Siding segment consists of LP® SmartSide® Trim & Siding and LP® Outdoor Building Solutions®. Our LP CanExel® prefinished siding was reclassified from Siding to Other during the nine months ended September 30, 2020. All prior periods presented have been adjusted for comparability.
Segment sales, Adjusted EBITDA, and Adjusted EBITDA margin for this segment were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||
Net sales | $ | 268 | $ | 244 | 10 | % | $ | 700 | $ | 695 | 1 | % | |||||||||
Adjusted EBITDA | 76 | 44 | 73 | % | 169 | 128 | 32 | % | |||||||||||||
Adjusted EBITDA margin | 28 | % | 18 | % | 24 | % | 18 | % | |||||||||||||
Sales in this segment by product line were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||
SmartSide® | $ | 260 | $ | 213 | 22 | % | $ | 658 | $ | 600 | 10 | % | |||||||||
Fiber siding | 6 | 28 | (79 | )% | 36 | 79 | (54 | )% | |||||||||||||
Other | 2 | 3 | (33 | )% | 6 | 16 | (63 | )% | |||||||||||||
Total | $ | 268 | $ | 244 | 10 | % | $ | 700 | $ | 695 | 1 | % | |||||||||
Percent changes in average sales prices and unit shipments for the three and nine months ended September 30, 2020, compared to the three and nine months ended September 30, 2019, were as follows:
Three Months Ended September 30, 2020 versus 2019 | Nine Months Ended September 30, 2020 versus 2019 | ||||||||||
Average Net Selling Price | Unit Shipments | Average Net Selling Price | Unit Shipments | ||||||||
SmartSide® | 3 | % | 19 | % | 1 | % | 9 | % | |||
Net sales increased by $24 million (or 10%) and by $5 million (or one percent) for the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019. This is primarily due to SmartSide revenue increases of 22% (19% volume, 3% prices) and 10% (9% volume, 1% prices) for the three and nine months ended September 30, 2020, respectively. The strategic exit of fiber decreased revenue by $22 million and $43 million for the three and nine months ended September 30, 2020.
Adjusted EBITDA increased year over year by $32 million and $41 million, respectively, for the three and nine months ended September 30, 2020, primarily due to the increased SmartSide revenue, improved operating efficiency, and lower raw material costs, partially offset by a decrease in fiber sales.
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OSB
The OSB segment manufactures and distributes OSB structural panel products including LP OSB and Structural Solutions products such as LP® TechShield® Radiant Barrier, LP® TopNotch® Sub-Flooring, LP Legacy® Premium Sub-Flooring, LP WeatherLogic® Air & Water Barrier, and LP® FlameBlock® Fire-Rated Sheathing.
Segment sales, Adjusted EBITDA, and Adjusted EBITDA Margin for this segment were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||
Net sales | $ | 368 | $ | 197 | 87 | % | $ | 792 | $ | 605 | 31 | % | |||||||||
Adjusted EBITDA | 189 | (1 | ) | NA | 270 | 4 | NA | ||||||||||||||
Adjusted EBITDA margin | 51 | % | (1 | )% | 34 | % | 1 | % | |||||||||||||
Sales in this segment by product line were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||
OSB - commodity | $ | 198 | $ | 100 | 98 | % | $ | 419 | $ | 304 | 38 | % | |||||||||
OSB - Structural Solutions | 162 | 96 | 69 | % | 360 | 295 | 22 | % | |||||||||||||
Other | 8 | 2 | 300 | % | 13 | 6 | 117 | % | |||||||||||||
Total | $ | 368 | $ | 197 | 87 | % | $ | 792 | $ | 605 | 31 | % | |||||||||
Percent changes in average sales prices and unit shipments for the three and nine months ended September 30, 2020, compared to the three and nine months ended September 30, 2019, were as follows:
Three Months Ended September 30, 2020 versus 2019 | Nine Months Ended September 30, 2020 versus 2019 | ||||||||||
Average Net Selling Price | Unit Shipments | Average Net Selling Price | Unit Shipments | ||||||||
OSB - commodity | 120 | % | (6 | )% | 53 | % | (9 | )% | |||
OSB - Structural Solutions | 73 | % | (3 | )% | 32 | % | (7 | )% | |||
Net sales increased by $171 million (or 87%) and $187 million (or 31%) for the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019. OSB prices increased over the prior year by $179 million and $235 million for the three and nine month periods, partially offset by five percent and eight percent lower sales volume, respectively. Structural Solutions sales volume, as a percentage of total OSB segment sales volume, was 44% and 43% for the three and nine months ended September 30, 2020, respectively, compared to 43% and 42% in the comparable periods of 2019.
Adjusted EBITDA increased over the prior year by $190 million and $266 million for the three and nine months ended September 30, 2020, respectively, primarily due to increased OSB prices, lower raw material costs, and lower freight costs.
EWP
The EWP segment consists of LP® SolidStart® I-Joist (I-Joist), Laminated Veneer Lumber (LVL), Laminated Strand Lumber (LSL), and other related products. This segment also includes the sales of I-Joist and LVL products produced by the joint venture and sales of plywood produced as a by-product of the LVL production process.
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Segment sales, Adjusted EBITDA, and Adjusted EBITDA margin for this segment were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||
Net sales | $ | 103 | $ | 105 | (2 | )% | $ | 281 | $ | 303 | (7 | )% | |||||||||
Adjusted EBITDA | 9 | 6 | 50 | % | 21 | 22 | (5 | )% | |||||||||||||
Adjusted EBITDA margin | 9 | % | 5 | % | 7 | % | 7 | % | |||||||||||||
Sales in this segment by product line were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||
I-Joist | $ | 37 | $ | 39 | (5 | )% | $ | 106 | $ | 103 | 3 | % | |||||||||
LVL | 35 | 37 | (5 | )% | 101 | 108 | (6 | )% | |||||||||||||
LSL | 14 | 12 | 17 | % | 35 | 40 | (13 | )% | |||||||||||||
Other, including OSB, plywood and related products | 17 | 17 | — | % | 39 | 52 | (25 | )% | |||||||||||||
Total | $ | 103 | $ | 105 | (2 | )% | $ | 281 | $ | 303 | (7 | )% | |||||||||
Percent changes in average sales prices and unit shipments for the three and nine months ended September 30, 2020, compared to the three and nine months ended September 30, 2019, were as follows:
Three Months Ended September 30, 2020 versus 2019 | Nine Months Ended September 30, 2020 versus 2019 | ||||||||||
Average Net Selling Price | Unit Shipments | Average Net Selling Price | Unit Shipments | ||||||||
I-Joist | (5 | )% | (1 | )% | (4 | )% | 7 | % | |||
LVL | (1 | )% | (4 | )% | (1 | )% | (5 | )% | |||
LSL | 1 | % | 13 | % | 1 | % | (12 | )% | |||
Net sales decreased by $2 million (or two percent) and by $22 million (or seven percent) and Adjusted EBITDA decreased by $3 million and $1 million for the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019.
SOUTH AMERICA
Our South America segment manufactures and distributes OSB structural panel and siding products in South America and certain export markets. This segment has manufacturing operations in Chile and Brazil and operates sales offices in Chile, Brazil, Peru, Columbia and Argentina.
Segment sales, Adjusted EBITDA, and Adjusted EBITDA margin for this segment were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||
Net sales | $ | 45 | $ | 36 | 25 | % | $ | 119 | $ | 121 | (2 | )% | |||||||||
Adjusted EBITDA | 11 | 7 | 57 | % | 29 | 27 | 7 | % | |||||||||||||
Adjusted EBITDA margin | 24 | % | 20 | % | 24 | % | 22 | % | |||||||||||||
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Sales in this segment by product line were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||
OSB - Structural Solutions | $ | 40 | $ | 32 | 25 | % | $ | 104 | $ | 105 | (1 | )% | |||||||||
Siding | 4 | 4 | — | % | 12 | 14 | (14 | )% | |||||||||||||
Other | 1 | 1 | — | % | 3 | 2 | 50 | % | |||||||||||||
Total | $ | 45 | $ | 36 | 25 | % | $ | 119 | $ | 121 | (2 | )% | |||||||||
Percent changes in average sales prices and unit shipments for the three and nine months ended September 30, 2020, compared to the three and nine months ended September 30, 2019, were as follows:
Three Months Ended September 30, 2020 versus 2019 | Nine Months Ended September 30, 2020 versus 2019 | ||||||||||
Average Net Selling Price | Unit Shipments | Average Net Selling Price | Unit Shipments | ||||||||
OSB | (15 | )% | 32 | % | (16 | )% | 15 | % | |||
Siding | (11 | )% | 40 | % | (14 | )% | 10 | % | |||
Foreign currency changes lowered net sales and Adjusted EBITDA by $7 million and $1 million, respectively, for the three months ended September 30, 2020, compared to the corresponding period in 2019. For the nine months ended September 30, 2020, foreign currency changes lowered net sales and Adjusted EBITDA by $22 million and $2 million, respectively, compared to the corresponding period in 2019. Excluding foreign currency changes, net sales in both the three and nine month periods increased as compared to the prior year due to higher OSB and Siding volumes (local and export), partially offset by higher imported resin costs.
OTHER PRODUCTS
Our Other products segment includes Entekra, remaining timber and timberlands, and other minor products, services, and closed operations, which are not classified as discontinued operations (such as LP CanExel® prefinished siding). During the nine months ended September 30, 2020, our LP CanExel® prefinished siding was reclassified from Siding to Other, reflecting changes in the organizational structure of the business.
Other net sales were $11 million and $36 million for the three and nine months ended September 30, 2020, respectively, as compared to $21 million and $53 million for the corresponding periods in 2019. Adjusted EBITDA was $(5) million and $(13) million for the three and nine months ended September 30, 2020, respectively, as compared to $(1) million for each of the corresponding periods in 2019.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $52 million and $157 million for the three and nine months ended September 30, 2020, respectively, as compared to $58 million and $172 million for the corresponding periods in 2019. The decrease in 2020 is primarily due to a reduction in travel, corporate overhead and sales related initiatives primarily driven by restrictions related to the COVID-19 pandemic.
INCOME TAXES
We recorded an estimated tax provision of $60 million and $88 million in the three and nine months ended September 30, 2020, respectively. We recorded an estimated tax provision of $3 million and $13 million in the three and nine months ended September 30, 2019, respectively. Each quarter the income tax accrual is adjusted to the latest estimate, and the difference from the previously accrued year-to-date balance is recorded in the current quarter. For 2020, the primary differences between the U.S. statutory rate of 21% and the effective rate relate to state income tax, foreign tax rates,
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stock-based compensation, the sale of our ARS and the redemption of our company-owned life insurance cash surrender value. For 2019, the primary differences between the U.S. statutory rate of 21% the effective rate related to state income tax, foreign tax rates, tax credits, and stock-based compensation.
Legal and Environmental Matters
For a discussion of legal and environmental matters involving us and the potential impact thereof on our financial position, results of operations and cash flows, see Items 3, 7 and 8 in our 2019 Annual Report on Form 10-K and Note 12 of the Notes to the Condensed Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-Q.
Liquidity and Capital Resources
OVERVIEW
Our principal sources of liquidity are existing cash and investment balances, cash generated by our operations, and our ability to borrow under such credit facilities as we may have in effect from time to time. We may also, from time to time, issue and sell equity, debt or hybrid securities, or engage in other capital market transactions.
Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness, paying dividends, and making capital expenditures. We may also, from time to time, prepay or repurchase outstanding indebtedness or shares or acquire assets or businesses that are complementary to our operations. Any such repurchases may be commenced, suspended, discontinued or resumed, and the method or methods of affecting any such repurchases may be changed at any time, or from time to time, without prior notice.
OPERATING ACTIVITIES
During the three months ended September 30, 2020, and 2019, cash provided by operations was $218 million and $59 million, respectively. During the nine months ended September 30, 2020, cash provided by operations was $338 million compared to $58 million for the comparable period in 2019. The improvement in cash provided by operations for the three and nine month periods ended September 30, 2020, was primarily related to increases in OSB commodity pricing and increases in SmartSide® sales volume.
INVESTING ACTIVITIES
During the three months ended September 30, 2020, and 2019, cash used in investing activities was $13 million and $40 million, respectively. During the nine months ended September 30, 2020, and 2019, cash used in investing activities was $25 million and $90 million, respectively.
Capital expenditures for the three months ended September 30, 2020, and 2019, were $14 million and $37 million, respectively. Capital expenditures in the nine months end September 30, 2020, and 2019, were $53 million and $118 million, respectively. As a result of the outbreak of the COVID-19 pandemic, we reduced capital expenditure plans by 50% for the year 2020. We expect to fund our capital expenditures through cash on hand and cash generated from operations.
During the three and nine months ended September 30, 2020, we received $1 million and $15 million, respectively, in cash related to the divestiture of our East River facility and assets and brand rights of CanExel®. During the nine months ended September 30, 2020, we received $10 million related to the cash surrender value of the company-owned life insurance policy, and $3 million related to the sale of our ARS.
During the nine months ended September 30, 2019, we paid $7 million to acquire a prefinishing company and acquired $40 million of cash in connection with our acquisition of a controlling interest in Entekra and the resulting consolidation of Entekra's financial results.
FINANCING ACTIVITIES
During the three and nine months ended September 30, 2020, cash used in financing activities was $45 million and $84 million, respectively. During the three months ended September 30, 2020, we used $29 million to repurchase shares of LP common stock under the share repurchase program authorized by our Board of Directors on February 6, 2020, which authorized LP to repurchase up to $200 million of our common stock. During the three and nine months ended September 30, 2020, we paid cash dividends of $16 million and $49 million, respectively. In March 2020, we borrowed $350 million under our Amended Credit Facility as a precautionary measure due to the COVID-19 pandemic, and we repaid the outstanding balance in the second quarter of 2020. We also paid $1 million of financing costs associated with our Amended Credit Facility during the nine months ended September 30, 2020. Additionally, we used $5 million to repurchase stock from employees in connection with income tax withholding requirements associated with our employee stock-based compensation plans.
During the three and nine months ended September 30, 2019, cash used in financing activities was $60 million and $541 million, respectively. We used $42 million and $480 million during the three and nine months ended September 30, 2019, respectively, to repurchase shares of LP common stock under the share repurchase program authorized by our Board of Directors in February 2019, which authorized LP to repurchase up to $600 million of our common stock. We paid cash dividends of $16 million and $50 million during the three and nine months ended September 30, 2019, respectively. The remaining financing activities relate to repayment of long-term debt and the repurchase of stock from employees in connection with income tax withholding requirements associated with our employee stock-based compensation plans.
CREDIT FACILITY AND LETTER OF CREDIT FACILITY
The Amended Credit Facility provides for revolving credit facilities in the aggregate principal amount of up to $550 million, with a $60 million sub-limit for letters of credit. The Revolving A Loan terminates, and all loans thereunder become due, on June 27, 2024. The Revolving B Loan terminates, and all loans made thereunder become due, on May 1, 2023. As of September 30, 2020, we had no amounts outstanding under the Amended Credit Facility.
The Amended Credit Facility contains various restrictive covenants and customary events of default. The Amended Credit Facility also contains financial covenants that requires us and our consolidated subsidiaries to have, as of the end of each quarter, (i) a capitalization ratio (i.e., funded debt less unrestricted cash to total capitalization) of no more than 57.5% and (ii) a net worth of at least $475 million plus 70% of consolidated net income after December 31, 2019, without deduction for net losses. As of September 30, 2020, we were in compliance with all financial covenants under the Amended Credit Facility. The Amended Credit Facility contains customary events of default, the occurrence of which could result in the acceleration of our obligation to repay the indebtedness outstanding thereunder. On May 27, 2020, LP entered into the second amendment to the Amended Credit Facility, which modified certain provisions to disregard, for purposes of the Company’s representations and warranties included in the Amended Credit Facility, the impacts of the ongoing COVID-19 pandemic on the Company’s business, operations or financial conditions that were disclosed to lenders or otherwise publicly available in the Company’s filings with the Securities and Exchange Commission prior to the First Amendment Effective Date (as defined in the Amended Credit Facility).
In March 2020, LP entered into the Letter of Credit Facility with Bank of America, N.A. (the Letter of Credit Facility), which provides for the funding of letters of credit up to an aggregate outstanding amount of $20 million, which may be secured by certain cash collateral of LP. The Letter of Credit Facility includes an unused commitment fee, due quarterly, ranging from 0.50% to 1.875% of the daily available amount to be drawn on each letter of credit issued under the Letter of Credit Facility. The Letter of Credit Facility is subject to similar affirmative, negative and financial covenants as those set forth in the Amended Credit Facility, including capitalization ratio and minimum net worth covenants. As of September 30, 2020, we were in compliance with all covenants under the Letter of Credit Facility.
OTHER LIQUIDITY MATTERS
Off-Balance Sheet Arrangements
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As of September 30, 2020, we had standby letters of credit of $12 million outstanding related to collateral for environmental impact on owned properties, deposit for forestry license, and insurance collateral, including workers' compensation.
Potential Impairments
We review our mill and investment assets for potential impairments at least annually and believe we have adequate support for the carrying value of our assets as of September 30, 2020. We recognized a non-cash impairment charge of $5 million during the nine months ended September 30, 2020 related to goodwill assigned to the Entekra reporting unit in part due to the impacts of the COVID-19 pandemic on this reporting unit.
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If demand and pricing for our products are significantly below cycle average demand and pricing, or should we decide to invest capital in alternative projects, or should changes occur related to our wood supply for these locations, it is possible that future impairment charges will be required. As of September 30, 2020, we believe the current impacts of the COVID-19 pandemic did not warrant impairments of our long-lived assets. The long-term effects of the COVID-19 pandemic on the demand and pricing of our products may result in future impairment charges.
We also review from time to time possible dispositions of various assets, considering current and anticipated economic and industry conditions, our strategic plan, and other relevant factors. 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, we may be required to record impairment charges in connection with decisions to dispose of assets.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in the Canadian dollar, Brazilian real and the Chilean peso. Although we have in the past entered into foreign exchange contracts associated with certain of our indebtedness and may continue to enter into foreign exchange contracts associated with major equipment purchases to manage a portion of the foreign currency rate risk, we historically have not entered into material currency rate hedges with respect to our exposure from operations, although we may do so in the future.
Some of our products are sold as commodities, and therefore sales prices fluctuate daily based on market factors over which we have little or no control. The most significant commodity product we sell is OSB. Based upon an assumed North America annual production capacity in the OSB segment of 3.7 billion square feet (3/8" basis) or 3.2 billion square feet (7/16" basis), a $1 change in the annual average price per thousand square feet on a 7/16" basis would change annual pre-tax profits by approximately $3 million.
We are exposed to market risk associated with changes in interest rates on our variable rate long-term debt. As of September 30, 2020, we had no outstanding amounts borrowed under our Amended Credit Facility. We do not currently have any derivative or hedging arrangements, or other known exposures, to changes in interest rates.
We historically have not entered into material commodity futures and swaps, although we may do so in the future.
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ITEM 4.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of September 30, 2020, our Chief Executive Officer and Chief Financial Officer have carried out, with the participation of the Company's Disclosure Practices Committee and the Company's management, an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2020, LP’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
KEY PERFORMANCE INDICATORS
We consider the following items to be key performance indicators because LP’s management uses these metrics to evaluate our business and trends, measure our performance, and make strategic decisions and believes that the key performance indicators presented provide additional perspective and insights when analyzing the core operating performance of LP. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the U.S. GAAP financial measures presented herein. These measures may not be comparable to similarly-titled performance indicators used by other companies.
We monitor housing starts, which is a leading external indicator of residential construction in the United States that correlates with the demand for many of our products. We believe that this is a useful measure for evaluating our results and that providing this measure should allow interested persons to more readily compare our sales volume for past and future periods to an external indicator of product demand. Other companies may present housing start data differently and therefore, as presented by us, our housing start data may not be comparable to similarly-titled indicators reported by other companies.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Housing starts1: | |||||||||||
Single-Family | 284 | 246 | 716 | 674 | |||||||
Multi-Family | 104 | 103 | 300 | 290 | |||||||
388 | 349 | 1,016 | 964 | ||||||||
1 Actual U.S. Housing starts data reported by U.S. Census Bureau as published through October 20, 2020. |
We monitor sales volumes for our products in our Siding, OSB and EWP segments, which we define as the number of units of our products sold within the applicable period. Evaluating sales volume by product type helps us identify and address changes in product demand, broad market factors that may affect our performance, and opportunities for future growth. It should be noted that other companies may present sales volumes differently and, therefore, as presented by us, sales volumes may not be comparable to similarly-titled measures reported by other companies. We believe that sales volumes can be a useful measure for evaluating and understanding our business.
The following table sets forth North American sales volumes for the three months ended September 30, 2020, and 2019:
Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | ||||||||||||||||
Sales Volume | Siding | OSB | EWP | Total | Siding | OSB | EWP | Total | |||||||||
SmartSide® siding (MMSF) | 395 | — | — | 395 | 332 | — | — | 332 | |||||||||
SmartSide® fiber siding (MMSF) | 22 | — | — | 22 | 56 | — | — | 56 | |||||||||
OSB - commodity (MMSF) | — | 531 | — | 531 | 4 | 565 | — | 569 | |||||||||
OSB - Structural Solutions (MMSF) | — | 406 | — | 406 | 1 | 419 | 5 | 425 | |||||||||
I-Joist (MMLF) | — | — | 28 | 28 | — | — | 28 | 28 | |||||||||
LVL (MCF) | — | — | 1,791 | 1,791 | — | — | 1,870 | 1,870 | |||||||||
LSL (MCF) | — | — | 850 | 850 | — | — | 751 | 751 | |||||||||
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The following table set forth North American sales volume for the nine months ended September 30, 2020, and 2019:
Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | ||||||||||||||||
Sales Volume | Siding | OSB | EWP | Total | Siding | OSB | EWP | Total | |||||||||
SmartSide® siding (MMSF) | 1,005 | — | — | 1,005 | 926 | — | — | 926 | |||||||||
SmartSide® fiber siding (MMSF) | 83 | — | — | 83 | 161 | — | — | 161 | |||||||||
OSB - commodity (MMSF) | — | 1,533 | — | 1,533 | 47 | 1,685 | 17 | 1,749 | |||||||||
OSB - Structural Solutions (MMSF) | — | 1,142 | — | 1,142 | 4 | 1,229 | 16 | 1,249 | |||||||||
I-Joist (MMLF) | — | — | 78 | 78 | — | — | 73 | 73 | |||||||||
LVL (MCF) | — | — | 5,084 | 5,084 | — | — | 5,351 | 5,351 | |||||||||
LSL (MCF) | — | — | 2,122 | 2,122 | — | — | 2,418 | 2,418 | |||||||||
We measure OEE of each of our mills to track improvements in the utilization and productivity of our manufacturing assets. OEE is a composite metric that considers asset uptime (adjusted for capital project downtime and similar events), production rates, and finished product quality. It should be noted that other companies may present OEE differently and, therefore, as presented by us, OEE may not be comparable to similarly-titled measures reported by other companies. We believe that when used in conjunction with other metrics, OEE can be a useful measure for evaluating our ability to generate profits, and that providing this measure should allow interested persons to more readily monitor operational improvements. OEE for the three and nine months ended September 30, 2020 and 2019, respectively, for each of our segments is listed below:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Siding | 88 | % | 85 | % | 88 | % | 86 | % | |||
OSB | 87 | % | 86 | % | 88 | % | 86 | % | |||
EWP | 90 | % | 78 | % | 89 | % | 80 | % | |||
South America | 75 | % | 75 | % | 72 | % | 76 | % | |||
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PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
The description of certain legal and environmental matters involving LP set forth in Item 1 of this quarterly report on Form 10-Q under “Note 12” to the Notes to the Condensed Consolidated Financial Statements contained herein is incorporated herein by reference.
Item 1A. | Risk Factors. |
You should be aware that the occurrence of any of the events described in this Risk Factors section and elsewhere in this quarterly report on Form 10-Q or in any other of our filings with the SEC could have a material adverse effect on our business, financial position, results of operations and cash flows. In evaluating us, you should consider carefully, among other things, the risks described below, and the matters described in “About Forward-Looking Statements.” The following risk factors amend, restate, and supplement the risk factors discussed in the Company’s 2019 Annual Report on Form 10-K.
Our business, financial condition, and results of operations may be adversely affected by global pandemics, including the recent COVID-19 pandemic. Our business, financial condition and results of operations have been and may be adversely affected if the COVID-19 pandemic continues to interfere with the ability of our employees, suppliers, customers, distributors, financing sources or others to conduct business or continues to negatively affects consumer confidence or the global economy.
In December 2019, COVID-19 was reported to have surfaced in Wuhan, China. In January 2020, COVID-19 spread to other countries, including the United States. In March 2020, WHO characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures, the United States declared a national emergency concerning the pandemic, and multiple states and municipalities have declared public health emergencies. Along with these declarations, there have been extraordinary and wide-ranging actions taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including quarantines, and “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Although many of the restrictions have eased across the country, the pandemic has yet to show substantial signs of decline in the United States and some areas are re-imposing closures and other restrictions due to increasing rates of COVID-19 cases. As a result, the COVID-19 pandemic is significantly affecting, and is likely to continue to affect, overall economic conditions in the United States.
The pandemic is a widespread health crisis that has affected large segments of the global economy, resulting in a rapidly changing market and economic activities. The pandemic and any preventative or protective actions that governments or we may take with respect to COVID-19 may have a material adverse effect on our business or our supply of raw materials, production, distribution channels, and customers, including business shutdowns or disruptions for an indefinite period of time, reduced operations, restrictions on manufacturing or shipping products or reduced consumer demand. Any additional financial impact cannot be estimated reasonably at this time but may materially affect our business, financial condition, or results of operations. The extent to which COVID-19 continues to affect our results will depend on future developments, which are highly uncertain and cannot be predicted.
We are uncertain of the potential full magnitude, duration, and timing of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, which has previously included, and may in the future include, among other things, significant volatility in financial markets and a sharp decrease in the value of equity securities, including our common stock.
Our business primarily relies on North American new home construction and repair, which are impacted by risks associated with fluctuations in the housing market. Downward changes in the general economy, the housing market or other business conditions could adversely affect our results of operations, cash flows, and financial condition. The housing market is sensitive to changes in economic conditions and other factors, such as the level of employment,
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access to labor, consumer confidence, consumer income, availability of financing, interest rate, and inflation levels, and growth of the gross domestic product.
Adverse changes in any of these conditions generally, or in any of the markets where we operate, could decrease demand for our products and could adversely impact our businesses by: causing consumers to delay or decrease homeownership; making consumers more price-conscious resulting in a shift in demand to smaller homes; making consumers more reluctant to make investments in their existing homes; or making it more challenging to secure loans for major renovations or new home construction. Although the U.S. new home construction market is improving, demand for new homes is still recovering after the 2007-2009 U.S. economic recession and continues to remain below average historical levels. While we believe long-term housing market fundamentals remain positive, including low interest rates and a relatively constrained supply of homes available for sale, we expect that overall economic conditions in the United States will be negatively impacted by the spread of COVID-19, as discussed above, though the magnitude and duration of any such impact are unknown and highly uncertain. If conditions in the overall housing market or in a specific market or submarket worsen in the future beyond our current expectations, such changes could have a material adverse effect on our financial position, results of operations, and cash flows. Additionally, higher interest rates, high levels of unemployment, restrictive lending practices, heightened regulation, and increased foreclosures could have a material adverse effect on our financial position, results of operations, and cash flows.
We have a high degree of product concentration in OSB. OSB accounted for about 39%, 54%, and 54% of our North American sales in 2019, 2018, and 2017, respectively, and we expect OSB sales to continue to account for a substantial portion of our revenues and profits in the future. The concentration of our business in the OSB market further increases our sensitivity to commodity pricing and price volatility. Historical prices for our commodity products have been volatile, and we, like other participants in the building products industry, have limited influence over the timing and extent of price changes for our products. Commodity product pricing is significantly affected by the relationship between supply and demand in the building products industry. Product supply is influenced primarily by fluctuations in available manufacturing capacity. Demand is affected by the state of the economy in general and a variety of other factors, including the level of new residential construction activity and home repair and remodeling activity, changes in the availability and cost of mortgage financing. In this competitive environment, with so many variables for which we do not control, we cannot guarantee that pricing for our OSB products will not decline from current levels. The continued development of builder and consumer preference for our OSB products (commodity and Structural Solutions) over competitive products is critical to sustaining and expanding demand for our products. Therefore, a failure to maintain and increase builder and consumer acceptance of our OSB products could have a material adverse effect on our financial position, liquidity, results of operations, and cash flows.
Intense competition in the building products industry could prevent us from increasing or sustaining our net sales and profitability. The markets for our products are highly competitive. Our competitors range from very large, fully integrated forest and building products firms to smaller firms that may manufacture only one or a few types of products. Many of our competitors may have greater financial and other resources, greater product diversity, and better access to raw materials than we do, and certain of the mills operated by our competitors may be lower-cost producers than the mills operated by us. Increased competition in any of the markets in which we compete would likely cause pricing pressures in those markets. Any of these factors could have a material adverse effect on our financial position, results of operations, and cash flows.
Our reliance on third-party wholesale distribution channels could impact our business. We offer our products directly and through a variety of third-party wholesale distributors and dealers. Adverse changes in the financial or business condition of these wholesale distributors and dealers or our customers, including as a result of the impacts arising from the COVID-19 pandemic, could subject us to losses and affect our ability to bring our products to market. One or more of our customers may experience financial difficulty, file for bankruptcy protection or go out of business as a result of the current events surrounding the COVID-19 pandemic, which could result in an increase in customer financial difficulties that affect us. The direct impact on us could include reduced revenues and write-offs of accounts receivable, and negatively impact our operating cash flow. While we currently cannot estimate what those effects will be, if they are severe, the indirect impact could include impairments of intangible assets and reduced liquidity, among others. Any such adverse changes could have a material adverse effect on our business, financial position, liquidity, results of operations, and cash flows. Further, our ability to effectively manage inventory levels at wholesale distributor locations
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may be impaired under such arrangements, which could increase expenses associated with excess and obsolete inventory and negatively impact cash flows.
Our results of operations may be adversely affected by potential shortages of raw materials and increases in raw material costs. The most significant raw material used in our operations is wood fiber. Wood fiber is subject to commodity pricing, which fluctuates based on market factors over which we have no control. In addition, the cost of various types of wood fiber that we purchase in the market has at times fluctuated greatly because of governmental, economic or industry conditions, and may be affected by increased demand resulting from initiatives to increase the use of biomass materials in the production of heat, power, bio-based products, and biofuels. Wood fiber supply could also be influenced by natural events, such as forest fires, severe weather conditions, insect epidemics, and other natural disasters, which may increase wood fiber costs, restrict access to wood fiber, or force production curtailments.
In addition to wood fiber, we also use a significant quantity of various resins in our manufacturing processes. Resin product costs are influenced by changes in the prices or availability of raw materials used to produce resins, primarily petroleum products, as well as demand for and availability of resin products. The selling prices of our products have not always increased in response to raw material cost increases. We are unable to determine to what extent, if any, we will be able to pass any future raw material cost increases through to our customers through product price increases. Our inability to pass increased costs through to our customers could have a material adverse effect on our financial condition, results of operations, and cash flows. In addition, supply disruptions in resin may impact our ability to produce our products or may cause production costs to increase.
Many of the Canadian forestlands from which we obtain wood fiber also are subject to the constitutionally protected treaty or common-law rights of the aboriginal peoples of Canada. Most of British Columbia is not covered by treaties and, as a result, the claims of British Columbia’s aboriginal peoples relating to forest resources are largely unresolved, although many aboriginal groups are actively engaged in treaty discussions with the governments of British Columbia and Canada. Final or interim resolution of claims brought by aboriginal groups are expected to result in additional restrictions on the sale or harvest of timber and may increase operating costs and affect timber supply and prices in Canada
We mostly depend on third parties for transportation services and increases in costs, and the availability of transportation could materially and adversely affect our business and operations. Our business depends on the transportation of many products, both domestically and internationally. We rely primarily on third parties for transportation of the products we manufacture and/or distribute as well as for delivery of our raw materials. In particular, a significant portion of the goods we manufacture and raw materials we use are transported by railroad or trucks, which are highly regulated. If any of our third-party transportation providers were to fail to deliver the goods we manufacture or distribute in a timely manner, including as a result of the impacts arising from the COVID-19 pandemic, we may be unable to sell those products at full value or at all. Similarly, if any of these providers were to fail to deliver raw materials to us in a timely manner, we may be unable to manufacture our products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with us, we may be unable to replace them at a reasonable cost. Any failure of a third-party transportation provider to deliver raw materials or finished products in a timely manner could harm our reputation, negatively affect our customer relationships and have a material adverse effect on our financial condition and results of operations. In addition, an increase in transportation rates or fuel surcharges could materially and adversely affect our sales and profitability.
We may experience difficulties in the launch or production ramp-up of new products, which could adversely affect our business. As we ramp up manufacturing processes for newly introduced products, we may experience difficulties, including manufacturing disruptions, delays or other complications, which could adversely impact our ability to serve our customers, our reputation, our costs of production and, ultimately, our financial position, results of operations and cash flows.
Unplanned events may interrupt our manufacturing operations, which may adversely affect our business. The manufacturing of our products is subject to unplanned events such as explosions, fires, inclement weather, natural disasters, accidents, equipment failures, labor disruptions, transportation interruptions, supply interruptions, public health issues (including pandemics and quarantines), riots, civil insurrection or social unrest, looting, protests, strikes
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and street demonstrations. Operational interruptions could significantly curtail the production capacity of a facility for a period of time. We have redundant capacity and capability to produce many of our products within our manufacturing platform to mitigate our business risk from such interruptions, but major or prolonged interruptions could compromise our ability to meet our customers' needs. Delayed delivery of our products to customers who require on-time delivery from us may cause customers to purchase alternative products at a higher cost, reschedule their own production, or incur other incremental costs. Customers may be able to pursue financial claims against us for their incremental costs, and we may incur costs to correct such problems in addition to any liability resulting from such claims. Interruptions may also harm our reputation among actual and potential customers, potentially resulting in a loss of business. To the extent these losses are not covered by insurance, our financial position, results of operations, and cash flows could be adversely affected by such events.
We are subject to significant environmental regulation and environmental compliance expenditures and liabilities. Our businesses are subject to many environmental laws and regulations, particularly with respect to discharges of pollutants and other emissions on or into the land, water and air, and the disposal and remediation of hazardous substances or other contaminants and the restoration and reforestation of timberlands. Compliance with these laws and regulations is a significant factor in our business. We have incurred and expect to continue to incur significant expenditures to comply with applicable environmental laws and regulations. Moreover, the environmental laws and regulations to which we are subject could become more stringent in the future, which could result in additional compliance costs or restrictions on our ability to manufacture our products or operate our business. Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment, or remedial actions.
Some environmental laws and regulations impose liability and responsibility on present and former owners, operators, or users of facilities and sites for contamination at such facilities and sites, without regard to causation or knowledge of contamination. In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities. Consequently, we cannot guarantee that existing or future circumstances or developments with respect to contamination will not require significant expenditures by us.
We are subject to various environmental, product liability, and other legal proceedings, matters, and claims. The outcome of these proceedings, matters, and claims, and the magnitude of related costs and liabilities are subject to uncertainties. We currently are, or from time to time in the future may be, involved in a number of environmental matters and legal proceedings, including legal proceedings involving antitrust, warranty or non-warranty product liability claims, negligence and other claims, including claims for wrongful death, personal injury and property damage alleged to have arisen out of the use by others of our or our predecessors’ products or the release by us or our predecessors of hazardous substances. The conduct of our business involves the use of hazardous substances and the generation of contaminants and pollutants. In addition, the end-users of many of our products are members of the general public. Environmental matters and other legal matters and proceedings, including class action settlements relating to certain of our products, have in the past caused and, in the future, may cause us to incur substantial costs. The actual or alleged existence of defects in any of our products could also subject us to significant product liability claims. We have established contingency reserves in our Consolidated Financial Statements with respect to the estimated costs of existing environmental matters and legal proceedings to the extent that our management has determined that such costs are both probable and reasonably estimable as to amount. However, such reserves are based upon various estimates and assumptions relating to future events and circumstances, all of which are subject to inherent uncertainties. We regularly monitor our estimated exposure to environmental and litigation loss contingencies and, as additional information becomes known, may change our estimates significantly. However, no estimate of the range of any such change can be made at this time. We may incur costs in respect of existing and future environmental matters and legal proceedings as to which no contingency reserves have been established. We cannot assure you that we will have sufficient resources available to satisfy the related costs and expenses associated with these matters and proceedings.
Warranty claims relating to our products and exceeding our warranty reserves could have a material adverse effect on our business. We have offered, and continue to offer, various warranties on our products. Although we maintain
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reserves for warranty-related claims and we have established and recorded product-related warranty reserves on our Consolidated Financial Statements, we cannot guarantee that warranty expense levels or the results of any warranty-related legal proceedings will not exceed our reserves. If our warranty reserves are significantly exceeded, the costs associated with such warranties could have a material adverse effect on our financial position, results of operations, and cash flows.
Because our intellectual property and other proprietary information may become publicly available, we are subject to the risk that competitors could copy our products or processes. Our success depends, in part, on the proprietary nature of our technology, including non-patentable intellectual property, such as our process technology. To the extent that a competitor can reproduce or otherwise capitalize on our technology, it may be difficult, expensive, or impossible for us to obtain adequate legal or equitable relief. Also, the laws of some foreign countries may not protect our intellectual property to the same extent as do the laws of the United States. In addition to patent protection of intellectual property rights, we consider elements of our product designs and processes to be proprietary and confidential and/or trade secrets. To safeguard our confidential information, we rely on employee, consultant, and vendor nondisclosure agreements and contractual provisions and a system of internal and technical safeguards to protect our proprietary information. However, any of our registered or unregistered intellectual property rights may be subject to challenge or possibly exploited by others in the industry, which could materially adversely affect our financial position, results of operations, cash flows, and competitive position.
We have not independently verified the results of third-party research or confirmed assumptions or judgments upon which it may be based, and the forecasted and other forward-looking information contained therein is subject to inherent uncertainties. We refer in our annual reports, quarterly reports and other documents that we file with the SEC to historical, forecasted and other forward-looking information published by sources such as Resource Information Systems, Inc. (RISI), Forest Economic Advisors, LLC (FEA), Random Lengths Publications, Inc. (Random Lengths) and the U.S. Census Bureau that we believe to be reliable. However, we have not independently verified this information and, with respect to the forecasted and forward-looking information, have not independently confirmed the assumptions and judgments upon which it is based. Forecasted and other forward-looking information is necessarily based on assumptions regarding future occurrences, events, conditions and circumstances and subjective judgments relating to various matters and is subject to inherent uncertainties. Actual results may differ materially from the results expressed or implied by, or based upon, such forecasted and forward-looking information.
Cybersecurity risks related to the technology used in our operations and other business processes, as well as security breaches of company, customer, employee, and vendor information, could adversely affect our business. We rely on various information technology systems to capture, process, store, and report data and interact with customers, vendors, and employees. Despite careful security and controls design, implementation, updating, and internal and independent third-party assessments, our information technology systems, and those of our third-party providers, could become subject to security breaches, cyber-attacks, employee misconduct, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Network, system, and data breaches could result in misappropriation of sensitive data or operational disruptions, including interruption to systems availability and denial of access to and misuse of applications required by our customers to conduct business with us. In addition, hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of the systems. Misuse of internal applications, theft of intellectual property, trade secrets, or other corporate assets, and inappropriate disclosure of confidential information could stem from such incidents. A breach in cybersecurity could result in manipulation and destruction of sensitive data, cause critical systems to malfunction, be damaged or shut down, and lead to disruption to our operations and production downtimes, potentially for lengthy periods of time. Theft of personal or other confidential data and sensitive proprietary information could also occur as a result of a breach in cybersecurity, exposing us to costs and liabilities associated with privacy and data security laws in the jurisdictions in which we operate. Furthermore, we face additional cybersecurity risks related to our employees working remotely as a result of the COVID-19 pandemic. While we have security measures in place that are designed to protect customer and other sensitive information and the integrity of our information technology systems and prevent data loss and other security breaches, our security measures or those of our third party service providers may not be sufficiently broad in scope to protect all relevant information, may not function as planned, or could be breached as a result of third-party action, employee or vendor error, malfeasance, or otherwise. Because the techniques used to obtain unauthorized access, disable
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or degrade service, or sabotage systems change frequently or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement sufficient control measures to defend against these techniques. Further, once a security incident is identified, we may be unable to remediate or otherwise respond to such incident in a timely manner. Additionally, a breach could expose us, our customers, our suppliers, and our employees to risks of misuse of such information. Such negative consequences of cyberattacks or security breaches could adversely affect our reputation, competitive position, business, or results of operations. The lost profits and increased costs related to cyber or other security threats or disruptions may not be fully insured against or indemnified by other means. A security failure could also impact our ability to operate our businesses effectively, adversely affect our reported financial results, impact our reputation, and expose us to potential liability or litigation. As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices remain a priority for us. We may be required to expend additional resources to continue to enhance our security measures to investigate and remediate any security vulnerabilities.
From time to time, we may implement new technology systems or replace and/or upgrade our current information technology systems. These upgrades or replacements may not improve our productivity to the levels anticipated and may subject us to inherent costs and risks associated with implementing, replacing and updating these systems, including potential disruption of our internal control structure, substantial capital expenditures, demands on management time and other risks of delays or difficulties in transitioning to new systems or of integrating new systems into other existing systems. Our inability to prevent information technology system disruptions or to mitigate the impact of such disruptions could have an adverse effect on us.
Because we have operations outside the United States and report our earnings in U.S. dollars, unfavorable fluctuations in currency values and exchange rates could have a material adverse effect on our results of operations. Because our reporting currency is the U.S. dollar, our non-U.S. operations face the additional risk of fluctuating currency values and exchange rates. Such operations may also face hard currency shortages and controls on currency exchange. Changes in the value of foreign currencies (principally Canadian dollars, Brazilian reals, and Chilean pesos) could have an adverse effect on our results of operations. We have, in the past, entered into foreign exchange contracts associated with certain of our indebtedness and may continue to enter into foreign exchange contracts associated with major equipment purchases to manage a portion of the foreign currency rate risk. We historically have not entered into currency rate hedges with respect to our exposure from operations, although we may do so in the future. There can be no assurance that fluctuation in foreign currencies and other foreign exchange risks will not have a material adverse effect on our financial position, results of operations or cash flows.
Covenants and events of default in our debt instruments could limit our ability to undertake certain types of transactions and adversely affect our liquidity. Our Amended Credit Facility and the indenture governing our 2024 Senior Notes contain a number of restrictive covenants that impose operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including, among others, restrictions on our ability to incur indebtedness, grant liens to secure indebtedness, engage in sale and leaseback transactions and merge or consolidate or sell all or substantially all of our assets.
In addition, restrictive covenants in our Amended Credit Facility require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we may be unable to meet them.
A breach of the covenants or restrictions under our Amended Credit Facility or under the indenture governing the 2024 Senior Notes could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt. A payment default or an acceleration following an event of default under our Amended Credit Facility or our indenture for our 2024 Senior Notes could trigger an event of default under the other indebtedness obligation, as well as any other debt to which a cross-acceleration or cross-default provision applies, which could result in the principal of and the accrued and unpaid interest on all such debt becoming due and payable. In addition, an event of default under our Amended Credit Facility could permit the lenders under our Amended Credit Facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay any amounts due and payable under our Amended Credit Facility, those lenders could proceed against the collateral granted to them to
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secure that indebtedness. In the event our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.
As a result of these restrictions, we may be:
• | limited in how we conduct our business and grow in accordance with our strategy; |
• | unable to raise additional debt or equity financing to operate during general economic or business downturns; or |
• | unable to compete effectively or to take advantage of new business opportunities. |
In addition, our financial results, our level of indebtedness, and our credit ratings could adversely affect the availability and terms of any additional or replacement financing.
More detailed descriptions of our Amended Credit Facility and the indenture governing our 2024 Senior Notes are included in filings made by us with the SEC, along with the documents themselves, which provide the full text of these covenants.
Our defined benefit plan funding requirements or plan settlement expense could impact our financial results and cash flow. We have several pension plans in the U.S. and Canada, covering many of the Company’s employees. Benefit accruals under our defined benefit pension plan in the U.S. were frozen as of January 1, 2010. Significant changes in interest rates, decreases in the fair value of plan assets, and timing and amount of benefit payments could affect the funded status of our plans and could increase future funding requirements of the plans. A significant increase in future funding requirements could have a negative impact on our financial position, results of operations, and cash flows. These plans allow eligible retiring employees to receive lump-sum distributions of benefits earned. Under applicable accounting rules, if annual lump sum distributions exceed an actuarially determined threshold of the total of the annual service and interest costs, we would be required to recognize, in the current period of operations, a settlement expense of a portion of the unrecognized actuarial loss, which could have a negative impact on our results of operations.
In addition to the risks discussed above, we are subject to a variety of other risks as a publicly traded U.S. manufacturing company. As a publicly-traded U.S. manufacturing company, we are subject to a variety of other risks, each of which could adversely affect our financial position, results of operations or cash flows, or the price of our common stock. These risks include but are not limited to:
• | the effects of global economic uncertainty or recession, including the impact of the COVID-19 pandemic and the responses of governmental authorities thereto; |
• | the ability to attract and retain key management and other personnel and develop effective succession plans; |
• | pursuing growth through acquisitions, including the ability to identify acceptable acquisition candidates, finance and consummate acquisitions on favorable terms and successfully integrate acquired assets or businesses; |
• | compliance with a wide variety of health and safety laws and regulations and changes to such laws and regulations; |
• | the exertion of influence over us, individually or collectively, by a few entities with concentrated ownership of our stock; |
• | taxation by multiple jurisdictions and the impact of such taxation on the effective tax rate and the amount of taxes paid; |
• | changes in tax laws and regulations; |
• | new or modified legislation related to health care; |
• | compliance with Section 404 of the Sarbanes-Oxley Act of 2002, including the potential impact of compliance failures; and |
• | failure to meet the expectations of investors, including as a result of factors beyond the control of an individual company. |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On February 6, 2020, LP’s Board of Directors authorized LP to repurchase up to $200 million of shares of LP’s common stock (the “Share Repurchase Program”). LP may initiate, discontinue or resume purchases of its common stock under this authorization in the open market, in privately negotiated transactions or otherwise at any time or from time to time without prior notice.
The following shares of our common stock were repurchased under this authorization during the quarter ended September 30, 2020:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Purchase Plans or Programs1 | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (In millions) | |||||||||
July 1, 2020 - July 31, 2020 | — | $ | — | — | $ | — | |||||||
August 1, 2020 - August 31, 2020 | — | $ | — | — | $ | — | |||||||
September 1, 2020 - September 30, 2020 | 925,862 | $ | 30.91 | 925,862 | $ | 171 | |||||||
Total for Third Quarter 2020 | 925,862 | $ | 171 | ||||||||||
1 On February 11, 2020, we announced that our Board of Directors authorized the Share Repurchase Program. As of September 30, 2020, $29 million has been used to repurchase our common stock under the Share Repurchase Program.
Additional repurchases of common stock may be made through open market, block and privately-negotiated transactions, including Rule 10b5-1 plans, at times and in such amounts as management deems appropriate, subject to market and business conditions, regulatory requirements and other factors.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
None.
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Item 6. | Exhibits. |
31.1 | |
31.2 | |
32.1 | |
101.INS | XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.* |
101.SCH | XBRL Taxonomy Extension Schema Document.* |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.* |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document.* |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.* |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document.* |
104 | Cover Page Interactive Data File (embedded with Inline XBRL document and contained in Exhibit 101)* |
*Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
LOUISIANA-PACIFIC CORPORATION | |||
Date: | November 4, 2020 | BY: | /S/ W. BRADLEY SOUTHERN |
W. Bradley Southern | |||
Chief Executive Officer | |||
Date: | November 4, 2020 | BY: | /S/ ALAN J.M. HAUGHIE |
Alan J.M. Haughie | |||
Executive Vice President and | |||
Chief Financial Officer | |||