LOUISIANA-PACIFIC CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Income Dollar amounts in millions, except per share amounts (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net sales $ 1,130 $ 1,168 $ 2,297 $ 2,062 Cost of sales ( 611 ) ( 483 ) ( 1,158 ) ( 910 ) Gross profit 518 684 1,139 1,152 Selling, general, and administrative expenses ( 67 ) ( 53 ) ( 129 ) ( 97 ) Other operating credits and charges, net 11 3 10 3 Income from operations 462 634 1,019 1,058 Interest expense ( 3 ) ( 4 ) ( 6 ) ( 9 ) Investment income 2 — 3 1 Other non-operating items 2 ( 3 ) ( 8 ) ( 11 ) Income before income taxes 463 629 1,007 1,040 Provision for income taxes ( 116 ) ( 144 ) ( 240 ) ( 239 ) Equity in unconsolidated affiliate 1 1 2 2 Income from continuing operations 348 486 769 802 Income from discontinued operations, net of income taxes 37 11 99 14 Net income $ 385 $ 497 $ 868 $ 817 Net loss attributed to noncontrolling interest — — 1 1 Net income attributed to LP $ 384 $ 498 $ 868 $ 818 Net income attributed to LP per share of common stock: Income per share continuing operations - basic $ 4.30 $ 4.82 $ 9.25 $ 7.76 Income per share discontinued operations - basic 0.46 0.11 1.18 0.14 Net income per share - basic $ 4.76 $ 4.93 $ 10.43 $ 7.90 Income per share continuing operations - diluted $ 4.28 $ 4.79 $ 9.19 $ 7.71 Income per share discontinued operations - diluted 0.45 0.11 1.18 0.14 Net income per share - diluted $ 4.73 $ 4.90 $ 10.36 $ 7.85 Average shares of common stock used to compute net income per share: Basic 81 101 83 103 Diluted 81 102 84 104 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. 4 Condensed Consolidated Statements of Comprehensive Income Dollar amounts in millions (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income $ 385 $ 497 $ 868 $ 817 Other comprehensive income, net of tax Foreign currency translation adjustments ( 32 ) 7 ( 9 ) — Changes in defined benefit pension plans 1 1 2 2 Other comprehensive income (loss), net of tax ( 31 ) 8 ( 7 ) 2 Comprehensive income 354 505 861 819 Comprehensive loss associated with noncontrolling interest — — 1 1 Comprehensive income attributed to LP $ 354 $ 506 $ 862 $ 819 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. 5 Condensed Consolidated Balance Sheets Dollar amounts in millions (Unaudited) June 30, 2022 December 31, 2021 ASSETS Cash and cash equivalents $ 503 $ 358 Receivables, net of allowance for doubtful accounts of $ 1 million as of June 30, 2022, and December 31, 2021 219 169 Inventories 309 278 Prepaid expenses and other current assets 28 17 Current assets held for sale 148 68 Total current assets 1,208 890 Timber and timberlands 40 42 Property, plant, and equipment, net 1,166 1,039 Operating lease assets 46 50 Goodwill and other intangible assets 37 39 Investments in and advances to affiliates 7 7 Restricted cash 13 13 Other assets 25 25 Deferred tax asset 4 2 Long-term assets held for sale — 87 Total assets $ 2,547 $ 2,194 LIABILITIES AND EQUITY Accounts payable and accrued liabilities $ 315 $ 305 Income tax payable 80 13 Current liabilities held for sale 69 34 Total current liabilities 464 351 Long-term debt 346 346 Deferred income taxes 114 86 Non-current operating lease liabilities 44 44 Contingency reserves, excluding current portion 26 24 Other long-term liabilities 64 63 Long-term liabilities held for sale — 42 Total liabilities 1,059 955 Redeemable noncontrolling interest 3 4 Stockholders’ equity: Common stock, $ 1 par value, 200,000,000 shares authorized; 93,546,332 and 77,241,859 shares issued and outstanding, respectively, as of June 30, 2022; and 102,415,883 and 85,636,154 shares issued and outstanding, respectively, as of December 31, 2021 94 102 Additional paid-in capital 457 458 Retained earnings 1,505 1,239 Treasury stock, 16,304,473 shares and 16,779,729 shares, at cost as of June 30, 2022, and December 31, 2021, respectively ( 390 ) ( 390 ) Accumulated comprehensive loss ( 181 ) ( 174 ) Total stockholders’ equity 1,484 1,235 Total liabilities and stockholders’ equity $ 2,547 $ 2,194 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. 6 Condensed Consolidated Statements of Cash Flows Dollar amounts in millions (Unaudited) Six Months Ended June 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 868 $ 817 Adjustments to net income: Depreciation and amortization 65 58 Gain on sale of joint ventures ( 39 ) — Deferred taxes 27 7 Loss on early debt extinguishment — 11 Other adjustments, net 12 10 Changes in assets and liabilities (net of acquisitions and divestitures): Receivables ( 66 ) ( 124 ) Prepaid expenses and other current assets ( 11 ) ( 6 ) Inventories ( 43 ) ( 53 ) Accounts payable and accrued liabilities 31 37 Income taxes payable, net of receivables 65 16 Net cash provided by operating activities 908 772 CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant, and equipment additions ( 196 ) ( 65 ) Proceeds from business divestiture 59 — Other investing activities 2 3 Net cash used in investing activities ( 135 ) ( 63 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing of long-term debt — 350 Repayment of long-term debt, including redemption premium — ( 359 ) Payment of cash dividends ( 37 ) ( 33 ) Purchase of stock ( 575 ) ( 588 ) Other financing activities ( 15 ) ( 12 ) Net cash used in financing activities ( 626 ) ( 642 ) EFFECT OF EXCHANGE RATE ON CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 2 ) — Net increase in cash, cash equivalents, and restricted cash 145 68 Cash, cash equivalents, and restricted cash at beginning of period 371 535 Cash, cash equivalents, and restricted cash at end of period $ 516 $ 603 Supplemental cash flow information: Cash paid for income taxes, net of cash received $ 171 $ 221 Cash paid for interest, net of cash received $ 7 $ 9 Unpaid capital expenditures $ 43 $ 26 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. 7 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, 2021 102 $ 102 17 $ ( 390 ) $ 458 $ 1,239 $ ( 174 ) $ 1,235 Net income attributed to LP — — — — — 484 — 484 Dividends paid ($ 0.22 per share) — — — — — ( 19 ) — ( 19 ) Issuance of shares under stock plans — — ( 1 ) 14 ( 14 ) — — — Taxes paid related to net settlement of stock-based awards — — — ( 15 ) — — — ( 15 ) Purchase of stock ( 2 ) ( 2 ) — — — ( 102 ) — ( 104 ) Compensation expense associated with stock-based compensation — — — — 7 — — 7 Other comprehensive income — — — — — — 24 24 Balance, March 31, 2022 101 $ 101 16 $ ( 391 ) $ 451 $ 1,601 $ ( 149 ) $ 1,613 Net income attributed to LP — — — — — 384 — 384 Dividends paid ($ 0.22 per share) — — — — — ( 18 ) — ( 18 ) Issuance of shares under stock plans — — — 2 — — — 2 Taxes paid related to net settlement of stock-based awards — — — ( 1 ) — — — ( 1 ) Purchase of stock ( 7 ) ( 7 ) — — — ( 463 ) — ( 471 ) Compensation expense associated with stock-based compensation — — — — 7 — — 7 Other comprehensive loss — — — — — — ( 31 ) ( 31 ) Balance, June 30, 2022 94 $ 94 16 $ ( 390 ) $ 457 $ 1,505 $ ( 181 ) $ 1,484 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. 8 Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings Accumulated Comprehensive Loss Total Stockholders' Equity Shares Amount Shares Amount Balance, December 31, 2020 124 $ 124 17 $ ( 397 ) $ 452 $ 1,206 $ ( 151 ) $ 1,234 Net income attributed to LP — — — — — 320 — 320 Dividends paid ($ 0.16 per share) — — — — — ( 17 ) — ( 17 ) Issuance of shares under stock plans — — — 11 ( 11 ) — — — Taxes paid related to net settlement of stock-based awards — — — ( 6 ) — — — ( 6 ) Purchase of stock ( 2 ) ( 2 ) — — — ( 120 ) — ( 122 ) Compensation expense associated with stock-based compensation — — — — 1 — — 1 Other comprehensive loss — — — — — — ( 6 ) ( 6 ) Balance, March 31, 2021 121 $ 121 17 $ ( 393 ) $ 443 $ 1,390 $ ( 157 ) $ 1,404 Net income attributed to LP — — — — — 498 — 498 Dividends paid ($ 0.16 per share) — — — — — ( 16 ) — ( 16 ) Issuance of shares under stock plans — — — 2 ( 1 ) — — 1 Purchase of stock ( 7 ) ( 7 ) — — — ( 458 ) — ( 465 ) Compensation expense associated with stock-based compensation — — — — 4 — — 4 Other comprehensive income — — — — — — 8 8 Balance, June 30, 2021 114 $ 114 17 $ ( 390 ) $ 446 $ 1,413 $ ( 149 ) $ 1,433 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. 9 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 are a leading provider of high-performance building solutions that meet the demands of builders, remodelers, and homeowners worldwide. Serving the new home construction, repair and remodeling, and outdoor structures markets, we have leveraged our expertise to become an industry leader known for innovation, quality, and reliability. The Company operates 22 plants in our continuing operations across the U.S., Canada, Chile, and Brazil through foreign subsidiaries, an d it operates facilities through 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. In June 2022, LP and one of its wholly-owned subsidiaries entered into an asset purchase agreement with Pacific Woodtech Corporation, a Washington corporation, and Pacific Woodtech Canada Holdings Limited, a British Columbia limited company (collectively, the Purchaser). Pursuant to the terms and conditions of the asset purchase agreement, LP agreed to sell to the Purchaser the assets related to its Engineered Wood Products (EWP) segment in exchange for the Purchaser’s payment to the Company of $ 210 million in cash, subject to certain purchase price adjustments, and the Purchaser’s assumption of certain liabilities of the EWP segment. On August 1, 2022, the Company completed the sale of the EWP assets to the Purchaser. Upon closing, the Company entered into a transition services agreement with the Purchaser, pursuant to which the Company agreed to support the various activities of the EWP segment for a period not to exceed eight months . As of June 30, 2022, we have classified the related assets and liabilities associated with the EWP segment as held for sale in our Condensed Consolidated Balance Sheets. The results of our EWP segment have been presented as discontinued operations in our Condensed Consolidated Statements of Income for all periods presented. See Note 7 –Discontinued Operations for additional information. 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 related Notes should be read in conjunction with our annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 22, 2022 (2021 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. NOTE 2. REVENUE 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. As noted in the segment reporting information in Note 17 below, our reportable segments are Siding, Oriented Strand Board (OSB), and South America (dollar amounts in millions). 10 Three Months Ended June 30, 2022 By product type and family: Siding OSB South America Other Inter-segment Total Value-add Siding Solutions $ 356 $ — $ 6 $ — $ — $ 362 OSB - Structural Solutions — 384 64 — ( 1 ) 448 356 384 70 — ( 1 ) 810 Commodity OSB - commodity — 287 — — — 287 Other Other products 1 2 — 30 — 33 $ 358 $ 673 $ 70 $ 30 $ ( 1 ) $ 1,130 Three Months Ended June 30, 2021 By product type and family: Siding OSB South America Other Inter-segment Total Value-add Siding Solutions $ 288 $ — $ 10 $ — $ — $ 298 OSB - Structural Solutions — 350 63 — — 414 288 350 74 — — 712 Commodity OSB - commodity — 425 — — — 425 Other Other products 3 2 — 26 — 31 $ 291 $ 778 $ 74 $ 26 $ — $ 1,168 11 Six Months Ended June 30, 2022 By product type and family: Siding OSB South America Other Inter-segment Total Value-add Siding Solutions $ 686 $ — $ 12 $ — $ — $ 698 OSB - Structural Solutions — 791 123 — ( 2 ) 913 686 791 135 — ( 2 ) 1,611 Commodity OSB - commodity — 621 — — — 621 Other Other products 3 5 2 55 — 66 $ 689 $ 1,417 $ 137 $ 55 $ ( 2 ) $ 2,297 Six Months Ended June 30, 2021 By product type and family: Siding OSB South America Other Inter-segment Total Value-add Siding Solutions $ 570 $ — $ 20 $ — $ — $ 589 OSB - Structural Solutions — 605 104 — — 709 570 605 124 — — 1,298 Commodity OSB - commodity — 707 — — — 707 Other Other products 6 5 3 43 ( 1 ) 57 $ 576 $ 1,317 $ 126 $ 43 $ ( 1 ) $ 2,062 Revenue is recognized when obligations under the terms of a contract (i.e. , purchase orders) with our customers are satisfied; generally, this occurs with the transfer of control of our products at a point in time. 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. Our businesses routinely incur customer program costs to obtain favorable product placement, promote sales of products, and 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 from 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. 12 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 (dollar amounts in millions, except per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Income from continuing operations $ 348 $ 486 $ 769 $ 802 Net loss attributed to noncontrolling interest — — 1 1 Income from continuing operations attributed to LP 348 486 770 803 Income for discontinued operations, net of income taxes 37 11 99 14 Net income attributed to LP $ 384 $ 498 $ 868 $ 818 Weighted average common shares outstanding - basic 81 101 83 103 Dilutive effect of employee stock plans — 1 1 1 Shares used for diluted earnings per share 81 102 84 104 Net income attributed to LP per share - basic: Continuing operations $ 4.30 $ 4.82 $ 9.25 $ 7.76 Discontinued operations 0.46 0.11 1.18 0.14 Net income attributed to LP per share - basic $ 4.76 $ 4.93 $ 10.43 $ 7.90 Net income attributed to LP per share – diluted: Continuing operations $ 4.28 $ 4.79 $ 9.19 $ 7.71 Discontinued operations 0.45 0.11 1.18 0.14 Net income attributed to LP per share - diluted $ 4.73 $ 4.90 $ 10.36 $ 7.85 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. 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. 13 The fair value of the 3.625 % Senior Notes due in 2029 (2029 Senior Notes) was estimated to be $ 279 million and $ 358 million as of June 30, 2022, and December 31, 2021, respectively, based on market quotations. The 2029 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 (defined below) as of June 30, 2022. 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. NOTE 5. RECEIVABLES Receivables consisted of the following (dollar amounts in millions): June 30, 2022 December 31, 2021 Trade receivables $ 199 $ 156 Income tax receivable 4 1 Other receivables 18 13 Allowance for doubtful accounts ( 1 ) ( 1 ) Total $ 219 $ 169 Trade receivables are primarily generated by sales of our products to our wholesale and retail customers. Other receivables as of June 30, 2022, and December 31, 2021, primarily consist of sales tax receivables, vendor rebates, 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 (work in process is not material and is included in Semi-finished inventory) are as follows (dollar amounts in millions): June 30, 2022 December 31, 2021 Logs $ 47 $ 50 Other raw materials 81 57 Semi-finished inventory 26 20 Finished products 157 150 Total $ 309 $ 278 NOTE 7. DISCONTINUED OPERATIONS Engineered Wood Products (EWP) In June 2022, LP and one of its wholly-owned subsidiaries entered into an asset purchase agreement with the Purchaser. Pursuant to the terms and conditions of the asset purchase agreement, the Company agreed to sell to the Purchaser the assets related to the EWP segment in exchange for the Purchaser’s payment to the Company of $ 210 million in cash, subject to certain purchase price adjustments, and the Purchaser’s assumption of certain liabilities of the EWP segment. On August 1, 2022, the Company completed the sale of the EWP assets to the Purchaser. As a result of the sale, the Company received $ 210 million, subject to post-closing adjustments, and we anticipate recognizing a pre-tax gain on the sale of between $ 120 million to $ 125 million in the third quarter. Upon closing, the Company entered into a transition services agreement with the Purchaser, pursuant to which the Company agreed to support the various activities of the EWP segment for a period not to exceed eight months . 14 The Company has classified the results of its EWP segment as discontinued operations in its Condensed Consolidated Statements of Income for all periods presented. As of June 30, 2022, and December 31, 2021, we have classified the related assets and liabilities associated with our EWP segment as discontinued operations held for sale in our Condensed Consolidated Balance Sheets. EWP Joint Ventures In March 2022, we sold our 50 % equity interest in two joint ventures that produce I-joists to Resolute Forest Products Inc. (Resolute) for $ 59 million. The total net carrying value of our equity method investment at the date of sale was $ 19 million, and we recognized a gain associated with the sale of $ 39 million within Income from discontinued operations in the Condensed Consolidated Statements of Income. The following table presents the financial results of the EWP segment (in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net sales $ 218 $ 158 $ 388 $ 280 Cost of sales ( 171 ) ( 136 ) ( 299 ) ( 248 ) Gross profit 48 22 89 33 Selling, general, and administrative expenses ( 6 ) ( 4 ) ( 9 ) ( 9 ) Income from operations of discontinued operations 42 18 80 25 Other non-operating items — ( 3 ) — ( 5 ) Gain on disposal before income taxes — — 39 — Income from discontinued operations before income taxes 42 15 119 19 Provision for income taxes ( 5 ) ( 4 ) ( 20 ) ( 5 ) Income from discontinued operations, net of income taxes $ 37 $ 11 $ 99 $ 14 The following summarizes the total cash provided by operations and total cash used for investing activities related to the EWP segment and included in the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (in millions): Six Months Ended June 30, 2022 2021 Net cash provided by discontinued operating activities $ 46 $ 4 Net cash provided by (used in) discontinued investing activities $ 56 $ ( 3 ) Net cash provided by discontinued investing activities for the six months ended June 30, 2022, includes $ 59 million of proceeds from the sale of our 50 % equity interest in two joint ventures that produce I-joists. 15 The following table presents the aggregate carrying amounts of discontinued operations related to the EWP segment in the Condensed Consolidated Balance Sheets (in millions): June 30, 2022 December 31, 2021 Carrying amounts of assets included as part of discontinued operations: Accounts receivable, net $ 36 $ 22 Inventories 54 46 Timber and timberlands 27 42 Property, plant, and equipment, net 30 30 Operating lease assets 1 1 Investments in and advances to affiliates — 14 Total assets classified as discontinued operations in the condensed consolidated balance sheet $ 148 $ 156 Carrying amounts of liabilities included as part of discontinued operations: Accounts payable and accrued liabilities $ 42 $ 34 Other liabilities 27 42 Total liabilities classified as discontinued operations in the condensed consolidated balance sheet $ 69 $ 76 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. Changes in goodwill and other intangible assets for the six months ended June 30, 2022, are provided in the following table (dollar amounts in millions): Timber licenses 1 Goodwill Developed Technology Trademarks Beginning balance December 31, 2021 $ 30 $ 19 $ 17 $ 2 Amortization ( 1 ) — ( 1 ) — Ending balance June 30, 2022 $ 29 $ 19 $ 16 $ 2 1 Timber 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 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). 16 The components of redeemable noncontrolling interest as of June 30, 2022, were as follows (dollar amounts in millions): Beginning balance December 31, 2021 $ 4 Net loss attributed to noncontrolling interest ( 1 ) Ending balance June 30, 2022 $ 3 NOTE 10. 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 in the current quarter. Changes in profitability estimates in various jurisdictions will impact our quarterly effective income tax rates. The tax provision for income taxes from continuing operations for the six months ended June 30, 2022 and 2021, reflected an estimated annual effective tax rate of 25 % and 24 %, respectively, excluding discrete items discussed below. The total effective tax rate for continuing operations for the three and six months ended June 30, 2022, was 25 % and 24 %, compared to 23 % for the comparable periods in 2021, respectively. We recorded a net discrete tax benefit of $ 9 million in both the six months ended June 30, 2022 and 2021, with the most significant benefit related to excess tax benefits from stock-based compensation in 2022 and the most significant benefits related to stock-based compensation and adjustments to the prior year, including an adjustment to the deferred tax rate in 2021. NOTE 11. COMMITMENTS AND CONTINGENCIES We maintain reserves for various contingent liabilities as follows (dollar amounts in millions): June 30, 2022 December 31, 2021 Environmental reserves $ 27 $ 25 Other reserves — — Total contingencies 27 25 Current portion (included in Accounts payable and accrued liabilities) ( 1 ) ( 1 ) Long-term portion $ 26 $ 24 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 17 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. Other Proceedings From time to time, we and our subsidiaries are parties to certain legal proceedings. Based on the information currently available, management believes the resolution of such proceedings will not have a material effect on our financial position, results of operations, cash flows, or liquidity. NOTE 12. 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 values of our long-lived assets. If demand and pricing for our products fall to levels significantly below cycle average demand and pricing, 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 June 30, 2022, there were no indications of impairment. 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 13. 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 six months ended June 30, 2022 and 2021, is summarized in the following table (dollar amounts in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Beginning balance $ 8 $ 8 $ 7 $ 8 Accrued to expense — — 2 1 Payments made ( 1 ) — ( 2 ) ( 1 ) Total warranty reserves 7 8 7 8 Current portion of warranty reserves (included in Accounts payable and accrued liabilities) ( 2 ) ( 2 ) ( 2 ) ( 2 ) Long-term portion of warranty reserves (included in Other long-term liabilities) $ 6 $ 6 $ 6 $ 6 We continue to monitor warranty and other claims associated with our products and believe, as of June 30, 2022, that the warranty reserve balances associated with these matters are adequate to cover future warranty payments. However, it is possible that additional changes may be required in the future. 18 NOTE 14. DEFINED BENEFIT PENSION PLANS The following table summarizes our net periodic pension cost for our defined benefit pension and postretirement plans during the three and six months ended June 30, 2022 and 2021 (dollar amounts in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Service cost $ 1 $ — $ 2 $ 1 Other components of net periodic pension cost 1 : Interest cost 2 2 3 4 Expected return on plan assets ( 2 ) ( 3 ) ( 3 ) ( 6 ) Amortization of prior service cost — — — — Amortization of net loss 1 1 2 3 Net periodic pension cost $ 2 $ 1 $ 4 $ 1 1 Other components of net periodic pension cost are included in Other non-operating items on our Condensed Consolidated Statements of Income. In November 2021, the Company initiated the termination of our frozen U.S. and Canadian defined benefit pension plans (collectively, the Plan), which would result in the full settlement of the Company's Plan obligations. The distribution of Plan assets pursuant to the termination will not be made until the Plan termination satisfies all regulatory requirements, which is expected to occur by the end of 2022. Plan participants will receive their full accrued benefits from Plan assets by electing either lump-sum distributions or annuity contracts with a qualifying third-party annuity provider. The Plan termination is expected to result in pension settlement expense in 2022, which will be determined based on prevailing market conditions, the actual lump-sum distributions, and annuity purchase rates at the date of distribution. As a result, we are currently unable to reasonably estimate the timing or final amount of such settlement charges. Upon settlement, we expect to recognize pre-tax pension settlement charges that will include (1) a non-cash charge for the recognition of all pre-tax actuarial losses accumulated in Accumulated other comprehensive loss ($ 98 million as of June 30, 2022) and (2) any cash contributions to settle the Plan’s obligations ($ 8 million net projected benefit obligation as of June 30, 2022). The actual amount of the settlement charges and any potential cash contribution will depend on various factors, including interest rates, Plan asset returns, and the lump-sum election rate. NOTE 15. ACCUMULATED COMPREHENSIVE LOSS Accumulated comprehensive loss is provided in the following table for the three months ended June 30, 2022 and 2021 (dollar amounts in millions): Pension Translation Adjustments Other Total Balance at March 31, 2022 $ ( 75 ) $ ( 73 ) $ ( 1 ) $ ( 149 ) Reclassified to income statement, net of taxes 1 1 — — 1 Translation adjustments — ( 32 ) — ( 32 ) Balance at June 30, 2022 $ ( 74 ) $ ( 105 ) $ ( 1 ) $ ( 181 ) Pension Translation Adjustments Other Total Balance at March 31, 2021 $ ( 81 ) $ ( 75 ) $ ( 2 ) $ ( 157 ) Reclassified to income statement, net of taxes 1 1 — — 1 Translation adjustments — 7 — 7 Balance at June 30, 2021 $ ( 80 ) $ ( 68 ) $ ( 2 ) $ ( 149 ) Accumulated comprehensive loss is provided in the following table for the six months ended June 30, 2022 and 2021 (dollar amounts in millions): 19 Pension Translation Adjustments Other Total Balance at December 31, 2021 $ ( 76 ) $ ( 96 ) $ ( 1 ) $ ( 174 ) Reclassified to income statement, net of taxes 1 2 — — 2 Translation adjustments — ( 9 ) — ( 9 ) Balance at June 30, 2022 $ ( 74 ) $ ( 105 ) $ ( 1 ) $ ( 181 ) Pension Translation Adjustments Other Total Balance at December 31, 2020 $ ( 81 ) $ ( 68 ) $ ( 2 ) $ ( 151 ) Reclassified to income statement, net of taxes 1 2 — — 2 Translation adjustments — — — — Balance at June 30, 2021 $ ( 80 ) $ ( 68 ) $ ( 2 ) $ ( 149 ) 1 Amounts of actuarial loss and prior service cost are components of net periodic benefit cost. NOTE 16. OTHER OPERATING AND NON-OPERATING ITEMS Other operating credits and charges, net Other operating credits and charges, net, is comprised of the following components (dollar amounts in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Insurance recoveries $ 13 $ 2 $ 13 $ 2 Reorganization charges — — ( 1 ) — Environmental costs ( 2 ) — ( 2 ) — Other — 1 — 1 Other operating credits and charges, net $ 11 $ 3 $ 10 $ 3 Other non-operating items Other non-operating items is comprised of the following components (dollar amounts in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net periodic pension cost, excluding service cost $ ( 1 ) $ — $ ( 3 ) $ — Loss on early debt extinguishment — — — ( 11 ) Foreign currency gain (loss) $ 3 $ ( 3 ) $ ( 5 ) $ — Other non-operating items $ 2 $ ( 3 ) $ ( 8 ) $ ( 11 ) NOTE 17. SELECTED SEGMENT DATA We operate in three segments: Siding, OSB, and South America. Our business units have been aggregated into these three 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. In June 2022, LP reached an agreement for the sale of its EWP segment assets. As a result of this transaction, EWP has been reclassified to discontinued operations and is no longer a reportable segment of the Company. See "Note 7 –Discontinued Operations" for additional information. 20 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 from continuing operations 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, pension settlement charges, and other non-operating items. Information about our business segments is as follows (dollar amounts in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net sales Siding $ 358 $ 291 $ 689 $ 576 OSB 673 778 1,417 1,317 South America 70 74 137 126 Other 30 26 55 43 Intersegment sales ( 1 ) — ( 2 ) ( 1 ) Total sales $ 1,130 $ 1,168 $ 2,297 2,062 PROFIT BY SEGMENT Net income $ 385 $ 497 $ 868 $ 817 Add (deduct): Net loss attributed to noncontrolling interest — — 1 1 Income from discontinued operations, net of income taxes ( 37 ) ( 11 ) ( 99 ) ( 14 ) Income attributed to LP from continuing operations 348 486 770 803 Provision for income taxes 116 144 240 239 Depreciation and amortization 32 29 64 57 Stock-based compensation expense 6 3 13 5 Other operating credits and charges, net ( 11 ) ( 3 ) ( 10 ) ( 3 ) Loss on early debt extinguishment — — — 11 Interest expense 3 4 6 9 Investment income ( 2 ) — ( 3 ) ( 1 ) Other non-operating items ( 2 ) 3 8 — Adjusted EBITDA $ 491 $ 665 $ 1,089 $ 1,119 Siding $ 78 $ 77 $ 160 $ 168 OSB 403 565 908 919 South America 26 34 51 54 Other ( 7 ) ( 4 ) ( 13 ) ( 8 ) Corporate ( 9 ) ( 7 ) ( 17 ) ( 14 ) Adjusted EBITDA $ 491 $ 665 $ 1,089 $ 1,119 NOTE 18. SUBSEQUENT EVENT As previously disclosed on May 3, 2022, LP's Board of Directors authorized a share repurchase plan under which LP was authorized to repurchase shares of LP's common stock totaling up to $ 600 million (the 2022 Share Repurchase Program). Subsequent to June 30, 2022, through August 8, 2022, we used $ 197 million to repurchase 3.4 million shares of LP common stock under the 2022 Share Repurchase Program. 21