Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income
Dollar and share amounts in millions, except per share amounts
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net sales $ 852 $ 1,018 $ 3,149 $ 3,080
Cost of sales ( 620 ) ( 513 ) ( 1,778 ) ( 1,423 )
Gross profit 232 505 1,370 1,657
Selling, general, and administrative expenses ( 67 ) ( 58 ) ( 196 ) ( 155 )
Other operating credits and charges, net 7 2 17 5
Income from operations 172 448 1,191 1,507
Interest expense ( 3 ) ( 4 ) ( 9 ) ( 12 )
Investment income 5 — 8 1
Other non-operating items ( 3 ) ( 2 ) ( 11 ) ( 13 )
Income before income taxes 172 442 1,178 1,482
Provision for income taxes ( 44 ) ( 111 ) ( 284 ) ( 350 )
Equity in unconsolidated affiliate 1 1 4 3
Income from continuing operations 129 332 898 1,134
Income from discontinued operations, net of income taxes 97 33 196 47
Net income $ 226 $ 365 $ 1,093 $ 1,182
Net loss attributed to noncontrolling interest — — 1 1
Net income attributed to LP $ 226 $ 365 $ 1,094 $ 1,183
Net income attributed to LP per share of common stock:
Income per share continuing operations - basic $ 1.75 $ 3.55 $ 11.23 $ 11.34
Income per share discontinued operations - basic 1.32 0.35 2.45 0.47
Net income per share - basic $ 3.07 $ 3.90 $ 13.67 $ 11.81
Income per share continuing operations - diluted $ 1.74 $ 3.52 $ 11.16 $ 11.26
Income per share discontinued operations - diluted 1.31 0.35 2.43 0.47
Net income per share - diluted $ 3.05 $ 3.87 $ 13.59 $ 11.73
Average shares of common stock used to compute net income per share:
Basic 74 94 80 100
Diluted 74 94 80 101
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,
2022 2021 2022 2021
Net income $ 226 $ 365 $ 1,093 $ 1,182
Other comprehensive income, net of tax
Foreign currency translation adjustments ( 13 ) ( 21 ) ( 22 ) ( 21 )
Changes in defined benefit pension plans 3 2 6 3
Other comprehensive income (loss), net of tax ( 9 ) ( 19 ) ( 16 ) ( 18 )
Comprehensive income 216 346 1,077 1,164
Comprehensive loss associated with noncontrolling interest — — 1 1
Comprehensive income attributed to LP $ 216 $ 346 $ 1,078 $ 1,165
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, 2022 December 31, 2021
ASSETS
Cash and cash equivalents $ 469 $ 358
Receivables, net of allowance for doubtful accounts of $ 1 million as of September 30, 2022, and December 31, 2021
171 169
Inventories 337 278
Prepaid expenses and other current assets 24 17
Current assets of discontinued operations — 68
Total current assets 1,001 890
Timber and timberlands 39 42
Property, plant, and equipment, net 1,215 1,039
Operating lease assets 44 50
Goodwill and other intangible assets 37 39
Investments in and advances to affiliates 7 7
Restricted cash 14 13
Other assets 23 25
Deferred tax asset 4 2
Long-term assets of discontinued operations — 87
Total assets $ 2,383 $ 2,194
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities $ 342 $ 304
Income tax payable 88 13
Current liabilities of discontinued operations — 34
Total current liabilities 430 351
Long-term debt 346 346
Deferred income taxes 107 86
Non-current operating lease liabilities 40 44
Contingency reserves, excluding current portion 26 24
Other long-term liabilities 69 63
Long-term liabilities of discontinued operations — 42
Total liabilities $ 1,019 $ 955
Redeemable noncontrolling interest 3 4
Stockholders’ equity:
Common stock, $ 1 par value, 200,000,000 shares authorized; 87,986,865 and 71,690,061 shares issued and outstanding, respectively, as of September 30, 2022; and 102,415,883 and 85,636,154 shares issued and outstanding, respectively, as of December 31, 2021
88 102
Additional paid-in capital 459 458
Retained earnings 1,395 1,239
Treasury stock, 16,296,804 shares and 16,779,729 shares, at cost as of September 30, 2022, and December 31, 2021, respectively
( 390 ) ( 390 )
Accumulated comprehensive loss ( 190 ) ( 174 )
Total stockholders’ equity 1,361 1,235
Total liabilities and stockholders’ equity $ 2,383 $ 2,194
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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Condensed Consolidated Statements of Cash Flows
Dollar amounts in millions
(Unaudited)
Nine Months Ended September 30,
2022 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,093 $ 1,182
Adjustments to net income:
Depreciation and amortization 99 88
Gain on sale of assets ( 157 ) —
Deferred taxes 27 15
Loss on early debt extinguishment — 11
Other adjustments, net 34 7
Changes in assets and liabilities (net of acquisitions and divestitures):
Receivables ( 20 ) ( 59 )
Prepaid expenses and other current assets ( 11 ) ( 5 )
Inventories ( 72 ) ( 66 )
Accounts payable and accrued liabilities 40 64
Income taxes payable, net of receivables 70 46
Net cash provided by operating activities 1,103 1,283
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant, and equipment additions ( 282 ) ( 133 )
Proceeds from sales of assets 265 —
Other investing activities 3 3
Net cash used in investing activities ( 14 ) ( 131 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of long-term debt — 350
Repayment of long-term debt, including redemption premium — ( 359 )
Payment of cash dividends ( 53 ) ( 50 )
Purchase of stock ( 900 ) ( 987 )
Other financing activities ( 15 ) ( 12 )
Net cash used in financing activities ( 968 ) ( 1,058 )
EFFECT OF EXCHANGE RATE ON CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 11 ) ( 10 )
Net increase in cash, cash equivalents, and restricted cash 111 84
Cash, cash equivalents, and restricted cash at beginning of period 371 535
Cash, cash equivalents, and restricted cash at end of period $ 482 $ 620
Supplemental cash flow information:
Cash paid for income taxes, net of cash received $ 242 $ 305
Cash paid for interest, net of cash received $ 14 $ 16
Unpaid capital expenditures $ 44 $ 42
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, 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
Net income attributed to LP — — — — — 226 — 226
Dividends paid (0.22 per share)
— — — — — ( 16 ) — ( 16 )
Issuance of shares under stock plans — — — — — — — —
Purchase of stock ( 6 ) ( 6 ) — — — ( 320 ) — ( 325 )
Compensation expense associated with stock-based compensation — — — — 2 — — 2
Other comprehensive loss — — — — — — ( 9 ) ( 9 )
Balance, September 30, 2022
88 $ 88 16 $ ( 390 ) $ 459 $ 1,395 $ ( 190 ) $ 1,361
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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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, 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
Net income attributed to LP — — — — — 365 — 365
Dividends paid ($0.18 per share)
— — — — — ( 17 ) — ( 17 )
Purchase of stock ( 7 ) ( 7 ) — — ( 392 ) — ( 399 )
Compensation expense associated with stock-based compensation — — — — 5 — — 5
Other comprehensive income — — — — — — ( 19 ) ( 19 )
Balance, September 30, 2021
107 $ 107 17 $ ( 390 ) $ 451 $ 1,369 $ ( 168 ) $ 1,368
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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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 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 August 2022, LP and one of its wholly-owned subsidiaries sold the assets related to the Engineered Wood Products (EWP) segment to P acific Woodtech Corporation, a Washington corporation, and Pacific Woodtech Canada Holdings Limited, a British Columbia limited company (collectively, the Purchaser) for $ 217 million in gross cash proceeds after taking into account working capital adjustments (including $ 3 million received subsequent to September 30, 2022). Upon closing, the Company entered into a transition services agreement (TSA) 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 . We have classified the related assets and liabilities associated with the EWP segment as discontinued operations 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).
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Three Months Ended September 30, 2022
By product type and family: Siding OSB South America Other Inter-segment Total
Value-add
Siding Solutions $ 393 $ — $ 6 $ — $ — $ 399
OSB - Structural Solutions — 205 47 — — 251
393 205 53 — — 650
Commodity
OSB - commodity — 180 — — — 180
Other
Other products 1 3 — 17 — 22
$ 394 $ 388 $ 53 $ 17 $ ( 1 ) $ 852
Three Months Ended September 30, 2021
By product type and family: Siding OSB South America Other Inter-segment Total
Value-add
Siding Solutions $ 310 $ — $ 9 $ — $ — $ 319
OSB - Structural Solutions — 307 65 — — 372
310 307 75 — — 691
Commodity
OSB - commodity — 290 — — — 290
Other
Other products 3 4 2 30 ( 1 ) 38
$ 312 $ 600 $ 76 $ 30 $ ( 1 ) $ 1,018
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Nine Months Ended September 30, 2022
By product type and family: Siding OSB South America Other Inter-segment Total
Value-add
Siding Solutions $ 1,079 $ — $ 18 $ — $ — $ 1,097
OSB - Structural Solutions — 995 172 — ( 2 ) 1,165
1,079 995 190 — ( 2 ) 2,262
Commodity
OSB - commodity — 801 — — ( 1 ) 801
Other
Other products 4 9 — 72 — 86
$ 1,083 $ 1,805 $ 190 $ 72 $ ( 2 ) $ 3,149
Nine Months Ended September 30, 2021
By product type and family: Siding OSB South America Other Inter-segment Total
Value-add
Siding Solutions $ 879 $ — $ 29 $ — $ — $ 908
OSB - Structural Solutions — 912 171 — — 1,082
879 912 200 — — 1,991
Commodity
OSB - commodity — 997 — — — 997
Other
Other products 9 9 3 73 ( 2 ) 93
$ 889 $ 1,917 $ 203 $ 73 $ ( 2 ) $ 3,080
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.
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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 (dollar and share amounts in millions, except per share amounts):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Income from continuing operations $ 129 $ 332 $ 898 $ 1,134
Net loss attributed to noncontrolling interest — — 1 1
Income attributed to LP from continuing operations 129 332 898 1,135
Income for discontinued operations, net of income taxes 97 33 196 47
Net income attributed to LP $ 226 $ 365 $ 1,094 $ 1,183
Weighted average common shares outstanding - basic 74 94 80 100
Dilutive effect of employee stock plans — — 1 1
Shares used for diluted earnings per share 74 94 80 101
Net income attributed to LP per share - basic:
Continuing operations $ 1.75 $ 3.55 $ 11.23 $ 11.34
Discontinued operations 1.32 0.35 2.45 0.47
Net income attributed to LP per share - basic $ 3.07 $ 3.90 $ 13.67 $ 11.81
Net income attributed to LP per share – diluted:
Continuing operations $ 1.74 $ 3.52 $ 11.16 $ 11.26
Discontinued operations 1.31 0.35 2.43 0.47
Net income attributed to LP per share - diluted $ 3.05 $ 3.87 $ 13.59 $ 11.73
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.
The fair value of the 3.625 % Senior Notes due in 2029 (2029 Senior Notes) was estimated to be $ 276 million and $ 358 million as of September 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
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are based on trading activity among the Company’s lenders and the average bid and ask price is determined using published rates.
There were no outstanding amounts borrowed under our Amended Credit Facility (defined below) as of September 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):
September 30, 2022 December 31, 2021
Trade receivables $ 147 $ 156
Other receivables 24 13
Income tax receivable — 1
Allowance for doubtful accounts ( 1 ) ( 1 )
Total $ 171 $ 169
Trade receivables are primarily generated by sales of our products to our wholesale and retail customers. Other receivables as of September 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):
September 30, 2022 December 31, 2021
Logs $ 45 $ 50
Other raw materials 95 57
Semi-finished inventory 25 20
Finished products 172 150
Total $ 337 $ 278
NOTE 7. DIS CONTINUED OPERATIONS
Engineered Wood Products (EWP)
On August 1, 2022, the Company completed the sale of the assets related to the EWP segment to the Purchaser. As a result of the sale, the Company received $ 217 million in gross cash proceeds after taking into account working capital adjustments (including $ 3 million received subsequent to September 30, 2022). The Company paid $ 12 million in direct transaction costs, resulting in net proceeds of $ 205 million. The net carrying value of the EWP assets at the time of sale was $ 87 million, which resulted in a pre-tax gain of approximately $ 118 million within Income from discontinued operations in the Condensed Consolidated Statements of Income.
Upon closing, the Company entered into the TSA 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 . During the three months ended September 30, 2022, the Company collected $ 33 million on the Purchaser's behalf pursuant to the TSA. As of September 30, 2022, the Company has $ 14 million due to the Purchaser, which is included in the Condensed Consolidated Balance Sheets.
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The Company has classified the results of its EWP segment as discontinued operations in its Condensed Consolidated Statements of Income and we have classified the related assets and liabilities associated with the EWP segment as discontinued operations 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. 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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net sales $ 67 $ 201 $ 455 $ 481
Cost of sales ( 54 ) ( 156 ) ( 352 ) ( 403 )
Gross profit 13 45 103 78
Selling, general, and administrative expenses ( 2 ) ( 5 ) ( 12 ) ( 15 )
Income from operations of discontinued operations 12 40 91 64
Other non-operating items — 5 — ( 1 )
Gain on disposal before income taxes 118 — 158 —
Income from discontinued operations before income taxes 130 44 249 63
Provision for income taxes ( 33 ) ( 11 ) ( 53 ) ( 16 )
Income from discontinued operations, net of income taxes $ 97 $ 33 $ 196 $ 47
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 nine months ended September 30, 2022 and 2021 (in millions):
Nine Months Ended September 30,
2022 2021
Net cash provided by discontinued operating activities $ 18 $ 30
Net cash provided by (used in) discontinued investing activities $ 258 $ ( 25 )
Net cash provided by discontinued investing activities for the nine months ended September 30, 2022, includes $ 59 million of proceeds from the sale of our 50 % equity interest in two joint ventures that produce I-joists and $ 202 million of net proceeds from the sale of the EWP segment assets.
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The following table presents the aggregate carrying amounts of discontinued operations related to the EWP segment in the Condensed Consolidated Balance Sheets (in millions):
December 31, 2021
Carrying amounts of assets included as part of discontinued operations:
Accounts receivable, net $ 22
Inventories 46
Timber and timberlands 42
Property, plant, and equipment, net 30
Operating lease assets 1
Investments in and advances to affiliates 14
Total assets classified as discontinued operations in the Condensed Consolidated Balance Sheet $ 156
Carrying amounts of liabilities included as part of discontinued operations:
Accounts payable and accrued liabilities $ 34
Other liabilities 42
Total liabilities classified as discontinued operations in the Condensed Consolidated Balance Sheet $ 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 nine months ended September 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 ( 2 ) — ( 1 ) —
Ending balance September 30, 2022
$ 28 $ 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).
The components of redeemable noncontrolling interest as of September 30, 2022, were as follows (dollar amounts in millions):
Beginning balance December 31, 2021
$ 4
Net loss attributed to noncontrolling interest ( 1 )
Ending balance September 30, 2022
$ 3
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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 nine months ended September 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 nine months ended September 30, 2022, was 26 % and 24 %, compared to 25 % and 24 % for the comparable periods in 2021, respectively.
We recognized net discrete tax benefits of $ 9 million and $ 7 million in the nine months ended September 30, 2022 and 2021, respectively. The discrete tax benefits primarily relate to excess tax benefits from stock-based compensation and changes to estimates in the prior year including our deferred tax rate.
NOTE 11. COMMITMENTS AND CONTINGENCIES
We maintain reserves for various contingent liabilities as follows (dollar amounts in millions):
September 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 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.
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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 September 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 nine months ended September 30, 2022 and 2021, is summarized in the following table (dollar amounts in millions):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Beginning balance $ 7 $ 8 $ 7 $ 8
Accrued to expense 1 — 3 1
Payments made ( 1 ) — ( 2 ) ( 1 )
Total warranty reserves 8 8 8 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 September 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.
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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 nine months ended September 30, 2022 and 2021 (dollar amounts in millions):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Service cost $ 1 $ — $ 3 $ 1
Other components of net periodic pension cost 1 :
Interest cost 2 2 5 5
Expected return on plan assets ( 2 ) ( 3 ) ( 5 ) ( 10 )
Amortization of prior service cost — — — —
Amortization of net loss 1 1 4 4
Loss due to settlement 4 — 4 —
Net periodic pension cost $ 7 $ 1 $ 11 $ 2
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.
During the three months ended September 30, 2022, we made lump-sum pension distributions and purchased non-participating group annuity contracts totaling $ 33 million which triggered partial settlement accounting for the Plan. Accordingly, reflected in the table above is a non-cash pre-tax loss due to settlement of $ 4 million for the three and nine months ended September 30, 2022 representing the recognition of a pro rata portion of the unrecognized loss recorded within Accumulated comprehensive loss.
The changes recognized in Other comprehensive loss were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net actuarial gain (loss) and prior service (cost) arising during the period, net of tax $ ( 1 ) $ — $ ( 1 ) $ —
Amortization of actuarial loss, prior service cost and settlements, net of tax $ 4 $ 2 $ 7 $ 3
Total amounts recognized in Other comprehensive income $ 3 $ 2 $ 6 $ 3
Remaining 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 remaining distribution of Plan assets pursuant to the termination will not be made until the Plan termination satisfies all regulatory requirements. The remaining Plan termination is expected to be substantially complete in the fourth quarter of 2022 and result in pension settlement expense, which will be determined based on prevailing market conditions, the actual lump-sum distributions, and annuity purchase rates at the date of distribution. Upon final 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 in Accumulated comprehensive loss ($ 93 million as of September 30, 2022) and (2) any cash contributions to settle the Plan’s obligations ($ 9 million net projected benefit obligation as of September 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.
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NOTE 15. ACCUMULATED COMPREHENSIVE LOSS
Accumulated comprehensive loss is provided in the following table for the three months ended September 30, 2022 and 2021 (dollar amounts in millions):
Pension Translation Adjustments Other Total
Balance at June 30, 2022
$ ( 74 ) $ ( 105 ) $ ( 1 ) $ ( 181 )
Reclassified to income statement, net of taxes 1
3 — — 3
Translation adjustments — ( 13 ) — ( 13 )
Balance at September 30, 2022
$ ( 71 ) $ ( 118 ) $ ( 1 ) $ ( 190 )
Pension Translation Adjustments Other Total
Balance at June 30, 2021
$ ( 80 ) $ ( 68 ) $ ( 2 ) $ ( 149 )
Reclassified to income statement, net of taxes 1
2 — — 2
Translation adjustments — ( 21 ) — ( 21 )
Balance at September 30, 2021
$ ( 78 ) $ ( 89 ) $ ( 2 ) $ ( 168 )
1 Amounts of actuarial loss and prior service cost are components of net periodic benefit cost. See Note 14 above for additional details.
Accumulated comprehensive loss is provided in the following table for the nine months ended September 30, 2022 and 2021 (dollar amounts in millions):
Pension Translation Adjustments Other Total
Balance at December 31, 2021
$ ( 76 ) $ ( 96 ) $ ( 1 ) $ ( 174 )
Reclassified to income statement, net of taxes 1
6 — — 6
Translation adjustments — ( 22 ) — ( 22 )
Balance at September 30, 2022
$ ( 71 ) $ ( 118 ) $ ( 1 ) $ ( 190 )
Pension Translation Adjustments Other Total
Balance at December 31, 2020
$ ( 81 ) $ ( 68 ) $ ( 2 ) $ ( 151 )
Reclassified to income statement, net of taxes 1
3 — — 3
Translation adjustments — ( 21 ) — ( 21 )
Balance at September 30, 2021
$ ( 78 ) $ ( 89 ) $ ( 2 ) $ ( 168 )
1 Amounts of actuarial loss and prior service cost are components of net periodic benefit cost. See Note 14 above for additional details.
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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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Insurance recoveries $ 2 $ 1 $ 15 $ 3
Reorganization charges ( 4 ) ( 1 ) ( 5 ) ( 1 )
Environmental costs — — ( 2 ) —
Other 9 1 9 3
Other operating credits and charges, net $ 7 $ 2 $ 17 $ 5
Other non-operating items
Other non-operating items is comprised of the following components (dollar amounts in millions):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net periodic pension cost, excluding service cost $ ( 1 ) $ — $ ( 4 ) $ —
Pension settlement charges ( 4 ) — ( 4 ) —
Loss on early debt extinguishment — — — ( 11 )
Foreign currency gain (loss) $ 2 $ ( 2 ) $ ( 3 ) $ ( 2 )
Other $ 1 $ — $ 1 $ —
Other non-operating items $ ( 3 ) $ ( 2 ) $ ( 11 ) $ ( 13 )
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. On June 21, 2022, LP reached an agreement for the sale of its EWP segment assets which subsequently closed on August 1, 2022. As a result of this transaction, the results of the EWP segment have been reclassified to discontinued operations and EWP is no longer a reportable segment of the Company. See "Note 7 –Discontinued Operations" for additional information.
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.
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Information about our business segments is as follows (dollar amounts in millions):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net sales
Siding $ 394 $ 312 $ 1,083 $ 889
OSB 388 600 1,805 1,917
South America 53 76 190 203
Other 17 30 72 73
Intersegment sales ( 1 ) ( 1 ) ( 2 ) ( 2 )
Total sales $ 852 $ 1,018 $ 3,149 3,080
PROFIT BY SEGMENT
Net income $ 226 $ 365 $ 1,093 $ 1,182
Add (deduct):
Net loss attributed to noncontrolling interest — — 1 1
Income from discontinued operations, net of income taxes ( 97 ) ( 33 ) ( 196 ) ( 47 )
Income attributed to LP from continuing operations 129 332 898 1,135
Provision for income taxes 44 111 284 350
Depreciation and amortization 32 28 96 85
Stock-based compensation expense 2 5 15 10
Other operating credits and charges, net ( 7 ) ( 2 ) ( 17 ) ( 5 )
Loss on early debt extinguishment — — — 11
Interest expense 3 4 9 12
Investment income ( 5 ) — ( 8 ) ( 1 )
Other non-operating items ( 1 ) 2 7 2
Pension settlement charges 4 — 4 —
Adjusted EBITDA $ 200 $ 480 $ 1,289 $ 1,600
Siding $ 90 $ 73 $ 251 $ 240
OSB 113 381 1,021 1,300
South America 14 37 65 91
Other ( 7 ) ( 3 ) ( 19 ) ( 11 )
Corporate ( 11 ) ( 8 ) ( 29 ) ( 22 )
Adjusted EBITDA $ 200 $ 480 $ 1,289 $ 1,600
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.