Item 2. Management’s Discussion and Analysis
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. See "Cautionary Statement Regarding Forward-Looking Statements."
General
We are a leading provider of high-performance building solutions that meet the demands of builders, remodelers, and homeowners worldwide. We have leveraged our expertise serving the new home construction, repair and remodeling, and outdoor structures markets to become an industry leader known for innovation, quality, reliability, and sustainability. Our manufacturing facilities are located in the U.S., Canada, Chile, and Brazil.
To serve these markets, we primarily operate in three segments: Siding, OSB, and South America.
In March 2022, we sold our 50% equity interest in two joint ventures that produce I-joists to Resolute for $59 million. The joint ventures were comprised of Resolute-LP Engineered Wood Larouche Inc. in Larouche, Quebec, and Resolute-LP Engineered Wood St-Prime Limited Partnership in Saint-Prime, Quebec. In August 2022, LP completed the sale of the EWP segment assets to the Purchaser in exchange for the Purchaser’s payment to the Company of $217 million in gross cash proceeds. The historical results of the EWP segment are reflected in the Company’s Condensed Consolidated Financial Statements as discontinued operations. See "Note 7 – Discontinued Operations" of the Notes to the Condensed Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-Q for additional information.
Demand for Building Products
Demand for our products correlates positively with new home construction and repair and remodeling activity in North America, which historically has been characterized by significant cyclicality. The U.S. Census Bureau reported on April 18, 2023, that actual single-family housing starts were 29% lower for the three months ended March 31, 2023, as compared to the same period in 2022. Actual multi-family housing starts for the three months ended March 31, 2023 were about 5% higher as compared to the same period in 2022. Repair and remodeling activity is difficult to reasonably measure, but many indications suggest that repair and remodeling activity is continuing to show resiliency.
Future economic conditions in the United States and the demand for homes are uncertain due to inflationary impacts on the economy, including interest rates, employment levels, consumer confidence, and financial markets, among other things. Additionally, we have experienced increases in material prices, supply disruptions, and labor challenges, which we continue to address as we work to meet the demands of builders, remodelers, and homeowners worldwide. The potential effect of these factors on our future operational and financial performance is uncertain. As a result, our past performance may not be indicative of future results.
Supply and Demand for Siding
Siding Solutions is a specialty building material and is subject to competition from various siding technologies, including vinyl, stucco, wood, fiber cement, brick, and others. We believe we are the largest manufacturer in the engineered wood siding market. We have consistently grown our Siding Solutions above the underlying market growth rates. Siding Solutions is generally less sensitive to new housing market cyclicality since demand comes from other markets, including sheds and repair and remodel. Our growth in this market depends upon the continued displacement of vinyl, wood, fiber cement, stucco, bricks, and other alternatives, our product innovation and our technological expertise in wood and wood composites to address the needs of our customers.
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Supply and Demand for OSB
OSB is a commodity product, and it is subject to competition from manufacturers worldwide. Product supply is influenced primarily by fluctuations in available manufacturing capacity and imports. The ratio of overall OSB demand to capacity generally drives price. During the three months ended March 31, 2023, OSB commodity prices have fallen with the decline in market demand for OSB commodity product. 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” section and our “Risk Factors” section contained in our 2022 Annual Report on Form 10-K, and to the “Cautionary Statement Regarding Forward-Looking Statements” section in this quarterly report on Form 10-Q.
Critical Accounting Policies and Significant Estimates
Note 1 of the Notes to the Condensed Consolidated Financial Statements included in our 2022 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.
There have been no changes in the application of principles, methods, and assumptions used to determine our significant estimates since December 31, 2022.
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 from continuing operations before interest expense, provision for income taxes, depreciation and amortization, and excluding 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 as Adjusted EBITDA from continuing operations (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 from continuing operations, excluding loss on impairment attributed to LP, product-line discontinuance charges, interest expense outside of normal operations, other operating credits and charges, net, loss on early debt extinguishment, gain (loss) on acquisition, and pension settlement charges, and adjusting for a normalized tax rate, as Adjusted Income from continuing operations (Adjusted Income). We also disclose Adjusted Diluted EPS from continuing operations (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 these measures should allow interested persons to more readily compare the earnings for past and future periods.
Adjusted EBITDA, Adjusted Income, and Adjusted Diluted EPS are not substitutes for the U.S. GAAP measures of Net income, Income attributed to LP from continuing operations, and Net income attributed to LP from continuing operations per diluted share 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 operation of our business.
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The following table reconciles Net income to Adjusted EBITDA (dollar amounts in millions):
Three Months Ended March 31,
2023 2022
Net income $ 22 $ 483
Add (deduct):
Net (income) loss attributed to noncontrolling interest (1) 1
Income from discontinued operations, net of income taxes — (62)
Income attributed to LP from continuing operations 21 422
Provision for income taxes 1 124
Depreciation and amortization 28 32
Stock-based compensation expense 4 6
Other operating credits and charges, net 5 1
Interest expense 3 3
Investment income (5) (1)
Pension settlement charges 6 —
Other non-operating items 3 10
Adjusted EBITDA $ 66 $ 598
SEGMENT ADJUSTED EBITDA
Siding $ 67 $ 83
OSB 5 505
South America 12 25
Other (9) (6)
Corporate (9) (9)
Total Adjusted EBITDA $ 66 $ 598
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The following table provides the reconciliation of Net income to Adjusted Income (dollar amounts in millions, except per share amounts):
Three Months Ended March 31,
2023 2022
Net income attributed to LP from continuing operations per share - diluted $ 0.29 $ 4.89
Net income $ 22 $ 483
Add (deduct):
Net (income) loss attributed to noncontrolling interest (1) 1
Income from discontinued operations, net of income taxes — (62)
Income attributed to LP from continuing operations 21 422
Other operating credits and charges, net 5 1
Pension settlement charges 6 —
Reported tax provision 1 124
Adjusted income before tax 33 547
Normalized tax provision at 25% (8) (137)
Adjusted Income $ 25 $ 411
Diluted shares outstanding 72 86
Adjusted Diluted EPS $ 0.34 $ 4.75
Key Performance Indicators
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. Census Bureau.
The following tables set forth: (1) housing starts, (2) our North American sales volume, and (3) OEE. 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, housing starts data presented by us may not be comparable to similarly-titled indicators reported by other companies.
(thousands of units) Three Months Ended March 31,
2023 2022
Housing starts 1 :
Single-Family 191 267
Multi-Family 129 123
320 390
1 Actual U.S. housing starts data reported by the U.S. Census Bureau as published through April 18, 2023.
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We monitor sales volumes for our products in our Siding, OSB and South America 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 sales volumes for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31, 2023 Three Months Ended March 31, 2022
Sales Volume Siding OSB South America Total Siding OSB South America Total
Siding Solutions (MMSF) 383 — 11 394 421 — 8 429
OSB - commodity (MMSF) — 382 — 382 — 437 — 437
OSB - Structural Solutions (MMSF) — 327 127 454 — 525 150 675
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. 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 monitor operational improvements. 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. OEE for the three months ended March 31, 2023 and 2022, for each of our segments is listed below:
Three Months Ended March 31,
2023 2022
Siding 76 % 76 %
OSB 76 % 73 %
South America 76 % 74 %
Results of Operations
Our results of operations for each of our segments are discussed below, as are the results of operations for the “other” category, which comprises other products that are not individually significant. See Note 16 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 serves diverse end markets with a broad product offering of engineered wood siding, trim, and fascia, including LP ® SmartSide ® Trim & Siding, LP ® SmartSide ® ExpertFinish ® Trim & Siding, LP BuilderSeries ® Lap Siding, and LP ® Outdoor Building Solutions TM (collectively referred to as Siding Solutions).
Segment Net sales and Adjusted EBITDA for this segment were as follows (dollar amounts in millions):
Three Months Ended March 31,
2023 2022 % Change
Net sales $ 331 $ 332 — %
Adjusted EBITDA 67 83 (18) %
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Net sales in this segment by product line were as follows (dollar amounts in millions):
Three Months Ended March 31,
2023 2022 % Change
Siding Solutions $ 329 $ 330 — %
Other 2 2 7 %
Total $ 331 $ 332 — %
Percent changes in average net sales price and unit shipments were as follows:
Three Months Ended
March 31, 2023 versus 2022
Average Net
Selling Price Unit
Shipments
Siding Solutions 10 % (9) %
The combined effects of list price increases and customer mix shifts drove year-over-year increases in the average net selling price for the three months ended March 31, 2023. The volume decrease for the three months ended March 31, 2023 was driven by a challenging new home construction market and elevated levels of channel inventory compared to the prior period.
Adjusted EBITDA decreased year-over-year by $15 million in the first quarter of 2023 due to lower volume and $17 million of raw material, freight and labor inflation, partially offset by an increase in the average net sales price.
OSB
The OSB segment manufactures and distributes OSB structural panel products, including our value-added OSB portfolio known as LP Structural Solutions (which includes LP ® TechShield ® Radiant Barrier, LP WeatherLogic ® Air & Water Barrier, LP Legacy ® Premium Sub-Flooring, LP NovaCore ™ Thermal Insulated Sheathing, LP ® FlameBlock ® Fire-Rated Sheathing and LP ® TopNotch ® Sub-Flooring). OSB is manufactured using wood strands arranged in layers and bonded with resins.
Segment Net sales and Adjusted EBITDA for this segment were as follows (dollar amounts in millions):
Three Months Ended March 31,
2023 2022 % Change
Net sales $ 189 $ 744 (75) %
Adjusted EBITDA 5 505 (99) %
Net sales in this segment by product line were as follows (dollar amounts in millions):
Three Months Ended March 31,
2023 2022 % Change
OSB - Structural Solutions $ 112 $ 406 (72) %
OSB - commodity 75 334 (78) %
Other 2 4 (35) %
Total $ 189 $ 744 (75) %
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Percent changes in average net sales price and unit shipments were as follows:
Three Months Ended
March 31, 2023 versus 2022
Average Net
Selling Price Unit
Shipments
OSB - Structural Solutions (56) % (38) %
OSB - commodity (74) % (13) %
The year-over-year net sales decrease of $555 million for the three months ended March 31, 2023 reflects a $470 million decrease in OSB prices, a $51 million decrease in sales volume from production curtailments, and a $27 million decrease related in production volume from the conversion of the Sagola mill to Siding production.
The year-over-year decrease in Adjusted EBITDA of $500 million for the three months ended March 31, 2023 reflects lower OSB prices and sales volume (as described above) and increased raw material and wage inflation of $7 million.
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 two countries, Chile and Brazil, and operates sales offices in Chile, Brazil, Peru, Colombia, Argentina, and Paraguay.
Segment Net sales and Adjusted EBITDA for this segment were as follows (dollar amounts in millions):
Three Months Ended March 31,
2023 2022 % Change
Net sales $ 55 $ 67 (17) %
Adjusted EBITDA 12 25 (53) %
Net sales in this segment by product were as follows (dollar amounts in millions):
Three Months Ended March 31,
2023 2022 % Change
OSB - Structural Solutions $ 46 $ 58 (20) %
Siding 8 6 36 %
Other 1 2 (64) %
Total $ 55 $ 67 (17) %
Percent changes in average Net sales price and unit shipments were as follows:
Three Months Ended
March 31, 2023 versus 2022
Average Net
Selling Price Unit
Shipments
OSB - Structural Solutions (6) % (15) %
Siding (4) % 42 %
South America net sales decreased year-over-year by $13 million, or 17%, for the three months ended March 31, 2023, predominantly driven by lower OSB sales volumes and pricing.
The year-over-year decrease in Adjusted EBITDA of $13 million for the three months ended March 31, 2023 reflects lower sales volumes and pricing as well as higher raw material costs.
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Other
Our other products segment includes off-site framing operation Entekra Holdings LLC (Entekra), remaining timber and timberlands, and other minor products, services, and closed operations, which do not qualify as discontinued operations. Other net sales were $8 million for the three months ended March 31, 2023, as compared to $26 million for the corresponding period in 2022. The decrease in Other net sales for the three months ended March 31, 2023 was primarily due to lower Entekra sales volumes.
Adjusted EBITDA was $(9) million for the three months ended March 31, 2023, as compared to $(6) million for the corresponding period in 2022.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $66 million for the three months ended March 31, 2023, compared to $62 million for the corresponding period in 2022. The increase in 2023 was due to increased labor, travel, and sales and marketing, partially offset by costs associated with stock compensation.
Income Taxes
We recognized an estimated tax provision from continuing operations of $1 million and $124 million in the three months ended March 31, 2023, and 2022, respectively. The total effective tax rate for continuing operations for the three months ended March 31, 2023 and 2022 was 5% and 23%, 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 2023 the primary differences between the U.S. statutory rate of 21% and the effective rate relates to benefits from stock-based compensation and inflationary adjustments, partially offset by expenses from state taxes and executive compensation deduction limitations. For 2022, the primary difference between the U.S. statutory rate of 21% and the effective rate relates to state income tax.
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 2022 Annual Report on Form 10-K and Note 10 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 assess our liquidity in terms of our ability to generate cash to fund our short- and long-term cash requirements. As such, we project our anticipated cash requirements as well as cash flows generated from operating activities to meet those needs. We anticipate long-term cash uses may also include strategic acquisitions. On a long-term basis, we will continue to rely on our credit facility for any long-term funding not provided by operating cash flows. 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 effecting any such repurchases may be changed, at any time, or from time to time, without prior notice.
We expect to fund our capital expenditures over at least the next 12 months through cash on hand, cash generated from operations, and available borrowing under our Amended Credit Facility, as necessary.
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Operating Activities
During the three months ended March 31, 2023 and 2022, cash provided by operations was $(119) million and $425 million, respectively. The decrease in cash provided by operations was primarily related a lower income from operations and timing of cash paid for income taxes.
Investing Activities
During the three months ended March 31, 2023 and 2022, cash used in investing activities was $113 million and $33 million, respectively. During the three months ended March 31, 2022, we received $59 million in proceeds from the sale of our 50% equity interest in two joint ventures.
Capital expenditures for the three months ended March 31, 2023 and 2022, were $114 million and $92 million, respectively, primarily related to siding conversion expenditures and growth and maintenance capital.
Financing Activities
During the three months ended March 31, 2023, cash used in financing activities was $27 million. We paid cash dividends of $17 million and used $10 million to repurchase stock from employees in connection with income tax withholding requirements associated with our employee stock-based compensation plans.
During the three months ended March 31, 2022, cash used in financing activities was $137 million. During the three months ended March 31, 2022, we used $104 million to repurchase shares of LP common stock under the share repurchase program authorized by LP's Board of Directors in November 2021 for the repurchase of up to $500 million shares of LP common stock and we paid cash dividends of $19 million. Additionally, we used $15 million to repurchase 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
In November 2022, LP entered into the Credit Agreement with American AgCredit, PCA, as administrative agent and sole lead arranger, and CoBank, ACB, as letter of credit issuer, relating to the Amended Credit Facility. The Credit Agreement provides for a revolving credit facility in the principal amount of up to $550 million, with a $60 million sub-limit for letters of credit. The Credit Agreement, and all loans thereunder, become due on November 29, 2028. As of March 31, 2023, we had no amounts outstanding under the Amended Credit Facility. As of May 3, 2023, the outstanding amount under the Amended Credit Facility was $45 million.
The Credit Agreement contains various restrictive covenants and customary events of default. The breach of restrictive covenants or the occurrence of any other event of default under the Credit Agreement could result in the acceleration of our obligation to repay the indebtedness outstanding thereunder. The Credit Agreement also contains financial covenants that require us and our consolidated subsidiaries to have, as of the end of each quarter, a capitalization ratio ( i.e. , funded debt less unrestricted cash to total capitalization) of no more than 57.5%. As of March 31, 2023, we were in compliance with all financial covenants under the Credit Agreement.
In March 2020, LP entered into 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 provides for 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 Credit Agreement, including the capitalization ratio covenant. As of March 31, 2023, we were in compliance with all covenants under the Letter of Credit Facility.
Other Liquidity Matters
Off-Balance Sheet Arrangements
As of March 31, 2023, we had standby letters of credit of $13 million outstanding related to collateral for environmental impact on owned properties, a deposit for a forestry license, and insurance collateral, including workers' compensation.
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Potential Impairments
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 as of March 31, 2023. In April 2023, we announced the shutdown of Entekra. We expect this to result in a pre-tax, non-cash impairment charge of between $25 million and $30 million in the second quarter of 2023.
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 March 31, 2023, 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.
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