LOUISIANA-PACIFIC CORP 10-Q

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, 2023 2022 2023 2022 Net sales $ 728 $ 852 $ 1,923 $ 3,149 Cost of sales ( 514 ) ( 620 ) ( 1,489 ) ( 1,778 ) Gross profit 214 232 434 1,370 Selling, general, and administrative expenses ( 58 ) ( 67 ) ( 191 ) ( 196 ) Impairment of long-lived assets, net ( 1 ) — ( 25 ) — Other operating credits and charges, net 6 7 ( 20 ) 17 Income from operations 161 172 198 1,191 Interest expense ( 4 ) ( 3 ) ( 9 ) ( 9 ) Investment income 4 5 10 8 Other non-operating items — ( 3 ) ( 17 ) ( 11 ) Income before income taxes 160 172 183 1,178 Provision for income taxes ( 44 ) ( 44 ) ( 66 ) ( 284 ) Equity in unconsolidated affiliate 1 1 3 4 Income from continuing operations 118 129 119 898 Income from discontinued operations, net of income taxes — 97 — 196 Net income $ 118 $ 226 $ 119 $ 1,093 Net loss attributed to non-controlling interest — — — 1 Net income attributed to LP $ 118 $ 226 $ 119 $ 1,094 Net income attributed to LP per share of common stock: Income per share continuing operations - basic $ 1.63 $ 1.75 $ 1.65 $ 11.23 Income per share discontinued operations - basic — 1.32 — 2.45 Net income attributed to LP per share - basic $ 1.63 $ 3.07 $ 1.65 $ 13.67 Income per share continuing operations - diluted $ 1.63 $ 1.74 $ 1.65 $ 11.16 Income per share discontinued operations - diluted — 1.31 — 2.43 Net income attributed to LP per share - diluted $ 1.63 $ 3.05 $ 1.65 $ 13.59 Average shares of common stock used to compute Net income per share: Basic 72 74 72 80 Diluted 72 74 72 80 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income $ 118 $ 226 $ 119 $ 1,093 Other comprehensive income (loss), net of tax Foreign currency translation adjustments ( 19 ) ( 13 ) ( 3 ) ( 22 ) Changes in defined benefit pension plans — 3 4 6 Other comprehensive income (loss), net of tax ( 19 ) ( 9 ) 2 ( 16 ) Comprehensive income 99 216 120 1,077 Comprehensive loss associated with non-controlling interest — — — 1 Comprehensive income attributed to LP $ 99 $ 216 $ 121 $ 1,078 The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. 5 Condensed Consolidated Balance Sheets Dollar amounts in millions (Unaudited) September 30, 2023 December 31, 2022 ASSETS Cash and cash equivalents $ 160 $ 369 Receivables, net of allowance for doubtful accounts of $ 3 million and $ 1 million as of September 30, 2023, and December 31, 2022, respectively 181 127 Inventories 379 337 Prepaid expenses and other current assets 25 20 Total current assets 745 854 Timber and timberlands 32 40 Property, plant, and equipment, net 1,512 1,326 Operating lease assets, net 34 44 Goodwill and other intangible assets 27 36 Investments in and advances to affiliates 6 6 Restricted cash — 14 Other assets 19 24 Deferred tax asset 4 7 Total assets $ 2,380 $ 2,350 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued liabilities $ 264 $ 317 Income taxes payable 2 19 Total current liabilities 266 336 Long-term debt 347 346 Deferred income taxes 152 113 Non-current operating lease liabilities 35 41 Contingency reserves, excluding current portion 25 26 Other long-term liabilities 53 53 Total liabilities $ 878 $ 916 Redeemable noncontrolling interest — — Stockholders’ equity: Common stock, $ 1 par value, 200,000,000 shares authorized; 87,986,865 and 72,114,051 shares issued and outstanding, respectively, as of September 30, 2023; and 87,986,865 and 71,748,200 shares issued and outstanding, respectively, as of December 31, 2022 88 88 Additional paid-in capital 460 462 Retained earnings 1,438 1,371 Treasury stock, 15,872,814 shares and 16,238,665 shares, at cost as of September 30, 2023, and December 31, 2022, respectively ( 387 ) ( 388 ) Accumulated comprehensive loss ( 98 ) ( 99 ) Total stockholders’ equity 1,502 1,433 Total liabilities and stockholders’ equity $ 2,380 $ 2,350 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) Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 119 $ 1,093 Adjustments to net income: Depreciation and amortization 87 99 Impairment of goodwill and long-lived assets 25 — Gain on sale of assets, net ( 6 ) ( 157 ) Pension loss due to settlement 6 4 Deferred taxes 44 27 Other adjustments, net 48 29 Changes in assets and liabilities (net of acquisitions and divestitures): Receivables ( 52 ) ( 20 ) Inventories ( 46 ) ( 72 ) Prepaid expenses and other current assets ( 5 ) ( 11 ) Accounts payable and accrued liabilities ( 36 ) 40 Income taxes payable, net of receivables ( 26 ) 70 Net cash provided by operating activities 157 1,103 CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant, and equipment additions ( 236 ) ( 282 ) Acquisition of facility assets ( 80 ) — Proceeds from sales of assets 9 — Proceeds from divestiture of business — 265 Other investing activities, net ( 4 ) 3 Net cash used in investing activities ( 312 ) ( 14 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing of long-term debt 80 — Repayment of long-term debt ( 80 ) — Payment of cash dividends ( 52 ) ( 53 ) Purchase of stock — ( 900 ) Other financing activities ( 10 ) ( 15 ) Net cash used in financing activities ( 61 ) ( 968 ) EFFECT OF EXCHANGE RATE ON CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 6 ) ( 11 ) Net (decrease) increase in cash, cash equivalents, and restricted cash ( 223 ) 111 Cash, cash equivalents, and restricted cash at beginning of period 383 371 Cash, cash equivalents, and restricted cash at end of period $ 160 $ 482 Supplemental cash flow information: Cash paid for income taxes, net $ 49 $ 242 Cash paid for interest, net $ 14 $ 14 Unpaid capital expenditures $ 17 $ 44 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, 2022 88 $ 88 16 $ ( 388 ) $ 462 $ 1,371 $ ( 99 ) $ 1,433 Net income attributed to LP — — — — — 21 — 21 Dividends paid ($ 0.24 per share) — — — — — ( 17 ) — ( 17 ) Issuance of shares under stock plans — — — 10 ( 10 ) — — — Taxes paid related to net settlement of stock-based awards — — — ( 10 ) — — — ( 10 ) Purchase of stock — — — — — — — — Compensation expense associated with stock-based compensation — — — — 4 — — 4 Other comprehensive income — — — — — — 19 19 Balance, March 31, 2023 88 $ 88 16 $ ( 388 ) $ 455 $ 1,375 $ ( 80 ) $ 1,450 Net loss attributed to LP — — — — — ( 20 ) — ( 20 ) Dividends paid ($ 0.24 per share) — — — — — ( 17 ) — ( 17 ) Issuance of shares under stock plans — — — 2 — — — 2 Taxes paid related to net settlement of stock-based awards — — — ( 1 ) — — — ( 1 ) Purchase of stock — — — — — — — — Compensation expense associated with stock-based compensation — — — — 3 — — 3 Other comprehensive income — — — — — — 1 1 Balance, June 30, 2023 88 $ 88 16 $ ( 387 ) $ 458 $ 1,337 $ ( 78 ) $ 1,419 Net income attributed to LP — — — — — 118 — 118 Dividends paid ($0.24 per share) — — — — — ( 17 ) — ( 17 ) Issuance of shares under stock plans — — — — — — — — Taxes paid related to net settlement of stock-based awards — — — — — — — — Purchase of stock — — — — — — — — Compensation expense associated with stock-based compensation — — — — 2 — — 2 Other comprehensive loss — — — — — — ( 19 ) ( 19 ) Balance, September 30, 2023 88 $ 88 16 $ ( 387 ) $ 460 $ 1,438 $ ( 98 ) $ 1,502 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, 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 — — — — — — — — Taxes paid related to net settlement of stock-based awards — — — — — — — — 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. 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, reliability, and sustainability. The principal customers for our building solutions are retailers, wholesalers, and home building and industrial businesses in North America and South America, with limited sales to Asia, Australia, and Europe. The Company operates 23 plants across the U.S., Canada, Chile, and Brazil through foreign subsidiaries, an d operates additional facilities through a joint venture. References to "LP," the "Company," "we," "our," and "us" refer to Louisiana-Pacific Corporation and its consolidated subsidiaries as a whole. During the year ended December 31, 2022, we sold our 50% equity interest in t wo joint ventures that produce I-joists, and we sold the remaining assets related to the Engineered Wood Product (EWP) segment. Accordingly, the results of our previously owned 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. In May 2023, we acquired a manufacturing facility in Wawa, Ontario, Canada from Wawa OSB, Inc. a subsidiary of Forex Inc., for $ 80 million, financed by a combination of cash on hand and availability under the Amended Credit Facility (defined below). The manufacturing facility is expected to be converted into an LP ® SmartSide ® Trim & Siding mill. We are evaluating project schedules and market demand to determine when construction will begin. The facility will remain shut down until such construction is completed. 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, 2022, filed with the SEC on February 21, 2023 (2022 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 depicts 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 - Selected Segment Data” below, our reportable segments are Siding, Oriented Strand Board (OSB), and South America. The following tables set forth our revenue by segment (dollar amounts in millions). 10 Three Months Ended September 30, 2023 By Product type and family: Siding OSB South America Other Inter-segment Total Value-add Siding Solutions $ 342 $ — $ 5 $ — $ — $ 347 OSB - Structural Solutions — 174 40 — — 213 342 174 44 — — 560 Commodity OSB - commodity — 157 — — — 157 Other Other products 2 5 — 4 — 11 $ 345 $ 335 $ 45 $ 4 $ — $ 728 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 11 Nine Months Ended September 30, 2023 By Product type and family: Siding OSB South America Other Inter-segment Total Value-add Siding Solutions $ 989 $ — $ 19 $ — $ — $ 1,008 OSB - Structural Solutions — 412 132 — — 544 989 412 151 — — 1,552 Commodity OSB - commodity — 332 — — — 332 Other Other products 7 9 2 21 — 39 $ 996 $ 754 $ 153 $ 21 $ — $ 1,923 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 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 to the customer 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 estimation 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 sales 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 on 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, restricted stock units, and performance stock units) be excluded from the calculation of diluted earnings per share for the periods in which losses from continuing operations are reported because the effect is anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share (dollar and share amounts in millions, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Income from continuing operations $ 118 $ 129 $ 119 $ 898 Net loss attributed to non-controlling interest — — — 1 Income attributed to LP from continuing operations 118 129 119 898 Income from discontinued operations, net of income taxes — 97 — 196 Net income attributed to LP $ 118 $ 226 $ 119 $ 1,094 Weighted average common shares outstanding - basic 72 74 72 80 Dilutive effect of employee stock plans — — — 1 Shares used for diluted earnings per share 72 74 72 80 Net income attributed to LP per share - basic: Continuing operations $ 1.63 $ 1.75 $ 1.65 $ 11.23 Discontinued operations — 1.32 — 2.45 Net income attributed to LP per share - basic $ 1.63 $ 3.07 $ 1.65 $ 13.67 Net income attributed to LP per share - diluted: Continuing operations $ 1.63 $ 1.74 $ 1.65 $ 11.16 Discontinued operations — 1.31 — 2.43 Net income attributed to LP per share - diluted $ 1.63 $ 3.05 $ 1.65 $ 13.59 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. The net carrying value of the 3.625 % Senior Notes due in 2029 (2029 Senior Notes) was $ 347 million and $ 346 million as of September 30, 2023 and December 31, 2022, respectively. The fair value of the 2029 Senior Notes was estimated to be $ 295 million and $ 306 million as of September 30, 2023 and December 31, 2022, 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 is determined using published rates. In November 2022, LP entered into a Second Amended and Restated Credit Agreement with American AgCredit, PCA, as administrative agent and sole lead arranger, and CoBank, ACB, as letter of credit issuer (the Credit 13 Agreement), relating to its revolving credit facility (as amended, 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. All loans under the Credit Agreement become due on November 29, 2028. As of September 30, 2023, there were no outstanding borrowings under our Amended Credit Facility. 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, 2023 December 31, 2022 Trade receivables $ 148 $ 106 Other receivables 27 19 Income tax receivable 9 4 Allowance for doubtful accounts ( 3 ) ( 1 ) Total $ 181 $ 127 Trade receivables are primarily generated by sales of our products to our wholesale and retail customers. Other receivables as of September 30, 2023 and December 31, 2022, 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, 2023 December 31, 2022 Logs $ 75 $ 59 Other raw materials 48 72 Semi-finished inventories 33 25 Finished products 222 180 Total $ 379 $ 337 NOTE 7. DISCONTINUED OPERATIONS In March 2022, the Company sold its 50 % equity interest in two joint ventures that produce I-joists for $ 59 million, resulting in a pre-tax gain associated with the sale of $ 39 million recorded in the year ended December 31, 2022 within Income from discontinued operations, net of income taxes in the Condensed Consolidated Statements of Income. On August 1, 2022, the Company completed the sale of the assets related to the EWP segment. As a result of the sale, the Company received $ 217 million in gross cash proceeds after taking into account working capital adjustments. The Company paid $ 12 million in direct transaction costs, resulting in net proceeds of $ 205 million. During the year ended December 31, 2022, the Company recorded a pre-tax gain of approximately $ 118 million within Income from discontinued operations, net of income taxes in the Condensed Consolidated Statements of Income. Upon closing, the Company entered into a transition services agreement with the purchaser of the assets, pursuant to which the Company agreed to support the various activities of the EWP segment, which concluded during the three months ended March 31, 2023. 14 The Company has classified the results of its EWP segment as discontinued operations in its Condensed Consolidated Statements of Income for the prior period presented. The following table presents the financial results of the EWP segment for the three and nine months ended September 30, 2022 (dollar amounts in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 2022 Net sales $ 67 $ 455 Cost of sales ( 54 ) ( 352 ) Gross profit 13 103 Selling, general, and administrative expenses ( 2 ) ( 12 ) Income from operations of discontinued operations 12 91 Gain on disposal before income taxes 118 158 Income from discontinued operations before income taxes 130 249 Provision for income taxes ( 33 ) ( 53 ) Income from discontinued operations, net of income taxes $ 97 $ 196 The following summarizes the total cash provided by operations and total cash provided by 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 (dollar amounts in millions): Net cash provided by discontinued operating activities $ 18 Net cash provided by discontinued investing activities $ 258 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. NOTE 8. BUSINESS EXIT CHARGES During the second quarter of 2023, we ceased the manufacturing operations of Entekra Holdings, LLC (Entekra), an off-site framing operation previously reported within our “Other” category, which comprises other products that are not individually significant. Business exit charges were $ 1 million and $ 35 million for the three and nine months ended September 30, 2023, respectively, which consist of the following (dollar amounts in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2023 Impairment of property, plant and equipment, operating lease assets, and other intangible assets 1 $ — $ 24 Restructuring and other related charges: Inventory write-down 2 — 6 Other expenses including personnel-related costs such as severance 3 1 4 $ 1 $ 35 1 Included within Impairment of long-lived assets, net on the Condensed Consolidated Income Statements. 2 Included within Cost of sales on the Condensed Consolidated Income Statements. 3 Included within Other operating credits and charges, net on the Condensed Consolidated Income Statements. 15 NOTE 9. GOODWILL AND OTHER INTANGIBLES Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment by applying a fair value-based test on an annual basis, or more frequently if circumstances indicate a potential impairment. The Company’s annual assessment date is October 1. During the nine months ended September 30, 2023, we recorded impairment charges of $9 million related to developed technology and trademarks related to Entekra, which is discussed further in “Note 8 - Business Exit Charges.” Changes in goodwill and other intangible assets for the nine months ended September 30, 2023 are provided in the following table (dollar amounts in millions): Timber Licenses 1 Goodwill Developed Technology Trademarks Beginning balance December 31, 2022 $ 28 $ 19 $ 15 $ 2 Impairment charges — — ( 7 ) ( 2 ) Amortization ( 2 ) — ( 1 ) — Ending balance September 30, 2023 $ 25 $ 19 $ 7 $ — 1 Timber licenses are included in Timber and timberlands on the Condensed Consolidated Balance Sheets. 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, 2023 and 2022, reflected an estimated annual effective tax rate of 27 % and 25 %, respectively, excluding discrete items discussed below. The total effective tax rate for continuing operations for the three and nine months ended September 30, 2023 was 27 % and 36 %, respectively, compared to 26 % and 24 %, respectively, for the comparable period in 2022. We recognized net discrete tax expense of $ 16 million and net discrete tax benefits of $ 9 million in the nine months ended September 30, 2023 and 2022, respectively. The net discrete tax expense in the current year relates primarily to a $ 22 million expense related to the second quarter change in management’s indefinite reinvestment assertion on Chile and Brazil earnings described in “Item 2 - Management's Discussion and Analysis of Financial Conditions and Results of Operation” of this quarterly report on Form 10-Q, while the net discrete tax benefit in the prior year primarily relates to excess tax benefits from stock-based compensation. NOTE 11. COMMITMENTS AND CONTINGENCIES We maintain reserves for various contingent liabilities as follows (dollar amounts in millions): September 30, 2023 December 31, 2022 Environmental reserves $ 26 $ 27 Other reserves — — Total contingencies 26 27 Current portion (included in Accounts payable and accrued liabilities) ( 1 ) ( 1 ) Long-term portion $ 25 $ 26 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 16 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 based on 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. Other Proceedings From time to time, we and our subsidiaries are parties to certain legal proceedings arising in our ordinary course of business. During the second quarter of 2023, we agreed to pay $ 16 million to resolve certain patent-related claims and to obtain certain patent rights, which is recorded within Other operating credits and charges, net in our Condensed Consolidated Statements of Income. As of September 30, 2023, $ 12 million of the settlement amount is outstanding and is included Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets. Based on the information currently available, management believes the resolution of such ongoing and future 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, 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. During the nine months ended September 30, 2023, we recorded impairment charges of $ 13 million and $ 3 million related to property, plant, and equipment and operating lease assets, respectively, related to Entekra which were written down to fair value based on Level 2 inputs under Accounting Standards Codification 820, Fair Value Measurement (ASC 820), using quoted market prices. See further discussion in “Note 8 - Business Exit Charges.” As of September 30, 2023, there were no other indications of impairment. 17 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, 2023 and 2022, is summarized in the following table (dollar amounts in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Beginning balance $ 8 $ 7 $ 8 $ 7 Accrued to expense — 1 2 3 Credited to other operating credits and charges ( 1 ) — ( 1 ) — Payments made — ( 1 ) ( 1 ) ( 2 ) 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 September 30, 2023, 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. 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, 2023 and 2022 (dollar amounts in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Service cost $ — $ 1 $ — $ 3 Other components of net periodic pension cost 1 : Interest cost — 2 — 5 Expected return on plan assets — ( 2 ) — ( 5 ) Amortization of prior service cost — — — — Amortization of net loss — 1 — 4 Net periodic pension costs before loss due to settlement — 2 — 7 Loss due to settlement — 4 6 4 Net periodic pension cost $ — $ 7 $ 6 $ 11 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 year ended December 31, 2022, the Company liquidated substantially all of the Plan assets to fund lump-sum distributions to participants and purchase non-participating group annuity contracts. As a result, a substantial portion of the Plan was settled during the year ended December 31, 2022. During the three months ended March 31, 2023, the Company completed the termination of the Plan resulting in the recognition of non-cash, pre-tax charges of $ 6 million from Accumulated comprehensive loss to Other non-operating items in our Condensed Consolidated Statements of Income. 18 The changes recognized in Other comprehensive loss were as follows (dollar amounts in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 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 4 7 Total amounts recognized in Other comprehensive income $ — $ 3 $ 4 $ 6 NOTE 15. ACCUMULATED COMPREHENSIVE LOSS Accumulated comprehensive loss is provided in the following table for the three months ended September 30, 2023, and 2022 (dollar amounts in millions): Pension Translation Adjustments Other Total Balance at June 30, 2023 $ — $ ( 78 ) $ — $ ( 78 ) Reclassified to income statement, net of taxes 1 — — — — Translation adjustments — ( 19 ) — ( 19 ) Balance at September 30, 2023 $ — $ ( 97 ) $ — $ ( 98 ) 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 ) 1 Amounts of actuarial loss and prior service cost are components of net periodic benefit cost. See “Note 14 - Defined Benefit Pension Plans” above for additional details. Accumulated comprehensive loss is provided in the following table for the nine months ended September 30, 2023 and 2022 (dollar amounts in millions): Pension Translation Adjustments Other Total Balance at December 31, 2022 $ ( 5 ) $ ( 94 ) $ — $ ( 99 ) Reclassified to income statement, net of taxes 1 4 — — 4 Translation adjustments — ( 3 ) — ( 3 ) Balance at September 30, 2023 $ — $ ( 97 ) $ — $ ( 98 ) 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 ) 1 Amounts of actuarial loss and prior service cost are components of net periodic benefit cost. See “Note 14 - Defined Benefit Pension Plans” above for additional details. 19 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, 2023 2022 2023 2022 Insurance recoveries $ — $ 2 $ — $ 15 Reorganization charges ( 2 ) ( 4 ) ( 9 ) ( 5 ) Legal settlement — — ( 16 ) — Environmental costs — — — ( 2 ) Gain on asset sales 6 — 6 — Other 1 9 ( 1 ) 9 Other operating credits and charges, net $ 6 $ 7 $ ( 20 ) $ 17 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, 2023 2022 2023 2022 Net periodic pension cost, excluding service cost $ — $ ( 1 ) $ — $ ( 4 ) Pension settlement charges — ( 4 ) ( 6 ) ( 4 ) Foreign currency gain (loss) $ — $ 2 $ ( 12 ) $ ( 3 ) Other $ — $ 1 $ 1 $ 1 Other non-operating items $ — $ ( 3 ) $ ( 17 ) $ ( 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. We evaluate the performance of our business segments based on Net sales and segment Adjusted EBITDA (defined below). Accordingly, our chief operating decision maker evaluates performance and allocates resources based primarily on Net sales and segment Adjusted EBITDA for our business segments. The Company's chief operating decision maker is the Chief Executive Officer. Segment Adjusted EBITDA 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, business exit charges, 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. 20 During the nine months ended September 30, 2023, we updated our definition of Adjusted EBITDA to exclude other business exit charges not classified as exit operations. Business exit charges consist of inventory and other asset impairment and exit charges related to the exit of businesses not individually significant. We consider business exit charges to be outside the performance of our ongoing core business operations and believe that presenting Adjusted EBITDA excluding business exit charges provides increased transparency as to the operating costs of our current business performance. We did not revise prior years’ Adjusted EBITDA amounts because there were no significant costs similar in nature to these items. Information about our business segments is as follows (dollar amounts in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net sales Siding $ 345 $ 394 $ 996 $ 1,083 OSB 335 388 754 1,805 South America 45 53 153 190 Other 4 17 21 72 Intersegment sales — ( 1 ) — ( 2 ) Total sales $ 728 $ 852 $ 1,923 3,149 NET INCOME TO ADJUSTED EBITDA Net income $ 118 $ 226 $ 119 $ 1,093 Add (deduct): Net loss attributed to non-controlling interest — — — 1 Income from discontinued operations, net of income taxes — ( 97 ) — ( 196 ) Income attributed to LP from continuing operations 118 129 119 898 Provision for income taxes 44 44 66 284 Depreciation and amortization 30 32 87 96 Stock-based compensation expense 2 2 9 15 Loss on impairment attributed to LP 1 — 1 — Other operating credits and charges, net ( 7 ) ( 7 ) 16 ( 17 ) Business exit charges 1 — 35 — Interest expense 4 3 9 9 Investment income ( 4 ) ( 5 ) ( 10 ) ( 8 ) Other non-operating items — ( 1 ) 11 7 Pension settlement charges — 4 6 4 Adjusted EBITDA $ 190 $ 200 $ 349 $ 1,289 SEGMENT ADJUSTED EBITDA Siding $ 71 $ 90 $ 198 $ 251 OSB 120 113 161 1,021 South America 6 14 31 65 Other — ( 7 ) ( 15 ) ( 19 ) Corporate ( 7 ) ( 11 ) ( 26 ) ( 29 ) Total Adjusted EBITDA $ 190 $ 200 $ 349 $ 1,289 21