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LOUISIANA-PACIFIC CORP - Quarter Report: 2019 September (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 2019
Commission File Number 1-7107
 
 LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
93-0609074
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
414 Union Street, Suite 2000 , Nashville, TN 37219
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:(615) 986 - 5600
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $1 par value
LPX
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐   No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 117,453,425 shares of Common Stock, $1 par value, outstanding as of November 4, 2019. Except as otherwise specified and unless the context otherwise requires, references to "LP", the “Company”, “we”, “us”, and “our” refer to Louisiana-Pacific Corporation and its subsidiaries.




ABOUT FORWARD-LOOKING STATEMENTS
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their businesses and other matters as long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. This report contains, and other reports and documents filed by us with the Securities and Exchange Commission (SEC) may contain, forward-looking statements. These statements are or will be based upon the beliefs and assumptions of, and on information available to, our management.
The following statements are or may constitute forward-looking statements: (1) statements preceded by, followed by or that include words like “may,” “will,” “could,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “potential,” “continue” or “future” or the negative or other variations thereof and (2) other statements regarding matters that are not historical facts, including without limitation, plans for product development, forecasts of future costs and expenditures, possible outcomes of legal proceedings, capacity expansion and other growth initiatives and the adequacy of reserves for loss contingencies.
Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the following:
•
changes in governmental fiscal and monetary policies, including tariffs and levels of employment;
•
changes in general economic conditions;
•
changes in the cost and availability of capital;
•
changes in the level of home construction and repair activity;
•
changes in competitive conditions and prices for our products;
•
changes in the relationship between supply of and demand for building products;
•
changes in the relationship between supply of and demand for raw materials, including wood fiber and resins, used in manufacturing our products;
•
changes in the cost of and availability of energy, primarily natural gas, electricity and diesel fuel;
•
changes in the cost of and availability of transportation;
•
changes in other significant operating expenses;
•
changes in exchange rates between the U.S. dollar and other currencies, particularly the Canadian dollar, Brazilian real and Chilean peso;
•
changes in general and industry-specific environmental laws and regulations;
•
changes in tax laws, and interpretations thereof;
•
changes in circumstances giving rise to environmental liabilities or expenditures;
•
the resolution of existing and future product-related litigation and other legal proceedings; and
•
acts of public authorities, war, civil unrest, natural disasters, fire, floods, earthquakes, inclement weather and other matters beyond our control.
In addition to the foregoing and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in the reports and other documents filed by us with the SEC that warn of risks or uncertainties associated with future results, events or circumstances identify important factors that could cause actual results, events and circumstances to differ materially from those reflected in the forward-looking statements.
ABOUT THIRD-PARTY INFORMATION
In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industry publications, U.S. government sources and other third parties. Although we believe the information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.

2


Item 1.
Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
304

 
$
878

Receivables, net of allowance for doubtful accounts of $3 million at September 30, 2019 and $1 million at December 31, 2018
183

 
128

Inventories
260

 
273

Prepaid expenses and other current assets
14

 
8

Total current assets
761

 
1,287

 
 
 
 
Timber and timberlands
61

 
62

Property, plant and equipment, net
1,034

 
1,010

Goodwill and other intangible assets
54

 
26

Operating lease assets
41

 
—

Investments in and advances to affiliates
10

 
49

Other assets
82

 
79

Total assets
$
2,043

 
$
2,514

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
3

 
$
5

Accounts payable and accrued liabilities
213

 
236

Income taxes payable
1

 
21

Total current liabilities
216

 
262

 
 
 
 
Long-term debt, excluding current portion
348

 
347

Non-current operating lease liabilities
33

 
—

Other long-term liabilities
223

 
205

 
 
 
 
Redeemable noncontrolling interest
12

 
—

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $1 par value, 200,000,000 shares authorized, 135,237,793 shares issued and outstanding at September 30, 2019 and 153,358,542 shares issued and outstanding at December 31, 2018
135

 
153

Additional paid-in capital
453

 
458

Retained earnings
1,185

 
1,613

Treasury stock, 17,793,832 shares and 16,525,351 shares, at cost
(408
)
 
(378
)
Accumulated comprehensive loss
(152
)
 
(146
)
Total stockholders’ equity
1,213

 
1,700

Total liabilities and stockholders’ equity
$
2,043

 
$
2,514

The accompanying notes are an integral part of these unaudited financial statements.

3


CONSOLIDATED STATEMENTS OF INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
603

 
$
737

 
$
1,773

 
$
2,239

Cost of sales
529

 
524

 
1,540

 
1,589

Gross profit
75

 
213

 
233

 
650

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
58

 
51

 
172

 
152

(Gain) loss on sale or impairment of long lived assets, net
5

 
—

 
6

 
—

Other operating credits and charges, net
3

 
(6
)
 
2

 
(11
)
Income from operations
8

 
168

 
53

 
510

Interest expense, net
(4
)
 
2

 
(5
)
 
1

Other non-operating items
(1
)
 
(2
)
 
8

 
(4
)
Income from continuing operations before taxes
3

 
167

 
56

 
506

Provision for income taxes
3

 
42

 
13

 
123

Equity in loss of unconsolidated affiliates
—

 
1

 
—

 
2

Income from continuing operations
1

 
124

 
43

 
382

Loss from discontinued operations
—

 
—

 
—

 
(4
)
Net income
$
1

 
$
124

 
$
42

 
$
378

Less: Net loss attributed to non-controlling interest
(1
)
 
—

 
(3
)
 
—

Net income attributed to Louisiana-Pacific Corporation
$
2

 
$
124

 
$
46

 
$
378

 
 
 
 
 
 
 
 
Amounts attributed to Louisiana-Pacific Corporation common shareholders:
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
2

 
$
124

 
$
46

 
$
382

Income from discontinued operations, net of tax
—

 
—

 
—

 
(4
)
 
$
2

 
$
124

 
$
46

 
$
378

Net income per share of common stock:
 
 
 
 
 
 
 
Income per share continuing operations
$
0.02

 
$
0.87

 
$
0.37

 
$
2.65

Loss per share discontinued operations
—

 
—

 
—

 
(0.03
)
Net income per share - basic
$
0.02

 
$
0.87

 
$
0.37

 
$
2.62

Diluted net income per share of common stock:
 
 
 
 
 
 
 
Income per share continuing operations
$
0.02

 
$
0.86

 
$
0.36

 
$
2.62

Loss per share discontinued operations
—

 
—

 
—

 
(0.03
)
Net income per share - diluted
$
0.02

 
$
0.86

 
$
0.36

 
$
2.59

 
 
 
 
 
 
 
 
Average shares of common stock used to compute net income per share:
 
 
 
 
 
 
 
Basic
121.4

 
142.5

 
125.1

 
143.9

Diluted
122.2

 
143.9

 
125.9

 
145.6

The accompanying notes are an integral part of these unaudited financial statements.

4


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
1

 
$
124

 
$
42

 
$
378

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(10
)
 
(2
)
 
(7
)
 
(14
)
Unrealized gain (loss) on investments, net of tax
—

 
—

 
(1
)
 
—

Amortization of pension and post-retirement prior service costs and net loss
1

 
1

 
3

 
4

Other comprehensive loss
(9
)
 
(1
)
 
(5
)
 
(9
)
Comprehensive income (loss)
(9
)
 
123

 
37

 
368

Less: comprehensive loss attributed to redeemable non-controlling interest
(1
)
 
—

 
(3
)
 
—

Comprehensive income (loss) attributed to Louisiana-Pacific Corporation
$
(7
)
 
$
123

 
$
41

 
$
368

The accompanying notes are an integral part of these unaudited financial statements.

5



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED) 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net income
$
1

 
$
124

 
$
42

 
$
378

Non-cash charges to income:
 
 
 
 
 
 
 
Depreciation and amortization
30

 
31

 
90

 
92

Gain on acquisition
—

 
—

 
(14
)
 
—

Other adjustments, net
17

 
(1
)
 
23

 
4

Changes in assets and liabilities:
 
 
 
 
 
 
 
(Increase) decrease in receivables
(6
)
 
19

 
(46
)
 
(26
)
(Increase) decrease in prepaids and other current assets
(3
)
 
1

 
(6
)
 
(4
)
(Increase) decrease in inventories
31

 
2

 
14

 
(12
)
Increase (decrease) in accounts payable and accrued liabilities
(11
)
 
2

 
(29
)
 
(18
)
Increase (decrease) in income taxes payable and deferred income taxes
1

 
10

 
(15
)
 
47

Pension contributions
—

 
(36
)
 
(1
)
 
(41
)
Net cash provided by (used in) operating activities
59

 
151

 
58

 
419

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Property, plant and equipment additions
(37
)
 
(63
)
 
(118
)
 
(150
)
Investment in unconsolidated affiliate
(3
)
 
—

 
(3
)
 
(45
)
Cash acquired (used in) acquisition
—

 
—

 
33

 
—

Other investing activities
(1
)
 
—

 
(1
)
 
23

Net cash used in investing activities
(40
)
 
(63
)
 
(90
)
 
(173
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
Repayment of long-term debt
—

 
(22
)
 
(3
)
 
(22
)
Payment of cash dividends
(16
)
 
(19
)
 
(50
)
 
(56
)
Purchase of stock
(42
)
 
(60
)
 
(480
)
 
(99
)
Other financing activities
(2
)
 
(2
)
 
(8
)
 
(6
)
Net cash used in financing activities
(60
)
 
(102
)
 
(541
)
 
(183
)
EFFECT OF EXCHANGE RATE ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(2
)
 
(1
)
 
(1
)
 
(5
)
Net decrease in cash, cash equivalents and restricted cash
(44
)
 
(14
)
 
(574
)
 
59

Cash, cash equivalents and restricted cash at beginning of period
362

 
1,014

 
892

 
941

Cash, cash equivalents and restricted cash at end of period
$
318

 
$
1,000

 
$
318

 
$
1,000

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
 
 
 
Cash paid for income taxes
$
—

 
$
32

 
$
29

 
$
73

Cash paid for interest, net of cash received
$
5

 
$
4

 
$
10

 
$
7


The accompanying notes are an integral part of these unaudited financial statements.

6



CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(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, 2018
153

 
$
153

 
17

 
$
(378
)
 
$
458

 
$
1,613

 
$
(146
)
 
$
1,700

Net income


 


 


 


 


 
27

 


 
27

Dividends paid ($0.135 per share)


 


 


 


 


 
(17
)
 


 
(17
)
Issuance of shares under stock plans


 


 
—

 
4

 
(8
)
 


 


 
(4
)
Purchase of stock
(12
)
 
(12
)
 
2

 
(38
)
 
(80
)
 
(308
)
 

 
(438
)
Compensation expense associated with stock-based compensation


 


 


 


 
2

 


 

 
2

Other comprehensive loss


 


 


 


 


 


 
2

 
2

Balance, March 31, 2019
141

 
141

 
18

 
(412
)
 
373

 
1,314

 
(144
)
 
1,273

Net income
 
 
 
 
 
 
 
 
 
 
17

 
 
 
17

Dividends paid ($0.135 per share)
 
 
 
 
 
 
 
 
 
 
(17
)
 
 
 
(17
)
Issuance of shares under stock plans
 
 
 
 
—

 
2

 
(1
)
 
 
 
 
 
1

Compensation expense associated with stock-based compensation
 
 
 
 
 
 
 
 
2

 
 
 
 
 
2

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
2

 
2

Balance, June 30, 2019
141

 
141

 
18

 
(410
)
 
374

 
1,315

 
(143
)
 
1,278

Net income
 
 
 
 
 
 
 
 
 
 
2

 
 
 
2

Dividends paid ($0.135 per share)
 
 
 
 
 
 
 
 
 
 
(16
)
 
 
 
(16
)
Issuance of shares under stock plans
 
 
 
 
—

 
2

 
(3
)
 
 
 
 
 
(1
)
Purchase of stock
(6
)
 
(6
)
 
 
 
 
 
80

 
(116
)
 
 
 
(42
)
Compensation expense associated with stock-based compensation
 
 
 
 
 
 
 
 
2

 
 
 
 
 
2

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(9
)
 
(9
)
Balance, September 30, 2019
135

 
$
135

 
18

 
$
(408
)
 
$
453

 
$
1,185

 
$
(152
)
 
$
1,213



7


 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Comprehensive
Loss
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, December 31, 2017
153

 
$
153

 
8

 
$
(178
)
 
$
471

 
$
1,280

 
$
(122
)
 
$
1,605

Effect of adoption of ASU 2014-09


 


 


 


 


 
(4
)
 


 
(4
)
Effect of adoption of ASU 2018-02


 


 


 


 


 
17

 
(17
)
 
—

Net income


 


 


 


 


 
91

 


 
91

Dividends paid ($0.13 per share)


 


 


 


 


 
(19
)
 


 
(19
)
Issuance of shares under stock plans


 


 
—

 
4

 
(10
)
 


 


 
(6
)
Compensation expense associated with stock-based compensation


 


 


 


 
2

 


 

 
2

Other comprehensive income


 


 


 


 


 


 
4

 
4

Balance, March 31, 2018
153

 
153

 
8

 
(173
)
 
463

 
1,364

 
(135
)
 
1,672

Net income
 
 
 
 
 
 
 
 
 
 
163

 
 
 
163

Dividends paid ($0.13 per share)
 
 
 
 
 
 
 
 
 
 
(19
)
 
 
 
(19
)
Issuance of shares under stock plans
 
 
 
 
—

 
6

 
(8
)
 
 
 
 
 
(2
)
Purchase of treasury stock
 
 
 
 
1

 
(39
)
 
 
 
 
 
 
 
(39
)
Compensation expense associated with stock-based compensation
 
 
 
 
 
 
 
 
3

 
 
 
 
 
3

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
(12
)
 
(12
)
Balance, June 30, 2018
153

 
153

 
9

 
(206
)
 
458

 
1,508

 
(147
)
 
1,766

Net income
 
 
 
 
 
 
 
 
 
 
124

 
 
 
124

Dividends paid ($0.13 per share)
 
 
 
 
 
 
 
 
 
 
(19
)
 
 
 
(19
)
Issuance of shares under stock plans
 
 
 
 
—

 
2

 
(3
)
 
 
 
 
 
(2
)
Purchase of treasury stock
 
 
 
 
2

 
(60
)
 
 
 
 
 
 
 

Compensation expense associated with stock-based compensation
 
 
 
 
 
 
 
 
2

 
 
 
 
 
2

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
 
(1
)
Balance, September 30, 2018
153

 
$
153

 
12

 
$
(264
)
 
$
457

 
$
1,614

 
$
(148
)
 
$
1,811

The accompanying notes are an integral part of these unaudited financial statements.

8


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS FOR PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of us and our subsidiaries for the interim periods presented. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. All dollar amounts are shown in millions except per share.
NOTE 2 - LEASES
On January 1, 2019, we adopted ASU 2016-02, "Leases (Topic 842)" (ASC 842), which supersedes the lease accounting requirements in ASC Topic 840, "Leases". The new standard requires entities to recognize, separately from each other, an asset for its right to use (ROU) the underlying asset equal to the liability for its finance and operating lease obligations. Further, the company is required to present separately the current and non-current portion of the ROU asset and corresponding lease liability.
In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842) Targeted Improvements", which provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. The amendments have the same effective date and transition requirements as the new lease standard. We have elected to adopt using this optional transition method.
We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration.
Our lease portfolio consists primarily of real estate, mobile equipment at our manufacturing facilities, railcars to transport our products, and a fleet of vehicles.
As part of our adoption of ASC 842, we have also elected to apply the following practical expedients as permitted under the new standard:
•
Package of practical expedients - we will not reassess whether expiring or existing contracts contain a lease, will not reassess the classification of expired or existing leases, and will not reassess whether lease initial direct costs would qualify for capitalization under the new lease accounting standard.
•
Lease and non-lease components as lessee - for leases across all asset classes in which we are a lessee, we will not separate non-lease components from lease components and instead will account for each separate lease component and the non-lease components associated with that lease component as a single lease component.
•
Short-term leases - we have elected not to recognize ROU assets and lease liabilities for short-term leases across all asset classes that have a lease term of 12 months or less. We recognize the lease payments associated with our short-term leases as an expense on a straight-line basis over the lease term.
Key estimates and judgments include how we determined the discount rate used to record the unpaid lease payments at present value and lease term.

•
ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As most of our leases do not provide an implicit rate, we used our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.


9


•
The lease term for all of our leases includes the non-cancelable period of the lease plus any additional periods covered by either an option to extend (or not to terminate) the lease that we are reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

Supplemental Balance Sheet information Related to Leases:
 
 
Classification
 
September 30, 2019
Assets:
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
41

Finance lease assets
 
Property, plant, and equipment, net
 
1

Total lease assets
 
 
 
$
42

Liabilities:
 
 
 
 
Current
 
 
 
 
  Operating
 
Accounts payable and accrued liabilities
 
$
9

  Finance
 
Current portion of long-term debt
 
1

Non-current
 
 
 
 
  Operating
 
Non-current operating lease liabilities
 
33

  Finance
 
Long-term debt
 
1

Total lease liabilities
 
 
 
$
42

Components of Lease Expense:
 
Quarter Ended September 30, 2019
Nine Months Ended
September 30, 2019
Lease Cost:
 
 
 
Operating lease cost
 
$
3

$
7

Finance lease cost:
 
 
 
  Amortization of leased assets
 
—

—

  Interest on lease liabilities
 
—

—

Total lease cost
 
$
3

$
8

Lease Term and Discount Rate:
 
September 30, 2019
Weighted average remaining lease term (years)
 
 
  Operating leases
 
12.0

  Finance leases
 
3.0

Weighted average discount rate
 
 
  Operating leases
 
4.6
%
  Finance leases
 
4.2
%


10


Maturity of Lease Liabilities
 
Operating Leases
 
Finance Leases
 
Total
2019
 
$
3

 
$
—

 
$
3

2020
 
9

 
1

 
10

2021
 
7

 
—

 
7

2022
 
5

 
—

 
5

2023
 
3

 
—

 
3

2024 and thereafter
 
29

 
—

 
29

Total lease payments
 
55

 
1

 
56

Less: Interest
 
(14
)
 
—

 
(14
)
Present value of lease liabilities
 
$
41


$
1


$
42

Other Information
 
Quarter Ended
September 30, 2019
Nine Months Ended September 30, 2019
Short-term lease cost
 
$
1

$
3

Variable lease cost
 
7

20

Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
  Operating cash flows from finance leases
 
—

—

  Operating cash flows from operating leases
 
2

6

  Financing cash flows from finance leases
 
—

—

ROU assets obtained in exchange for new operating lease liabilities
 
20

25

ROU assets obtained in exchange for new financing lease liabilities
 
—

1


As of December 31, 2018, total future minimum commitments under non-cancelable operating leases were as follows:
 
2019
2020
2021
2022
2023
Thereafter

Lease Obligations
$
8

$
7

$
5

$
2

$
—

$
—



NOTE 3 - REVENUE
Revenue is recognized when obligations under the terms of a contract (purchase orders) with our customers are satisfied; generally, this occurs with the transfer of control of our products. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Shipping cost incurred by us to deliver products to our customers are recorded in cost of sales. We recognize revenue as of a point in time.
The following tables disaggregate our revenue by product line and product type by segment for the quarter and nine months ended September 30, 2019 and 2018:

11


Quarter Ended September 30, 2019
By Product family:
Siding
 
OSB
 
EWP
 
South America
 
Other
 
Inter-segment
 
Total
SmartSide® Strand siding
$
213

 
$
—

 
$
—

 
$
4

 
$
—

 
$
—

 
$
217

SmartSide® Fiber siding
28

 
—

 
—

 
—

 
—

 
—

 
28

CanExel® siding
15

 
—

 
—

 
—

 
—

 
—

 
15

OSB - commodity
1

 
100

 
—

 
—

 
—

 
(1
)
 
100

OSB - value-add
—

 
96

 
2

 
32

 
—

 
—

 
130

LVL
—

 
—

 
37

 
—

 
—

 
—

 
37

LSL
—

 
—

 
12

 
—

 
—

 
—

 
12

I-joist
—

 
—

 
39

 
—

 
—

 
—

 
39

Plywood
—

 
—

 
7

 
—

 
—

 
—

 
7

Other
2

 
2

 
8

 
1

 
6

 
—

 
19

 
$
259

 
$
197

 
$
105

 
$
36

 
$
6

 
$
(1
)
 
$
603

By Product type:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity
$
1

 
$
100

 
$
7

 
$
—

 
$
—

 
$
(1
)
 
$
107

Value-add
256

 
96

 
90

 
36

 
—

 
—

 
478

Other
2

 
2

 
8

 
1

 
6

 
—

 
19

 
$
259

 
$
197

 
$
105

 
$
36

 
$
6

 
$
(1
)
 
$
603

Nine Months Ended September 30, 2019
By Product family:
Siding
 
OSB
 
EWP
 
South America
 
Other
 
Inter-segment
 
Total
SmartSide® Strand siding
$
600

 
$
—

 
$
—

 
$
14

 
$
—

 
$
—

 
$
614

SmartSide® Fiber siding
79

 
—

 
—

 
—

 
—

 
—

 
79

CanExel® siding
38

 
—

 
—

 
—

 
—

 
—

 
38

OSB - commodity
9

 
304

 
3

 
—

 
—

 
(4
)
 
312

OSB - value-add
—

 
295

 
7

 
105

 
—

 
—

 
406

LVL
—

 
—

 
108

 
—

 
—

 
—

 
108

LSL
—

 
—

 
40

 
—

 
—

 
—

 
39

I-joist
—

 
—

 
103

 
—

 
—

 
—

 
103

Plywood
—

 
—

 
19

 
—

 
—

 
—

 
19

Other
7

 
6

 
23

 
2

 
16

 
—

 
55

 
$
733

 
$
605

 
$
303

 
$
121

 
$
16

 
$
(4
)
 
$
1,773

By Product type:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity
$
9

 
$
304

 
$
22

 
$
—

 
$
—

 
$
(4
)
 
$
331

Value-add
717

 
295

 
257

 
119

 
—

 
(1
)
 
1,387

Other
7

 
6

 
23

 
2

 
16

 
—

 
55

 
$
733

 
$
605

 
$
303

 
$
121

 
$
16

 
$
(4
)
 
$
1,773



12


Quarter Ended September 30, 2018
By Product family:
Siding
 
OSB
 
EWP
 
South America
 
Other
 
Inter-segment
 
Total
SmartSide® Strand siding
$
188

 
$
—

 
$
—

 
$
3

 
$
—

 
$
—

 
$
191

SmartSide®  Fiber siding
30

 
—

 
—

 
—

 
—

 
—

 
30

CanExel® siding
7

 
—

 
—

 
—

 
—

 
—

 
7

OSB - commodity
13

 
197

 
1

 
—

 
—

 
—

 
211

OSB - value-add
—

 
151

 
4

 
30

 
—

 
—

 
185

LVL
—

 
—

 
36

 
—

 
—

 
—

 
36

LSL
—

 
—

 
18

 
—

 
—

 
—

 
18

I-joist
—

 
—

 
34

 
—

 
—

 
—

 
34

Plywood
—

 
—

 
8

 
—

 
—

 
—

 
8

Other
2

 
2

 
10

 
1

 
3

 
—

 
17

 
$
241

 
$
349

 
$
110

 
$
35

 
$
3

 
$
—

 
$
737

By Product type:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity
$
13

 
$
197

 
$
9

 
$
—

 
$
—

 
$
—

 
$
219

Value-add
226

 
151

 
91

 
34

 
—

 
—

 
502

Other
2

 
2

 
10

 
1

 
3

 
—

 
17

 
$
241

 
$
349

 
$
110

 
$
35

 
$
3

 
$
—

 
$
737


Nine Months Ended September 30, 2018
By Product family:
Siding
 
OSB
 
EWP
 
South America
 
Other
 
Inter-segment
 
Total
SmartSide® Strand siding
$
546

 
$
—

 
$
—

 
$
17

 
$
—

 
$
—

 
$
563

SmartSide®  Fiber siding
84

 
—

 
—

 
—

 
—

 
—

 
84

CanExel® siding
33

 
—

 
—

 
—

 
—

 
—

 
33

OSB - commodity
34

 
609

 
9

 
—

 
—

 
—

 
652

OSB - value-add
22

 
435

 
11

 
103

 
—

 
—

 
571

LVL
—

 
—

 
113

 
—

 
—

 
—

 
113

LSL
—

 
—

 
49

 
—

 
—

 
—

 
49

I-joist
—

 
—

 
98

 
—

 
—

 
—

 
98

Plywood
—

 
—

 
23

 
—

 
—

 
—

 
23

Other
9

 
6

 
26

 
3

 
9

 
—

 
52

 
$
729

 
$
1,050

 
$
329

 
$
122

 
$
9

 
$
—

 
$
2,239

By Product type:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity
$
34

 
$
609

 
$
32

 
$
—

 
$
—

 
$
—

 
$
675

Value-add
686

 
435

 
271

 
120

 
—

 
—

 
1,512

Other
9

 
6

 
26

 
3

 
9

 
—

 
52

 
$
729

 
$
1,050

 
$
329

 
$
122

 
$
9

 
$
—

 
$
2,239





NOTE 4 - STOCK-BASED COMPENSATION

13


We have a Management Incentive Plan (MIP) that is administered by the Compensation Committee of the Board of Directors. The Compensation Committee authorizes the grants of restricted stock awards (shares or units), performance share awards payable in stock based upon the attainment of specified performance goals and stock-settled stock appreciation rights (SSARs).We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of LP common stock at a discount. As of September 30, 2019, 2.9 million shares were available for grant under the 2013 Omnibus Plan and 1.9 million shares were available under the 2019 Employee Stock Purchase Plan.
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,

2019
 
2018
 
2019
 
2018
Total stock-based compensation expense (cost of sales, selling, general and administrative and other operating credits and charges, net)
$
2

 
$
2

 
$
6

 
$
7

Income tax provision related to stock-based compensation
—

 
—

 
(1
)
 
(3
)
Impact on cash flow due to taxes paid related to net share settlement of equity awards
2

 
2

 
5

 
9


At September 30, 2019, $15 million of compensation cost related to unvested performance awards, restricted stock awards and SSARs attributable to future service had not yet been recognized.
During the first nine months of 2019, we granted 195,452 performance awards at an average grant date fair value of $25.19 per share and 393,054 restricted stock awards at an average grant date fair value of $24.21 per share.
NOTE 5 – FAIR VALUE MEASUREMENTS
We estimated our Senior Notes due in 2024 to have a fair value of $357 million at September 30, 2019 and $338 million at December 31, 2018 based upon market quotations.
Carrying amounts reported on the balance sheet for cash and cash equivalents, accounts receivables, accounts payable and current portion of long-term debt approximate fair value due to the short-term maturity of these items.
NOTE 6 – EARNINGS PER SHARE
Basic earnings per share are based upon the weighted-average number of shares of common stock outstanding. Diluted earnings per share are 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. Our potentially dilutive securities consist of stock options, SSARs, restricted stock or units and performance share awards.
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
2019
 
2018
 
2019
 
2018
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
121.4

 
142.5

 
125.1

 
143.9

Effect of dilutive securities:
 
 
 
 
 
 
 
Dilutive effect of employee stock plans
0.8

 
1.4

 
0.9

 
1.7

Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted
122.2

 
143.9

 
125.9

 
145.6


For the quarter and nine months ended September 30, 2019 and 2018, there were no SSARs that were considered not in-the-money for purposes of our earnings per share calculation.

14


NOTE 7 - SHARE REPURCHASE PROGRAM

During the quarter ended March 31, 2019, we announced that our Board of Directors authorized an additional $600 million share repurchase program, including an accelerated share repurchase (ASR) program. In connection with the ASR program, we entered into an agreement with Goldman, Sachs & Co. (GS) to repurchase $400 million of our common stock. Under the ASR, we received approximately 11.9 million shares of our common stock during the first quarter of 2019. During the third quarter of 2019, GS delivered the final settlement of the ASR resulting in an additional 4.4 million shares.

NOTE 8 – RECEIVABLES
Receivables consist of the following:
 
September 30, 2019
 
December 31, 2018
Trade receivables
$
140

 
$
87

Income tax receivable
27

 
16

Other receivables
19

 
25

Allowance for doubtful accounts
(3
)
 
(1
)
Total
$
183

 
$
128


Other receivables at September 30, 2019 and December 31, 2018 primarily consist of sales tax receivables, vendor rebates, a receivable associated with an affiliate and other miscellaneous receivables.
NOTE 9 – INVENTORIES
Inventories are valued at the lower of cost or net realizable value. Inventory cost includes materials, labor and operating overhead. The major types of inventories are as follows (work in process is not material):
 
September 30, 2019
 
December 31, 2018
Logs
$
41

 
$
57

Other raw materials
31

 
25

Semi-finished inventory
22

 
23

Finished products
166

 
168

Total
$
260

 
$
273



NOTE 10 - ACQUISITIONS AND REDEEMABLE NONCONTROLLING INTEREST

Redeemable noncontrolling interest are interests in subsidiaries that are 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 at the end of each reporting period or the historical cost basis of the noncontrolling interest adjusted for cumulative earnings allocations. The resulting increases or decreases in the estimated redemption amount of redeemable preferred noncontrolling interest are affected by corresponding charges through income. Any adjustments recognized on redeemable common noncontrolling interest are affected by corresponding charges to accumulated paid in capital.

15



Entekra

During the second quarter of 2018, we invested $45 million in Entekra Holdings, LLC (Entekra), a start-up design, engineering and manufacturing company that provides off-site framing for both residential and commercial construction. This investment was recorded as an equity investment based upon the joint control of Entekra’s operations. We own 81.8% of the A units and 55% of the B units of Entekra. Our portion of the earnings and losses of Entekra was included in our Consolidated Statement of Income as income (loss) from unconsolidated affiliate.
During the first quarter of 2019, we obtained a controlling interest in Entekra. Entekra's results of operations have been fully consolidated for periods after December 31, 2018 and we established a redeemable noncontrolling interest related to the minority holders. Due to the pre-existing ownership interest in Entekra, this acquisition was accounted for as a step acquisition in accordance with ASC 805, "Business Combinations". We recognized a gain of $14 million recorded within other non-operating items on our Consolidated Statements of Income in connection with this transaction to record our ownership interest in Entekra at fair value on the acquisition date based upon an appraisal.
Including our previously owned interest, we acquired net assets of $56 million, consisting of $41 million in current assets, $6 million in fixed assets, $25 million of goodwill and other intangible assets less $1 million in current liabilities and $15 million in non-controlling interest. Certain information about Entekra (e.g., pro forma financial information and allocation of purchase price) is not presented because such information is not material to our results of operations and financial position.
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Beginning balance
$
13

 
$
—

 
$
—

 
$
—

Purchase of redeemable common and preferred stock
—

 
—

 
15

 
—

Net loss attributable to redeemable non-controlling interest
(1
)
 
—

 
(3
)
 
—

Adjustment to redemption value
—

 
—

 
—

 
—

Ending balance
$
12

 
$
—

 
$
12

 
$
—


Prefinished Staining Product Incorporated (PSPI)
During the second quarter of 2019, we acquired certain assets and liabilities of Prefinished Staining Product Incorporated (PSPI), a prefinished siding company located in Green Bay, Wisconsin. The purchase resulted in us recording intangible assets of $4 million. Our assessment of fair value and the purchase price allocation related to this acquisition is final. Certain information about PSPI (e.g., pro forma financial information and allocation of purchase price) is not presented because such information is not material to our results of operations and financial position.

16



NOTE 11 - GOODWILL AND OTHER INTANGIBLES

Changes in goodwill and other intangible assets for the nine months ended September 30, 2019 is provided in the following table:
 
2019
 
Timber and timberlands
Goodwill
Developed Technology
Other Assets
Beginning balance December 31, 2018
$
41

$
16

$
10

$
—

Acquisitions (Note 10)
—

14

12

3

Amortization
(2
)
—

(1
)
—

Total goodwill and other intangibles
$
39

$
30

$
21

$
3



NOTE 12 – INCOME TAXES
For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate to year-to-date results, unless this method does not result in a reliable estimate of year-to-date income tax expense. Each period, the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted to the current quarter. Changes in profitability estimates in various jurisdictions will impact our quarterly effective income tax rates.

For the first nine months of 2019, our income tax expense on continuing operations reflects a rate of 24% as compared to 24% in the comparable period of 2018. For the first nine months of 2019, the primary differences between the U.S. statutory rate of 21% and the effective rate of 24% relates to state income tax, foreign tax rates and benefit from U.S. tax credits. For the first nine months of 2018, the primary differences between the U.S. statutory rate of 21% and the effective rate of 24% relates to state income tax, discretionary pension payments, foreign tax rates and tax deductions related to stock-based compensation.

NOTE 13 - OTHER OPERATING CREDITS AND CHARGES AND IMPAIRMENTS
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Reorganization charges
$
(2
)
 
$
(1
)
 
$
(5
)
 
$
(5
)
Severance and other charges associated with curtailment
(2
)
 
—

 
(3
)
 
—

Adjustment to product-related warranty reserves
—

 
8

 
4

 
8

Refund of environmental costs
—

 
—

 
—

 
8

Insurance recoveries
—

 
—

 
1

 
—

Expenses related to hurricane
—

 
(1
)
 
—

 
(1
)
 
$
(3
)
 
$
6

 
$
(2
)
 
$
11



During the third quarter of 2019, we recorded a charge of $2 million related to severance associated with certain reorganizations within the corporate office and $2 million related to severance and other charges associated with our curtailment of an OSB mill in British Columbia, Canada.

During the third quarter of 2019, we recorded a $5 million impairment related to a facility in Canada that LP expects to sell within the next 12 months.


17


During the second quarter of 2019, we reduced our product related warranty reserves by $4 million and recorded a gain of $1 million in insurance recoveries associated with property damage from prior years. Additionally, we recorded a charge of $1 million related to severance associated with certain reorganizations within the corporate office and $1 million related to severance and other charges associated with our recently announced planned curtailment of an OSB mill in British Columbia, Canada.

During the first quarter of 2019, we recorded a charge of $2 million on severance and other charges related to certain reorganizations within the corporate offices and property damage sustained by our Wilmington facility during a hurricane occurring in the fall of 2018.

During the third quarter of 2018, we recorded a gain of $8 million related to the reduction in product-related warranty reserves associated with CanExel products sold in specific geographic locations and for a specific time period based upon reductions in claims activities. Additionally, we recorded $1 million in severance and other charges related to certain reorganizations and a loss of $1 million related to property damage sustained by our Wilmington facility during a hurricane occurring in the fall of 2018.

During the second quarter of 2018, we recorded a gain of $8 million related to the settlement of previously-paid environmental costs or the liability for future environmental costs to be paid by a third party associated with a non-operating site. Additionally, we recorded a charge of $4 million in severance and other charges related to certain reorganizations within the corporate offices, including the costs associated with the retirement of our previous chief financial officer.

NOTE 14 – LEGAL AND ENVIRONMENTAL MATTERS
Certain environmental matters and legal proceedings are discussed below.
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 in light of 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 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. However, no estimate of the range of any such change can be made at this time.

Recorded in Other assets is $1 million related to a receivable for reimbursements of environmental costs associated with a non-operating site as of September 30, 2019.
Other Proceedings
We and our subsidiaries are parties to other legal proceedings. Based on the information currently available, management believes the resolution of such proceedings will not have a material adverse effect on our financial position, results of operations, cash flows or liquidity.


18


NOTE 15 – SELECTED SEGMENT DATA
We operate in four segments: Siding, North America Oriented Strand Board (OSB), Engineered Wood Products (EWP) and South America. Our business units have been aggregated into these four segments based upon the similarity of economic characteristics, customers and distribution methods. Our results of operations attributed to LP 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. Segment information was prepared in accordance with the same accounting principles as those described in Note 1 of the Notes to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. During the first quarter of 2019, certain timber operations where reclassified from other to EWP and we have reclassified a significant portion of our unallocated expenses to the business segments effective during the first quarter of 2019. All prior periods presented have been adjusted for comparability.
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net sales
 
 
 
 
 
 
 
Siding
$
259

 
$
241

 
$
733

 
$
729

OSB
197

 
349

 
605

 
1,050

EWP
105

 
110

 
303

 
329

South America
36

 
35

 
121

 
122

Other
6

 
3

 
16

 
9

Intersegment sales
(1
)
 
—

 
(4
)
 
—

 
$
603

 
$
737

 
$
1,773

 
$
2,239

Operating profit (loss):
 
 
 
 
 
 
 
Siding
$
38

 
$
51

 
$
108

 
$
140

OSB
(16
)
 
106

 
(41
)
 
345

EWP
2

 
6

 
11

 
12

South America
6

 
7

 
20

 
25

Other
(4
)
 
(2
)
 
(10
)
 
(7
)
Other operating credits and charges, net
(3
)
 
6

 
(2
)
 
11

Gain (loss) on sale or impairment of long-lived assets, net
(5
)
 
—

 
(6
)
 
—

General corporate and other expenses, net
(6
)
 
(6
)
 
(23
)
 
(18
)
Interest expense, net
(4
)
 
2

 
(5
)
 
1

Other non-operating items
(1
)
 
(2
)
 
8

 
(4
)
Income from continuing operations before taxes
5

 
166

 
59

 
505

Provision for income taxes
3

 
42

 
13

 
123

Income from continuing operations attributed to LP
$
2

 
$
124

 
$
46

 
$
382



19


NOTE 16 – POTENTIAL IMPAIRMENTS
We continue to review asset groupings and investments for potential impairments. Management currently believes we have adequate support for the carrying value of each of these assets based upon the anticipated cash flows that result from our estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures. As of September 30, 2019, there were no indications of impairment for the asset grouping that included our indefinitely curtailed facilities and supports the conclusion that no impairment is necessary for those facilities.
We also review from time to time possible dispositions of various assets in light of 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 17 – PRODUCT WARRANTY
We provide 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 quarter and nine months ended September 30, 2019 and 2018 are summarized in the following table:
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Beginning balance
$
9

 
$
23

 
$
14

 
$
25

Accrued to expense
—

 
—

 
1

 
1

Reduced to other operating credits and charges
—

 
(8
)
 
(4
)
 
(8
)
Accrued to discontinued operations
—

 
—

 
—

 
5

Foreign currency translation
—

 
—

 
—

 
(1
)
Payments made
(1
)
 
(1
)
 
(2
)
 
(8
)
Total warranty reserves
9

 
14

 
9

 
14

Current portion of warranty reserves
(2
)
 
(4
)
 
(2
)
 
(4
)
Long-term portion of warranty reserves
$
7

 
$
10

 
$
7

 
$
10


We continue to monitor warranty and other claims associated with these products and believe as of September 30, 2019 that the reserves associated with these matters are adequate. However, it is possible that additional changes may be required in the future.
The current portion of the warranty reserve is included in the caption “Accounts payable and accrued liabilities” and the long-term portion is included in Other long-term liabilities on our Consolidated Balance Sheets.
NOTE 18 - DISCONTINUED OPERATIONS
LP has adopted and implemented plans to sell selected businesses and assets in order to improve its operating results. For all periods presented, these operations include residual losses of mills divested in past years and associated warranty and other liabilities associated with these operations.

Included in the operating losses of discontinued operations for the nine months ended September 30, 2018 was an increase in warranty reserves associated with our discontinued composite decking products of $5 million.




20


NOTE 19 – DEFINED BENEFIT PENSION PLANS
The following table sets forth the net periodic pension cost for our defined benefit pension and postretirement plans during the nine months ended September 30, 2019 and 2018:
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Service cost
$
1

 
$
1

 
$
3

 
$
3

Other components of net periodic pension cost1:
 
 
 
 
 
 
 
Interest cost
3

 
3

 
9

 
9

Expected return on plan assets
(4
)
 
(3
)
 
(11
)
 
(10
)
Amortization of prior service cost
—

 
—

 
—

 
—

Amortization of net loss
1

 
2

 
4

 
5

Net periodic pension cost
$
2

 
$
2

 
$
5

 
$
7


1Other components of net periodic pension cost are included in Other non-operating items on our Consolidated Statements of Income.
For the nine months ended September 30, 2019, $2 million of net periodic pension cost was included in Cost of sales and $1 million included in Selling, general and administrative expenses. For the nine months ended September 30, 2018, $2 million of net periodic pension cost was included in Cost of sales and $1 million included in Selling, general and administrative expenses.
During the nine months ended September 30, 2019, we made $4 million in contributions to our defined benefit pension and postretirement plans. We expect to contribute about $1 million to our defined benefit pension plans in the remaining months of 2019.
NOTE 20 - ACCUMULATED COMPREHENSIVE INCOME (LOSS)
Other comprehensive income activity, net of tax, is provided in the following table for the quarter and nine months ended September 30, 2019 and 2018:

21


 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Pension1
 
 
 
 
 
 
 
Balance at beginning of period
$
(91
)
 
$
(99
)
 
$
(93
)
 
$
(84
)
Other comprehensive income (loss) before reclassifications
—

 
—

 
—

 
—

Amounts reclassified from accumulated other comprehensive loss to income 2
1

 
1

 
3

 
4

Total other comprehensive income
1

 
1

 
3

 
4

Reclassification of of certain effects due to tax law changes 3
—

 
—

 
—

 
(17
)
Balance at end of period
(90
)
 
(98
)
 
(90
)
 
(98
)
Translation Adjustments
 
 
 
 
 
 
 
Balance at beginning of period
(54
)
 
(51
)
 
(57
)
 
(40
)
Translation adjustments
(10
)
 
(2
)
 
(7
)
 
(14
)
Balance at end of period
(64
)
 
(53
)
 
(64
)
 
(53
)
Other
 
 
 
 
 
 
 
Balance at beginning of period
3

 
3

 
3

 
2

Other comprehensive income (loss) before reclassifications
—

 
—

 
(1
)
 
—

Amounts reclassified from accumulated other comprehensive loss to income
—

 
—

 
—

 
—

Total other comprehensive income
—

 
—

 
(1
)
 
—

Reclassification of certain effects due to tax law changes 3
—

 
—

 
—

 
1

Balance at end of period
3

 
3

 
3

 
3

Accumulated other comprehensive loss, end of period
$
(152
)
 
$
(148
)
 
$
(152
)
 
$
(148
)

1 Amounts are presented net of tax
2 Amounts of actuarial loss and prior service cost are components of net periodic benefit cost. See note 19 above fore additional details.
3 We reclassified certain tax effects from tax law changes of $16 million from "Accumulated other comprehensive loss" to "Retained earnings" on our Consolidated Balance Sheet in accordance with ASU 2018-02 which we adopted in 2018.

22



NOTE 21 - NON-OPERATING INCOME (EXPENSE)
Components of non-operating income and expense are as follows:  
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Interest income
$
2

 
$
5

 
$
8

 
$
14

SERP market adjustments
—

 
—

 
1

 
—

Interest expense
(5
)
 
(5
)
 
(14
)
 
(15
)
Amortization of debt charges
—

 
—

 
(1
)
 
(1
)
Capitalized interest, net of reversals
(1
)
 
1

 
1

 
3

Interest expense, net
(4
)
 
2

 
(5
)
 
1

 
 
 
 
 
 
 
 
Net periodic pension cost, excluding service cost
(1
)
 
(1
)
 
(2
)
 
(4
)
Gain on acquisition of controlling interest
—

 
—

 
14

 
—

Foreign currency gain (loss)
—

 
(1
)
 
(4
)
 
(1
)
Other non-operating items
(1
)
 
(2
)
 
8

 
(4
)
 
 
 
 
 
 
 
 
Total non-operating income (expense)
$
(5
)
 
$
—

 
$
3

 
$
(4
)


23



Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
We are a leading provider of high-performing building solutions. We design, manufacture and market a broad range of products for the new home construction, repair and remodeling and outdoor structures markets. We also market and sell our products in light industrial and commercial construction and we have a modest export business. Our manufacturing facilities are primarily located in the U.S. and Canada, and we also operate two facilities in Chile and one facility in Brazil.
To serve these markets, we operate in four segments: Siding; North America Oriented Strand Board (OSB); Engineered Wood Products (EWP); and South America.
Demand for our products correlates to a significant degree to the level of new home construction activity in North America, which historically has been characterized by significant cyclicality. The U.S. Department of Census reported that U.S. single housing starts were 5% higher for the third quarter of 2019 and 2% lower for the first nine months of 2019 as compared to the same periods of 2018.
OSB is sold as a commodity for which sales prices fluctuate daily based on market factors over which we have little or no control. We cannot predict whether the prices of our OSB products will remain at current levels or increase or decrease in the future. OSB prices (NC 7/16"), as reported by Random Lengths, were 41% lower for the third quarter and 47% lower for the first nine months of 2019 as compared to the same periods in 2018.
For additional factors affecting our results, refer to the Management Discussion and Analysis of Financial Condition and Results of Operations overview contained in our Annual Report on Form 10-K for the year ended December 31, 2018 and to “About Forward-Looking Statements” and “Risk Factors” in this report.

EXECUTIVE SUMMARY

We recorded a 18% decrease in sales to $603 million for the quarter ended September 30, 2019 from $737 million reported for the quarter ended September 30, 2018. We recorded income from operations of $8 million for the quarter ended September 30, 2019 compared to $168 million for the quarter ended September 30, 2018. We recorded net income attributed to LP of $2 million ($0.02 per diluted share) for the quarter ended September 30, 2019 compared to $124 million ($0.86 per diluted share) for the quarter ended September 30, 2018. We reported a decrease of $144 million in Adjusted EBITDA from continuing operations for the third quarter of 2019 as compared to the third quarter of 2018. Declines in OSB pricing in all North American operations had a negative impact on our operating results of $119 million for the quarter ended September 30, 2019 as compared to the quarter ended September 30, 2018.

We recorded a 21% decrease in sales to $1.8 billion for the nine months ended September 30, 2019 from $2.2 billion reported for the nine months ended September 30, 2018. We recorded income from operations of $53 million for the nine months ended September 30, 2019 compared to $510 million for the nine months ended September 30, 2018. We recorded net income attributed to LP of $46 million ($0.36 per diluted share) for the nine months ended September 30, 2019 compared to $378 million ($2.59 per diluted share) for the nine months ended September 30, 2018. We reported a decrease of $435 million in Adjusted EBITDA from continuing operations for the nine months ended September 30, 2019 as compared to the first nine months of 2018. Declines in OSB pricing in all North American operations had a negative impact on our operating results of $278 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.

These changes are discussed further in "Our Operating Results" below.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES


24


Presented in Note 1 of the Notes to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 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. For 2019, these significant accounting estimates and judgments include:
Long-lived Assets
Long-lived assets (including amortizable identifiable intangible assets) or asset group held for use is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows are based on our best estimate of future cash flows derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is calculated based on fair value. Fair value is estimated primarily using discounted expected future cash flows on a market-participant basis.
Defined Benefit Plans
We have a number of pension plans in the U.S. and Canada, covering many of the our employees. Benefit accruals under our defined benefit pension plan in the U.S. were frozen as of January 1, 2010.

We account for the consequences of our sponsorship of these plans based upon assumptions that are used to calculate the related assets, liabilities and expenses recorded in our financial statements. Net actuarial gains and losses occur when actual experience differs from any of the assumptions used to value defined benefit plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value obligations as of the measurement date and the differences between expected and actual returns on pension plan assets. This accounting method results in the potential for volatile and difficult to forecast gains and losses.

We record amounts relating to these defined benefit plans based on various actuarial assumptions, including discount rates, assumed rates of return, compensation increases and life expectancy. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current economic conditions and trends. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on our experience and on advice from our independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect our financial condition or results of operations.

A 50 basis point change in our discount rate assumption would lead to an increase or decrease in our pension liability of approximately $15 million. A 50 basis point change in the long-term rate of return on plan assets used in accounting for our pension plans would have a $1 million impact on pension expense. It is not possible to forecast or predict whether there will be actuarial gains and losses in future periods, and if required, the magnitude of any such adjustment. These gains and losses are driven by differences in actual experience or changes in the assumptions that are beyond our control, such as changes in interest rates and the actual return on pension plan assets.
Income Taxes
We establish deferred tax liabilities or assets for temporary differences between financial and tax reporting bases and subsequently adjust them to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance reducing deferred tax assets when it is more likely than not that such assets will not be realized.

We record liabilities for uncertain income tax positions based on a two-step process. The first step is recognition, where we evaluate whether an individual tax position has a likelihood of greater than 50% of being sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation processes. For tax positions that are currently estimated to have a less than 50% likelihood of being sustained, no tax benefit (expense) is recorded. For tax positions that have met the recognition threshold in the first step, we perform the second step of measuring the benefit (expense) to be recorded. The actual benefit (expense) ultimately realized

25


may differ from our estimates. In future periods, changes in facts, circumstances, and new information may require us to change the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recorded in the consolidated statement of income and consolidated balance sheet in the period in which such changes occur. As of September 30, 2019 and December 31, 2018, we had liabilities for unrecognized tax benefits (including interest) pertaining to uncertain tax positions totaling $38 million and $41 million.
Customer Program Costs
Customer programs and incentives are a common practice in our businesses. Our businesses incur customer program costs to obtain favorable product placement, to promote sales of products and to maintain competitive pricing. Customer program costs and incentives, including rebates and promotion and volume allowances, are accounted for in either sales or the category selling, general and administrative expenses at the time the program is initiated and/or the revenue is recognized. The costs are predominantly recognized in sales and include, but are not limited to, volume allowances and rebates, promotional allowances, and cooperative advertising programs. These costs are recorded at the later of 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 products, store sell-through, merchandising support and customer training. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in volume expectations). As of September 30, 2019 and December 31, 2018, we had $32 million and $30 million accrued as customer rebates.
Inventory valuation
We record inventories at the lower of cost or estimated net realizable value. Inventory cost includes an overhead component that can be affected by levels of production and actual costs incurred. We evaluate the need to record adjustments for impairment of inventory at least quarterly. If in our judgment persuasive evidence exists that the net realizable value of inventory is lower than its cost, the inventory value is written-down to its estimated net realizable value. Significant judgments regarding future events and market conditions must be made when estimating net realizable value.

NON-GAAP FINANCIAL MEASURES
In evaluating our business, we utilize several non-GAAP financial measures. A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so excluded or included under applicable GAAP guidance. In this report on Form 10-Q, we disclose segment earnings (loss) from continuing operations before interest expense, taxes, depreciation and amortization and exclude stock-based compensation expense, (gain) loss on sales or impairment of long-lived assets, other operating credits and charges, net, investment income and other non-operating items as Adjusted EBITDA from continuing operations (Adjusted EBITDA) which is a non-GAAP financial measure. We also disclose Adjusted income from continuing operations which excludes (gain) loss on sale or impairment of long-lived assets, gain on acquisition, interest outside of normal operations, other operating credits and charges, net, and adjusts for a normalized tax rate. Neither Adjusted EBITDA nor Adjusted income from continuing operations is a substitute for the GAAP measure of net income or for any other GAAP measures of operating performance.
We have included Adjusted EBITDA in this report because we use it as important supplemental measures of our performance and believe that it is frequently used by securities analysts, investors and other interested persons in the evaluation of companies in our industry, some of which present Adjusted EBITDA when reporting their results. We use Adjusted EBITDA to evaluate our performance as compared to other companies in our industry that have different financing and capital structures. It should be noted that companies calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA measures may not be comparable to Adjusted EBITDA reported by other companies. Our Adjusted EBITDA measures have material limitations as performance measures because they exclude interest expense, income tax (benefit) expense and depreciation and amortization which are necessary to operate our business or which we otherwise incur or experience in connection with the operation of our business.

26


We believe that Adjusted income from continuing operations, which excludes (gain) loss on sale or impairment of long-lived assets, interest outside of normal operations, and other operating credits and charges, net, adjusted for a normalized tax rate is a useful measure for evaluating our ability to generate earnings and that providing this measure will allow investors to more readily compare the earnings for past and future periods. It should be noted that other companies may present similarly-titled measures differently and, therefore, as presented by us may not be comparable to similarly-titled measures reported by other companies. In addition, Adjusted income from continuing operations has material limitations as a performance measure because it excludes items that are actually incurred or experienced in connection with the operations of our business.
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
1

 
$
124

 
$
42

 
$
378

Add (deduct):
 
 
 
 

 
 
Loss from noncontrolling interest
1

 
—

 
3

 
—

Loss from discontinued operations
—

 
—

 
—

 
4

Income from continuing operations attributable to LP
2

 
124

 
46

 
382

Provision for income taxes
3

 
42

 
13

 
123

Depreciation and amortization
29

 
31

 
89

 
92

Stock-based compensation
2

 
2

 
6

 
6

Loss on sale or impairment of long-lived assets, net
5

 
—

 
6

 
—

Other operating credits and charges, net
3

 
(6
)
 
2

 
(11
)
Interest expense, net
4

 
(2
)
 
5

 
(1
)
Other non-operating items
1

 
2

 
(8
)
 
4

Adjusted EBITDA
$
49

 
$
193

 
$
160

 
$
595

 
 
 
 
 
 
 
 
Siding
$
47

 
$
60

 
$
135

 
$
167

OSB
(1
)
 
123

 
4

 
391

EWP
6

 
10

 
22

 
27

South America
7

 
9

 
27

 
32

Other
(4
)
 
(2
)
 
(8
)
 
(6
)
Corporate
(6
)
 
(6
)
 
(20
)
 
(15
)
Adjusted EBITDA
$
49

 
$
193

 
$
160

 
$
595


27


The following table provides the reconciliation of net income to Adjusted income from continuing operations:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
1

 
$
124

 
$
42

 
$
378

Add (deduct):
 
 
 
 
 
 
 
Loss from noncontrolling interest
1

 
—

 
3

 
—

Loss from discontinued operations
—

 
—

 
—

 
4

(Gain) loss on sale or impairment of long-lived assets, net
5

 
—

 
6

 
—

Other operating credits and charges, net
3

 
(6
)
 
2

 
(11
)
Gain on acquisition of controlling interest
—

 
—

 
(14
)
 
—

Reported tax provision
3

 
42

 
13

 
123

Adjusted income from continuing operations before tax
13

 
160

 
53

 
493

Normalized tax provision at 25%
3

 
40

 
13

 
123

Adjusted income from continuing operations
$
10

 
$
120

 
$
40

 
$
370

Diluted shares outstanding
122.2

 
143.9

 
125.9

 
145.6

Adjusted income from continuing operations per diluted share
$
0.08

 
$
0.83

 
$
0.32

 
$
2.54


OUR OPERATING RESULTS
Our results of operations for each of our segments are discussed below, as are results of operations for the “other” category which comprises other products that are not individually significant. See Note 15 of the Notes to the consolidated financial statements included in item 1 of this report for further information regarding our segments.
SIDING
Our siding segment manufactures and markets wood-based siding and related accessories and OSB products.
Segment sales, operating income and Adjusted EBITDA for this segment were as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Net sales
$
259

 
$
241

 
8
 %
 
$
733

 
$
729

 
—
 %
Operating income
38

 
51

 
(26
)%
 
108

 
140

 
(23
)%
Adjusted EBITDA
47

 
60

 
(22
)%
 
135

 
167

 
(19
)%
Adjusted EBITDA margin
18
%
 
25
%
 


 
18
%
 
23
%
 


Sales in this segment by product line were as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
SmartSide® strand siding
$
213

 
$
188

 
13
 %
 
$
600

 
$
546

 
10
 %
SmartSide® fiber siding
28

 
30

 
(8
)%
 
79

 
84

 
(7
)%
CanExel siding
15

 
7

 
111
 %
 
38

 
33

 
15
 %
OSB - commodity
1

 
13

 
(91
)%
 
9

 
34

 
(74
)%
OSB - value-add
—

 
—

 
(100
)%
 
—

 
22

 
(100
)%
Other
2

 
2

 
(5
)%
 
7

 
9

 
(20
)%
Total
$
259

 
$
241

 
8
 %
 
$
733

 
$
729

 
—
 %

28


Percent changes in average gross sales prices and unit shipments for the quarter and nine months ended September 30, 2019 compared to the quarter and nine months ended September 30, 2018 are as follows:
 
Quarter Ended September 30,
2019 versus 2018
 
Nine Months Ended September 30,
2019 versus 2018
 
Average
Selling Price
 
Unit
Shipments
 
Average Net
Selling Price
 
Unit
Shipments
SmartSide® strand siding
1
 %
 
14
 %
 
3
 %
 
7
 %
SmartSide® fiber siding
3
 %
 
(10
)%
 
4
 %
 
(9
)%
CanExel siding
7
 %
 
93
 %
 
2
 %
 
11
 %
OSB
(22
)%
 
(88
)%
 
(47
)%
 
(70
)%
For the quarter and nine months ended September 30, 2019 compared to the corresponding periods in 2018, sales volumes were higher in our SmartSide strand product line due to increased market penetration in key markets and introduction of new products. Sales prices in our SmartSide strand product line for the quarter and nine months ended September 30, 2019 as compared to the corresponding periods in 2018 were higher due to price increases which were implemented in the first quarter of 2019 and 2018.
For the quarter and nine months ended September 30, 2019 compared to the corresponding periods in 2018, sales volumes declined in our SmartSide fiber product line due to our decision to raise prices which slowed demand. Sales prices in our SmartSide fiber product line for the quarter and nine month period ended September 30, 2019 as compared to the corresponding periods in 2018 were higher due to a price increase implemented in 2018.
For CanExel, sales volumes increased in the third quarter and first nine months of 2019 as compared to the corresponding periods in 2018 due to increased demand in Canada as customers re-balance their inventories. Sales prices changed for the third quarter and first nine months of 2019 as compared to the corresponding periods in 2018 due to changes in our product mix and the fluctuations in the U.S. to Canadian dollar as a majority of these sales are denominated in Canadian dollars.
For our OSB produced in the siding segment for the quarter ended September 30, 2019 compared to the corresponding period in 2018, sales prices changed as discussed in the OSB segment below. Sales volumes were lower for the quarter and nine months ended September 30, 2019 compared to the corresponding periods in 2018 due to the conversion of our Dawson Creek OSB mill to siding which occurred during the later portion of 2018 and our decision to reduce all OSB production in our siding mills due to the continued lower OSB demand and pricing.
Overall, the decline in the siding segment for the third quarter of 2019 compared to the same period of 2018 was due to expenses associated with the Dawson Creek conversion project ($3 million for the quarter ended September 30, 2019 and $18 million for the nine months ended September 30, 2019), lower OSB sales prices and volume and increases in sales and marketing expenses which were partially offset by higher pricing on our SmartSide strand products.
OSB
Our OSB segment manufactures and distributes OSB structural panel products in North America and certain export markets.
Segment sales, operating income and Adjusted EBITDA for this segment were as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Net sales
$
197

 
$
349

 
(43
)%
 
$
605

 
$
1,050

 
(42
)%
Operating income
(16
)
 
106

 
(115
)%
 
(41
)
 
345

 
(112
)%
Adjusted EBITDA
(1
)
 
123

 
(101
)%
 
4

 
391

 
(99
)%
Adjusted EBITDA Margin
(1
)%
 
35
%
 
 
 
1
%
 
37
%
 
 
Sales in this segment by product line were as follows:

29


 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
OSB - commodity
$
100

 
$
197

 
(49
)%
 
$
304

 
$
609

 
(50
)%
OSB - value-add
96

 
151

 
(36
)%
 
295

 
435

 
(32
)%
Other
2

 
2

 
12
 %
 
6

 
6

 
8
 %
Total
$
197

 
$
349

 
(43
)%
 
$
605

 
$
1,050

 
(42
)%
Percent changes in average gross sales prices and unit shipments for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 are as follows:
 
Quarter Ended September 30,
2019 versus 2018
 
Nine Months Ended September 30,
2019 versus 2018
 
Average
Selling Price
 
Unit
Shipments
 
Average Net
Selling Price
 
Unit
Shipments
OSB - commodity
(41
)%
 
(14
)%
 
(42
)%
 
(13
)%
OSB - value-add
(33
)%
 
(4
)%
 
(33
)%
 
1
 %
For the quarter and nine months ended September 30, 2019, OSB prices and volumes decreased compared to the corresponding periods in 2018 likely due to the overall demand compared to the supply available in the market. Our percentage of value-add OSB versus commodity OSB increased in both the quarter and the nine months ended September 30, 2019 as we continued to transform our OSB business model. The decrease in selling price negatively impacted operating results and Adjusted EBITDA by $119 million for the quarter and by $275 million for the nine months ended September 30, 2019 as compared to the same periods in 2018.
Overall the decline in our OSB segment results for the quarter ended September 30, 2019 as compared to the same period in 2018 was due to decreased sales prices and volume, offset by improved operating efficiencies.
EWP
Our EWP segment manufactures and distributes laminated veneer lumber (LVL), I-Joists, laminated strand lumber (LSL) and other related products. This segment also includes the sale of I-Joist and LVL products produced by our joint venture with Resolute Forest Products and LVL sold under a contract manufacturing relationship. Included in this segment is a plywood mill, which primarily produces plywood as a by-product from the LVL production process. OSB is also produced by our LSL facility.
Segment sales, operating results and Adjusted EBITDA for this segment were as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Net sales
$
105

 
$
110

 
(4
)%
 
$
303

 
$
329

 
(8
)%
Operating income
2

 
6

 
(69
)%
 
11

 
12

 
(13
)%
Adjusted EBITDA
6

 
10

 
(44
)%
 
22

 
27

 
(15
)%
Adjusted EBITDA margin
5
%
 
9
%
 


 
7
%
 
8
%
 



30


Sales in this segment by product line were as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
LVL
$
37

 
$
36

 
3
 %
 
$
108

 
$
113

 
(4
)%
LSL
12

 
18

 
(33
)%
 
40

 
49

 
(18
)%
I-Joist
39

 
34

 
15
 %
 
103

 
98

 
6
 %
OSB - commodity
—

 
1

 
(90
)%
 
3

 
9

 
(67
)%
OSB - value-add
2

 
4

 
(37
)%
 
7

 
11

 
(42
)%
Plywood
7

 
8

 
(14
)%
 
19

 
23

 
(19
)%
Other
8

 
10

 
(13
)%
 
23

 
26

 
(10
)%
Total
$
105

 
$
110

 
(4
)%
 
$
303

 
$
329

 
(8
)%
Percent changes in average gross sales prices and unit shipments for the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018 are as follows:  
 
Quarter Ended September 30,
2019 versus 2018
 
Nine Months Ended September 30,
2019 versus 2018
 
Average
Selling Price
 
Unit
Shipments
 
Average Net
Selling Price
 
Unit
Shipments
LVL
(3
)%
 
9
 %
 
1
 %
 
(4
)%
LSL
—
 %
 
(31
)%
 
4
 %
 
(21
)%
I-Joist
(3
)%
 
20
 %
 
1
 %
 
6
 %
OSB
8
 %
 
(54
)%
 
(17
)%
 
(44
)%
Plywood
(20
)%
 
7
 %
 
(20
)%
 
1
 %
For the quarter and nine months ended September 30, 2019 compared to the same periods in 2018, sales volumes decreased in LSL due to market weakness with increases in LVL and I-joists. For the quarter end September 30, 2019 compared to the same period in 2018, average selling prices declined due to increased pricing pressure. For the nine months ended September 30, 2019 compared to the same period in 2018, average sales prices increased due to price increases implemented across all product lines, except plywood and OSB. The decrease in selling prices for OSB and plywood negatively impacted operating results and Adjusted EBITDA from continuing operations by $0 million for OSB and $2 million for plywood for the quarter and by $2 million and $5 million for the nine months ended September 30, 2019 as compared to the same periods in 2018. For the quarter ended September 30, 2019, compared to the same period in 2018, results of operations declined due to reduced sales and higher manufacturing costs due to lower volumes and lower OSB and plywood pricing. For the nine months ended September 30, 2019, compared to the same period in 2018, results of operations are about flat between periods with the higher sales prices offset the higher manufacturing costs associated with the lower volumes.
SOUTH AMERICA
Our South America segment manufactures and distributes OSB structural panel and siding products in South America and selected export markets. This segment has manufacturing operations in two countries, Chile and Brazil and operates sales offices in Chile, Brazil, Peru, Colombia and Argentina.
Segment sales, operating income and Adjusted EBITDA for this segment were as follows:

31


 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Net sales
$
36

 
$
35

 
6
 %
 
$
121

 
$
122

 
(1
)%
Operating income
6

 
7

 
(15
)%
 
20

 
25

 
(20
)%
Adjusted EBITDA
7

 
9

 
(14
)%
 
27

 
32

 
(15
)%
Adjusted EBITDA margin
20
%
 
25
%
 


 
22
%
 
26
%
 


Sales in this segment by product line were as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
OSB - value-add
$
32

 
$
30

 
6
%
 
$
105

 
$
103

 
3
 %
Siding
4

 
3

 
3
%
 
14

 
17

 
(19
)%
Other
1

 
1

 
—
%
 
2

 
3

 
(12
)%
Total
$
36

 
$
35

 
6
%
 
$
121

 
$
122

 
(1
)%
Percent changes in average gross sales prices and unit shipments for the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018 are as follows:  
 
Quarter Ended September 30,
2019 versus 2018
 
Nine Months Ended September 30,
2019 versus 2018
 
Average
Selling Price
 
Unit
Shipments
 
Average Net
Selling Price
 
Unit
Shipments
OSB
(15
)%
 
25
 %
 
(13
)%
 
18
 %
Siding
1
 %
 
(1
)%
 
(1
)%
 
(18
)%
OSB sales volumes increased for the quarter and nine months ended September 30, 2019 as compared to the corresponding periods in 2018 due to increased demand across South America due to improved economic conditions. Sales prices for OSB decreased for the quarter ended September 30, 2019 as compared to the corresponding period in 2018 due to increased imports at a lower price, which created downward pricing pressure and the impact of the change of foreign currency rates on local sales prices.
For the quarter and nine months ended September 30, 2019, compared to the same periods in 2018, results of operations are lower due to reduced sales prices and increased operating costs associated with start up of the third mill in Chile.
OTHER PRODUCTS
Our other products segment includes our off-site framing operation, remaining timber and timberlands and other minor products, services and closed operations which are not classified as discontinued operations.
Segment sales, operating losses and Adjusted EBITDA for this category were as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Net sales
$
6

 
$
3

 
111
 %
 
$
16

 
$
9

 
78
 %
Operating losses
(4
)
 
(2
)
 
(79
)%
 
(10
)
 
(7
)
 
(43
)%
Adjusted EBITDA
(4
)
 
(2
)
 
(52
)%
 
(8
)
 
(6
)
 
(32
)%
INCOME TAXES
For the first nine months of 2019, our income tax expense on continuing operations reflects a rate of 24% as compared to 24% in the comparable period of 2018. For the first nine months of 2019, the primary differences between the U.S. statutory rate of 21% and the effective rate of 24% relates to state income tax, foreign tax rates and benefit from U.S. tax credits. For the first nine months of 2018, the primary differences between the U.S.

32


statutory rate of 21% and the effective rate of 24% relates to state income tax, discretionary pension payments, foreign tax rates and tax deductions related to stock-based compensation.
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.
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 Annual Report on Form 10-K for the year ended December 31, 2018 and Note 14 to the Notes to the financial statements contained herein.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our principal sources of liquidity are existing cash and investment balances, cash generated by our operations and our ability to borrow under such credit facilities as we may have in effect from time to time. We may also from time to time issue and sell equity, debt or hybrid securities or engage in other capital market transactions.
Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness, 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.
OPERATING ACTIVITIES
During the first nine months of 2019, cash provided by operating activities was $58 million compared to $419 million during the first nine months of 2018. This change was primarily related to declines in operating results (lower OSB pricing) offset by increases in working capital changes.
INVESTING ACTIVITIES
During the first nine months of 2019, cash used in investing activities was approximately $90 million. Capital expenditures in the first nine months of 2019 were $118 million and cash acquired in connection with the consolidation of Entekra was $33 million, net of other acquisitions. Included in “Accounts payable” is $10 million related to capital expenditures that had not yet been paid as of September 30, 2019.
During the first nine months of 2018, cash used in investing activities was approximately $173 million. Capital expenditures in the first nine months of 2018 were $150 million. Included in “Accounts payable” was $17 million related to capital expenditures that had not yet been paid as of September 30, 2018.
Capital expenditures in 2019 are expected to be less than $160 million related to expansions in our siding business, growth and maintenance projects and our South American expansion.
FINANCING ACTIVITIES
During the first nine months of 2019, cash used in financing activities was $541 million. We used $3 million to pay long-term debt, $50 million to pay cash dividends, $480 million to repurchase stock though our share repurchase program and $5 million to repurchase stock from employees in connection with income tax withholding requirements associated with our employee stock-based compensation plans.
During the first nine months of 2018, cash used in financing activities was $183 million. We used $56 million to pay cash dividends, $99 million to repurchase stock through our share repurchase program and $9 million to repurchase stock from employees in connection with income tax withholding requirements associated with our employee stock-based compensation plans. Additionally, during the first nine months of 2018, we received a grant from the Investments in Forest Industry Transformation program in Canada for $3 million in connection with our conversion of the Dawson Creek OSB mill.

33


POTENTIAL IMPAIRMENTS
We continue to review asset groupings and investments for potential impairments. Management currently believes we have adequate support for the carrying value of each of these assets based upon the anticipated cash flows that result from our estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures. As of September 30, 2019, there were no indications of impairment for the asset grouping that included our indefinitely curtailed facilities and supports the conclusion that no impairment is necessary for those facilities.
We also review from time to time possible dispositions of various assets in light of 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.

34


Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in the Canadian dollar, Brazilian real and the Chilean peso. Although we have in the past entered into foreign exchange contracts associated with certain of our indebtedness and may continue to enter into foreign exchange contracts associated with major equipment purchases to manage a portion of the foreign currency rate risk, we historically have not entered into material currency rate hedges with respect to our exposure from operations, although we may do so in the future.
Some of our products are sold as commodities and therefore sales prices fluctuate daily based on market factors over which we have little or no control. The most significant commodity product we sell is OSB. Based upon an assumed annual production capacity of 4.9 billion square feet (3/8" basis) or 4.2 billion square feet (7/16" basis), a $1 change in the annual average price per thousand square feet on 7/16" basis would change annual pre-tax profits by approximately $4 million.
We historically have not entered into material commodity futures and swaps, although we may do so in the future.

35


Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2019, our Chief Executive Officer and Chief Financial Officer have carried out, with the participation of the Company's Disclosure Practices Committee and the Company's management, an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Act). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that LP’s disclosure controls and procedures are effective to provide reasonable assurance that material information required to be disclosed by us in reports we file under the Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that information required to be disclosed by us in the reports we file or submit under the Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
We had no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



36


LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
KEY STATISTICS
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Housing starts1:
 
 
 
 
 
 
 
Single Family
246

 
236

 
677

 
688

Multi-Family
103

 
95

 
287

 
285

 
349


331

 
964

 
972

1 Actual U.S. Housing starts data reported by U.S. Census Bureau
The following tables set forth North American sales volume for the quarter ended September 30, 2019 and 2018:
 
Quarter Ended September 30, 2019
 
Quarter Ended September 30, 2018
Sales Volume
Siding
OSB
EWP
Total
 
Siding
OSB
EWP
Total
SmartSide® Strand siding (MMSF)
332

—

—

332

 
291

—

—

291

SmartSide® fiber siding (MMSF)
56

—

—

56

 
62

—

—

62

CanExel® siding (MMSF)
13

—

—

13

 
7

—

—

7

OSB - commodity (MMSF)
4

565

—

569

 
47

660

4

710

OSB - value added (MMSF)
1

419

5

425

 
1

435

9

445

LVL (MCF)
—

—

1,866

1,866

 
—

—

1,715

1,715

LSL (MCF)
—

—

751

751

 
—

—

1,086

1,086

I-joist (MMLF)
—

—

28

28

 
—

—

24

24

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
Sales Volume
Siding
OSB
EWP
Total
 
Siding
OSB
EWP
Total
SmartSide® Strand siding (MMSF)
926

—

—

926

 
862

—

—

862

SmartSide® fiber siding (MMSF)
160

—

—

160

 
175

—

—

175

CanExel® siding (MMSF)
35

—

—

35

 
32

—

—

32

OSB - commodity (MMSF)
47

1,685

17

1,749

 
112

1,939

29

2,079

OSB - value added (MMSF)
4

1,229

16

1,249

 
59

1,218

30

1,307

LVL (MCF)
—

 
5,323

5,323

 
—

—

5,564

5,564

LSL (MCF)
—

 
2,418

2,418

 
—

—

3,051

3,051

I-joist (MMLF)
—


73

73

 
—

—

69

69

INDUSTRY PRODUCT TRENDS
The following table sets forth the average wholesale price of OSB in the United States for the periods specified in dollars per 1,000 square feet.
 

37


 
OSB
Western Canada 7/16"  Basis
OSB
Southwest 7/16"  Basis
OSB
N. Central 7/16"  Basis
Average
 
 
 
2018 1st Qtr. Avg.
$356
$346
$367
2018 2nd Qtr. Avg.
$408
$435
$423
2018 3rd Qtr. Avg.
$285
$306
$369
2019 1st Qtr. Avg.
$161
$194
$213
2019 2nd Qtr. Avg.
$149
$174
$187
2019 3rd Qtr. Avg.
$168
$161
$216
 
Source:
Random Lengths


38


PART II OTHER INFORMATION
Item 1.
Legal Proceedings.
The description of certain legal and environmental matters involving LP set forth in Part I of this report under “Note 14 – Legal and Environmental Matters” to the Notes to the financial statements contained herein is incorporated herein by reference.
Item 1A.
Risk Factors.

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following amount of our common stock was repurchased during the quarter ended September 30, 2019:
Period
Total Number of Shares Repurchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as part of Publicly Announced Purchase Plan or Program
 
Maximum Dollar Value of Shares That May Yet be Purchased under the Plans or Programs
July 1, 2019 - July 31, 2019
—

 
—

 
—

 
$
280

August 1, 2019 - August 31, 2019
4,804,813

 
24.28

 
4,804,813

 
$
192

September 1, 2019 - September 30, 2019
1,374,307

 
24.39

 
1,374,307

 
$
158

 
6,179,120

 
 
 
6,179,120

 
 
On February 13, 2019, we announced that our Board of Directors authorized an additional $600 million share repurchase program. On February 19, 2019, we entered an accelerated share repurchase (ASR) agreement with Goldman Sachs & Co. LLC to repurchase $400 million of our common stock. Under the ASR agreement, LP received an initial delivery of 11,944,756 million shares on February 21, 2019, representing approximately 80 percent of the number of shares of common stock initially underlying the ASR agreement, based on the closing price of LP’s common stock of $26.79 on February 15, 2019. The final delivery of the ASR occurred during August of 2019, which included the settlement of 4,429,043 shares.
Additional repurchases of common stock may be made through open market, block and privately-negotiated transactions, including Rule 10b5-1 plans, at times and in such amounts as management deems appropriate, subject to market and business conditions, regulatory requirements and other factors.
Item 3.
Defaults Upon Senior Securities.
None.
Item 4.
Mine Safety Disclosures.
Not applicable.
Item 5.
Other Information.

None.

39


Item 6.
Exhibits.
10.1
 
 
10.2
 
 
10.3
 
 
31.1
 
 
31.2
 
 
32.1
 
 
101.INS
XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.*
 
 
101.SCH
XBRL Taxonomy Extension Schema Document.*
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.*
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.*
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.*
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.*
*Filed herewith.

40


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
LOUISIANA-PACIFIC CORPORATION
 
 
 
 
Date:
November 5, 2019
BY:
                 /S/ W. BRADLEY SOUTHERN
 
 
 
W. Bradley Southern
 
 
 
Chief Executive Officer
 
 
 
 
Date:
November 5, 2019
BY:
/S/ ALAN J.M. HAUGHIE
 
 
 
Alan J.M. Haughie
 
 
 
Executive Vice President and
 
 
 
Chief Financial Officer