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 June 30, 1998
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 (IRS Employer Identification No.)
incorporation or organization)
111 S. W. Fifth Avenue, Portland, Oregon 97204-3699
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 221-0800
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 ---.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 109,777,957 shares of Common Stock, $1 par value, outstanding as
of August 1, 1998.
FORWARD LOOKING STATEMENTS
Statements in this report, to the extent they are not based on historical
events, constitute forward looking statements. Forward looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, or plans
for product development. Investors are cautioned that forward looking statements
are subject to an inherent risk that actual results may vary materially from
those described herein. Factors that may result in such variance, in addition to
those accompanying the forward looking statements, include changes in interest
rates, commodity prices, and other economic conditions; actions by competitors;
changing weather conditions and other natural phenomena; actions by government
authorities; uncertainties associated with legal proceedings; technological
developments; future decisions by management in response to changing conditions;
and misjudgments in the course of preparing forward looking statements.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED SUMMARY STATEMENTS OF INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE) (UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Net sales $ 623.2 $ 633.3 $1,171.5 $1,187.9
------- ------- ------- -------
Costs and expenses:
Cost of sales 506.2 552.1 1,002.2 1,059.5
Depreciation, amortization
and depletion 49.5 46.1 89.0 87.0
Selling and administrative 45.5 43.3 89.5 84.7
Unusual credits and
charges, net (328.3) --- (328.3) (121.9)
Interest expense 10.1 7.0 19.8 15.8
Interest income (1.5) (.5) (3.6) (.8)
------- ------- ------- -------
Total costs and expenses 281.5 648.0 868.6 1,124.3
------- ------- ------- -------
Income (loss) before taxes
and minority interest 341.7 (14.7) 302.9 63.6
Provision (benefit) for
income taxes 138.8 (3.4) 126.3 34.2
Minority interest in
net income (loss) of
consolidated subsidiaries (1.0) (1.2) (2.2) (2.5)
------- ------- ------- -------
Net income (loss) $ 203.9 $ (10.1) $ 178.8 $ 31.9
======= ======= ======= =======
Net income (loss) per share-
basic and diluted $ 1.87 $ (.10) $ 1.64 $ .29
======= ======= ======= =======
Cash dividends per share $ .14 $ .14 $ .28 $ .28
======= ======= ======= =======
Average shares outstanding (thousands)-
Basic 109,070 108,190 109,070 108,190
======= ======= ======= =======
Diluted 109,350 108,190 109,350 108,190
======= ======= ======= =======
See notes to financial statements
- 1 -
CONSOLIDATED SUMMARY BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
JUNE 30, 1998 DEC. 31, 1997
------------- -------------
Cash and cash equivalents $ 433.0 $ 31.9
Accounts receivable, net 160.5 146.2
Inventories 192.8 258.8
Prepaid expenses 13.1 8.9
Income tax refunds receivable --- 78.0
Deferred income taxes 73.0 73.0
-------- --------
Total current assets 872.4 596.8
-------- --------
Timber and timberlands 515.8 634.2
Property, plant and equipment 2,254.2 2,433.9
Less accumulated depreciation (1,197.2) (1,242.1)
-------- --------
Net property, plant and equipment 1,057.0 1,191.8
Timber notes receivable 403.8 49.9
Goodwill and other assets 99.4 105.7
-------- --------
Total assets $2,948.4 $2,578.4
======== ========
Current portion of long-term debt $ 83.8 $ 22.9
Short-term notes payable 28.4 22.0
Accounts payable and accrued liabilities 231.6 234.4
Current portion of contingency reserves 50.0 40.0
Income taxes payable 11.7 ---
-------- --------
Total current liabilities 405.5 319.3
-------- --------
Long-term debt, excluding current portion 598.7 572.3
Contingency reserves, net of current portion 143.3 184.0
Deferred income taxes and other 352.5 216.6
Stockholders' equity:
Common stock 117.0 117.0
Additional paid-in capital 468.4 472.2
Retained earnings 1,125.8 977.5
Treasury stock (158.7) (163.4)
Loans to Employee Stock Ownership Trusts (25.8) (37.7)
Accumulated comprehensive income (loss) (78.3) (79.4)
-------- --------
Total stockholders' equity 1,448.4 1,286.2
-------- --------
Total liabilities and equity $2,948.4 $2,578.4
======== ========
See notes to financial statements
- 2 -
CONSOLIDATED SUMMARY STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 1997
------- -------
Cash flows from operating activities:
Net income $ 178.8 $ 31.9
Depreciation, amortization and depletion 89.0 87.0
Non-cash unusual credits and charges (328.3) ---
Cash settlements of contingencies (38.9) (105.3)
Other adjustments, net 10.4 15.6
Decrease in certain working
capital components and deferred taxes 219.0 111.6
------- -------
Net cash provided by operating activities 130.0 140.8
------- -------
Cash flows from investing activities:
Capital spending, including acquisitions (75.9) (137.4)
Proceeds from sales of assets 299.5 8.3
Other investing activities, net 4.1 1.9
------- -------
Net cash provided by (used in) investing activities 227.7 (127.2)
------- -------
Cash flows from financing activities:
New borrowings 348.6 125.0
Repayment of long-term debt, including
net decrease in credit line (285.6) (115.3)
Increase (decrease) in short-term notes payable 6.4 (13.4)
Cash dividends (30.5) (30.3)
Other financing activities, net 4.5 (.5)
------- -------
Net cash provided by (used in) financing activities 43.4 (34.5)
------- -------
Net increase (decrease) in cash and cash equivalents 401.1 (20.9)
Cash and cash equivalents at beginning of year 31.9 27.8
------- -------
Cash and cash equivalents at end of period $ 433.0 $ 6.9
======= =======
See notes to financial statements
- 3 -
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE) (UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 1998
--------------------
SHARES AMOUNT
----------- -------
Common Stock 116,937,022 $ 117.0
=========== =======
Additional Paid-in-Capital:
Beginning balance $ 472.2
Net transactions (3.8)
-------
Ending balance $ 468.4
=======
Retained Earnings:
Beginning balance $ 977.5
Net income 178.8
Cash dividends, $.28 per share (30.5)
-------
Ending balance $1,125.8
=======
Treasury stock:
Beginning balance 7,309,360 $(163.4)
Shares reissued for employee stock
plans and acquisition adjustment (204,023) 4.7
---------- -------
Ending balance 7,105,337 $(158.7)
========== =======
Loans to Employee Stock Ownership Trusts:
Beginning balance $ (37.7)
Less accrued contribution 11.9
-------
Ending balance $ (25.8)
=======
Accumulated comprehensive income (loss):
Beginning balance $ (79.4)
Currency translation adjustment and
amortization of deferred compensation 1.1
-------
Ending balance $ (78.3)
=======
See notes to financial statements
- 4 -
NOTES TO FINANCIAL STATEMENTS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
1. The interim period information included herein reflects all
adjustments which are, in the opinion of the management of L-P, necessary for a
fair statement of the results of the respective interim periods. Such
adjustments are of a normal recurring nature. Results of operations for interim
periods are not necessarily indicative of results to be expected for an entire
year. These summary financial statements should be read in conjunction with the
financial statements and the notes thereto included in L-P's 1997 Annual
Financial Report to Stockholders. Interim financial statements are by necessity
somewhat tentative; judgments are used to estimate quarterly amounts for items
that are normally determinable only on an annual basis.
Certain 1997 expense costs in the consolidated summary statement of
income have been reclassified to conform to 1998 classifications.
2. Basic earnings per share are based on the weighted average number
of shares of common stock outstanding during the periods. Diluted earnings per
share include the effect of potentially dilutive common stock equivalents. The
effect of potentially dilutive common stock equivalents is not included in the
calculation of diluted earnings per share in 1997 because it was anti-dilutive
as a result of L-P's net losses for the entire year.
3. The effective income tax rate is based on estimates of annual
amounts of taxable income, foreign sales corporation income and other factors.
These estimates are updated quarterly.
4. Determination of interim LIFO inventories requires estimates of
year-end inventory quantities and costs. These estimates are revised quarterly
and the estimated incremental change in the LIFO inventory reserve is expensed
over the remainder of the year.
5. Reference is made to "Legal Proceedings" for a description of
certain environmental litigation and other litigation and its potential impact
on L-P and for a description of settlements of certain class action proceedings.
6. Effective January 1, 1998, L-P adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which requires
items previously reported as a component of stockholders' equity to be more
prominently reported as a component of comprehensive income. Components of
comprehensive income include net income (loss), currency translation
adjustments, and deferred compensation. Comprehensive income (loss) was $203.6
million in the second quarter of 1998 compared to ($10.5) million in the second
quarter of 1997 and $179.9 million for the first six months of 1998 compared to
$27.0 million for the same period in 1997.
Effective June 15, 1999, the Financial Accounting Standards Board has
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). The new statement
will require recognition of all financial instruments as either assets or
liabilities on the balance sheet at fair value; changes to fair value will
impact earnings either as gains or losses. SFAS 133 will be effective for L-P in
1999. Based on an initial review of SFAS 133, L-P does not expect that it will
have a significant impact on the Company's financial statements and related
disclosures.
7. Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion and
disclosures regarding items included in the financial statement caption "unusual
credits and charges, net" and significant transactions which occurred
- 5 -
during the second quarter of 1998, including asset sales, receipt of notes
receivable and issuance of debt.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
- ---------------------
General
- -------
Overall net loss before unusual credits and charges decreased to
$16.4 million ($.15 per share) for the first six months of 1998 compared to a
loss of $41.8 million ($.39 per share) in 1997. L-P earned $8.7 million ($.08
per share) before unusual credits and charges in the second quarter of 1998
compared to a loss of $10.1 million ($.10 per share) in the second quarter of
1997. The improvement was primarily the result of higher average selling prices
of oriented strand board (OSB). Total sales declined approximately one percent
for the 1998 second quarter and six month periods as compared with the
comparable periods of the prior year. In the second quarter of 1998, L-P
recorded a net credit of $328.3 million ($195.2 million after taxes, or $1.79
per share) primarily resulting from gains on the sales of timberland, sawmill
and distribution assets in California and the Weather-Seal window and door
business. Charges relating to the settlement of legal proceedings in Montrose,
Colorado of $14.0 million after taxes (or $.13 per share) and other charges were
netted against the asset sales gains and are included in "Unusual credits and
charges, net." In the first quarter of 1997, L-P's Ketchikan Pulp Company (KPC)
subsidiary recorded a net gain of $121.9 million ($73.7 million after income
taxes, or $.68 per share) to reflect the initial amount paid under a settlement
agreement with the U.S. government over claims related to KPC's long-term timber
supply contract in Alaska, net of adjustments to closure-related accruals.
L-P operates in two segments: building products and pulp. Building
products is the most significant segment, accounting for more than 93 percent of
sales in the first six months of 1998 and 1997. The results of operations are
discussed separately for each segment below. Key segment information, production
volumes and industry product price trends are presented in the following tables
labeled "Sales and Operating Profit by Major Product Group," "Summary of
Production Volumes" and "Industry Product Price Trends."
Building Products Segment
- -------------------------
Quarter Ended Six Months Ended
June 30 June 30
--------------------- -------------------------
1998 1997 % Chg 1998 1997 % Chg
------ ------ ----- -------- ------- -----
(Dollar amounts in millions)
Sales:
Structural panels $253.6 $215.9 +18% $ 467.0 $ 406.5 +15%
Lumber 159.2 187.6 -15% 295.9 342.9 -14%
Industrial panel products 45.8 46.5 -2% 89.3 90.6 -1%
Other building products 143.8 148.5 -3% 277.6 270.6 +3%
------ ------ -------- --------
Total building products $602.4 $598.5 +1% $1,129.8 $1,110.6 +2%
====== ====== ======== ========
Operating profit $ 46.0 $ 18.9 +143% $ 50.0 $ 16.8 +198%
====== ====== ======== ========
- 6 -
The increase in building products segment sales for the six months
ended June 30, 1998 was primarily attributable to a 15 percent growth in
structural panel products (OSB and plywood) sales over the prior year (second
quarter 1998 increased 18 percent over the second quarter 1997). The increase in
structural panel products sales in 1998 was primarily attributable to a 36
percent increase in OSB average prices (a 51 percent increase in the second
quarter of 1998 over the same quarter in 1997), while plywood prices remained
level. OSB sales volume increased six percent due to stronger demand, while
plywood sales volume decreased 15 percent due to plant closures. Lumber sales
volume dropped moderately due to mill closures. Average lumber prices declined
approximately eight percent due to weak markets compared to the prior year
(average prices declined approximately 11 percent compared to the 1997 second
quarter). Industrial panel products sales decreased slightly due to a decrease
in average selling prices offset by an increase in sales volume in both the 1998
second quarter and six month period. The sales increase in the other building
products category was primarily attributable to the purchase of Tecton Laminates
(engineered wood products) late in the first quarter of 1997.
Building products segment operating profits increased to $50.0
million in 1998 from $16.8 million in 1997 primarily due to the increased
average OSB prices discussed above. Lower profits in industrial panels and
lumber and higher log costs, especially in the South, partially offset the OSB
improvement.
L-P's building products are primarily sold as commodities and
therefore sales prices fluctuate based on market factors over which L-P has no
control. L-P cannot predict whether prices of its building products will remain
at current levels, or will increase or decrease in the future because supply and
demand are influenced by many factors, only one of which is the cost and
availability of raw materials. Therefore, L-P is not able to determine to what
extent, if any, it will be able to pass any future increases in the price of raw
materials on to customers through product price increases.
Pulp Segment
- ------------
Quarter Ended Six Months Ended
June 30 June 30
--------------------- ----------------------
1998 1997 % Chg 1998 1997 % Chg
------ ------ ----- ------ ------ -----
(Dollar amounts in millions)
Pulp sales $ 20.8 $ 34.8 -40% $ 41.7 $ 77.3 -46%
====== ====== ====== ======
Operating profit (loss) $ (3.9) $ (6.0) +35% $(15.5) $(17.6) +12%
====== ====== ====== ======
Pulp average selling prices decreased approximately three percent
and volume decreased approximately 12 percent for the six months ended June 30,
1998 (prices increased two percent over the second quarter of 1997 and 16
percent over the first quarter of 1998) for L-P's remaining pulp mills. Pulp
sales were negatively impacted by the Asian economic crisis which affected both
prices and volume. The pulp mill owned by L-P's Ketchikan Pulp Company
subsidiary generated sales of $28.3 million in the first half of 1997. This mill
was permanently closed in 1997 and, thus, did not generate any sales in 1998.
Pulp segment losses decreased in 1998 despite the sales price
changes discussed above due to higher profit margins as a result of cost cutting
measures and higher productivity from improved maintenance programs.
L-P's pulp products are primarily sold as commodities and therefore
sales prices fluctuate based on market factors over which L-P has no control.
- 7 -
L-P cannot predict whether the prices of its pulp products will remain at
current levels, or will increase or decrease in the future because supply and
demand are influenced by many factors, only one of which is the cost and
availability of raw materials. Therefore, L-P is not able to determine to what
extent, if any, it will be able to pass any future increases in the price of raw
materials on to customers through product price increases.
Unusual Credits and Charges, net
- --------------------------------
Second First
quarter quarter
1998 1997
------- ------
KPC settlement $ --- $ 135.0
Charges for litigation, property impairments
and other (30.8) (13.1)
Asset sales - net gain 359.1 ---
------- -------
$ 328.3 $ 121.9
======= =======
In the second quarter of 1998, L-P recorded a net gain of $328.3
million ($195.2 million after taxes, or $1.79 per share) primarily resulting
from gains on the sales of timberland, sawmill and distribution assets in
California and the Weather-Seal window and door business (see further discussion
below under the heading "ASSET SALES"). Charges relating to the settlement of
legal proceedings in Montrose, Colorado of $14.0 million after taxes (or $.13
per share) and other charges were netted against the asset sales gains.
In the first quarter of 1997, L-P's Ketchikan Pulp Company
subsidiary recorded a net gain of $121.9 million ($73.7 million after taxes, or
$.68 per share) to reflect the initial amount paid under a settlement agreement
with the U.S. government over claims related to KPC's long-term timber supply
contract in Alaska of $135.0 million. Adjustments to pulp mill closure-related
accruals were netted against this gain.
General Corporate and Other Expense
- -----------------------------------
The variations in net general corporate expense are due to numerous
factors, none of which are individually significant.
Net Interest Income (Expense)
- -----------------------------
Interest expense increased 25 percent in 1998 due to higher
borrowing levels and higher interest rates on borrowings. Higher borrowing
levels were attributable to losses sustained earlier in 1998 as well as capital
expenditures. Interest income increased in 1998 due to notes receivable related
to the sale of timberland late in 1997.
Legal and Environmental Matters
- -------------------------------
Refer to the "Legal Proceedings" section of this Form 10-Q for a
discussion of certain environmental litigation and other litigation and its
potential impact on L-P.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
Net cash provided by operations decreased slightly in 1998 over
1997. The decrease is primarily due to the $135.0 million settlement payment
from the U.S. government received in 1997. In 1998, improved operating results
(without unusual items) and lower payments of settlement liabilities partially
offset this decrease. Cash flows from investing activities increased mainly from
asset sales proceeds which netted $299.5 million for the six months ended June
30, 1998. Financing activities also provided cash as new borrowings, from
- 8 -
the transactions described under the heading "ASSET SALES", exceeded repayments
of long term debt and cash dividends. L-P repaid $265.0 million on its revolving
credit line by June 30, 1998, and subsequently repaid an additional $60.0
million on the revolving credit line and $125.0 million outstanding on its term
loan facility.
L-P's inventories decreased $66.0 million, net property, plant and
equipment decreased $134.8 million and deferred income taxes increased $135.9
million as a result of the asset sales.
L-P's liquidity has improved over year end primarily due to the
proceeds of the asset sales. Cash and cash equivalents totaled $433.0 million at
June 30, 1998 compared to $6.9 million at December 31, 1997.
ASSET SALES
- -----------
On June 30, 1998, L-P completed the sale of its California redwood
timberlands and associated sawmill and manufacturing and distribution operations
in Northern California in two separate transactions to Simpson Timber Company
("Simpson"), a subsidiary of Simpson Investment Company, and Sansome Forest
Partners, L.P., and its subsidiaries ("Sansome"). The sales included more than
300,000 acres of timberlands, three operating sawmills, and two distribution
facilities, among other operations. The sales prices for the divested assets
totaled approximately $610.2 million and were determined by arm's length
negotiations between the parties. Sansome and its subsidiaries paid $240.0
million in cash, subject to post-closing adjustments for changes in working
capital and other items. Simpson paid $16.3 million in cash and delivered
promissory notes in the aggregate principal amount of $353.9 million (the
"Simpson Notes"), subject to post-closing adjustments for changes in working
capital and other items. The Simpson Notes mature in varying amounts between
June 30, 2006 and June 30, 2018. The weighted average interest rate of the
Simpson Notes is 7 percent. The net book value of the assets sold was $192.7
million.
Subsequently, in a separate transaction, L-P issued $348.6 million
of senior debt at a weighted average interest rate of 7 percent maturing in
varying amounts between 2006 and 2018 in a private placement to institutional
investors. The Simpson Notes were pledged as additional security for this senior
debt.
On June 16, 1998, L-P completed the sale of its Weather-Seal windows
and doors operations to American Architectural Products Corporation of
Youngstown, Ohio for approximately $39.9 million. The Weather-Seal business
consists of seven manufacturing facilities and related engineering, research and
development, customer service, sales group and trucking operations in Ohio.
The proceeds realized in the asset sales completed since October
1997 have initially been used to fund operations, to reduce or eliminate
outstanding borrowings on L-P's revolving credit and term loan facilities, and
to begin implementation of a stock repurchase plan. Management continues to
study additional uses of the proceeds to maximize long-term value to L-P and its
stockholders, which may include internal investments in L-P's core businesses in
the building products market and strategic acquisitions.
In October 1997, L-P announced its intent to divest certain other
non-core business assets, including the Samoa pulp mill, L-P's fiber cement
roofing products manufacturing operations, its Creative Point, Inc. subsidiary,
and certain remaining parcels of timberland in the interior of California. The
total proceeds of such sales, together with the asset sales already completed,
are estimated to be in the range of $800 million to $1 billion, although there
can be no assurance that the higher amount will be attained.
- 9 -
YEAR 2000 COMPLIANCE
- --------------------
As the year 2000 approaches, an issue impacting most companies
has emerged regarding the ability of computer applications and systems to
properly interpret the year. This is a pervasive and complex issue.
L-P is in the process of identifying significant applications
that will require modification to ensure Year 2000 compliance. Internal and
external resources are being used to make this assessment, the required
modifications and test Year 2000 compliance. L-P plans on completing the
assessment of all significant applications and developing a plan for appropriate
action by September 30, 1998.
In addition, L-P will begin communicating with others with whom
it does significant business to determine their Year 2000 compliance readiness
and the extent to which L-P is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
L-P's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with L-P's systems, would
not have a material adverse effect on L-P.
The total cost to L-P of these Year 2000 compliance activities
has not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which L-P
plans to complete the Year 2000 assessment process are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
STOCK REPUCHASE PLAN
- --------------------
On July 27, 1998, L-P announced a stock repurchase plan to buy
back up to 20 million shares of common stock from time to time in open market
purchases. L-P currently has approximately 110 million shares outstanding.
- 10 -
SALES AND OPERATING PROFIT BY MAJOR PRODUCT GROUP
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ------------------
1998 1997 1998 1997
------- ------- -------- -------
Sales:
Structural panel products $ 253.6 $ 215.9 $ 467.0 $ 406.5
Lumber 159.2 187.6 295.9 342.9
Industrial panel products 45.8 46.5 89.3 90.6
Other building products 143.8 148.5 277.6 270.6
------- ------- ------- -------
Total building products 602.4 598.5 1,129.8 1,110.6
Pulp 20.8 34.8 41.7 77.3
------- ------- ------- -------
Total sales $ 623.2 $ 633.3 $1,171.5 $1,187.9
======= ======= ======= =======
Export sales $ 32.8 $ 54.4 $ 74.8 $ 127.6
======= ======= ======= =======
Profit (loss):
Building products $ 46.0 $ 18.9 $ 50.0 $ 16.8
Pulp (3.9) (6.0) (15.5) (17.6)
Unusual credits and
charges, net 328.3 -- 328.3 121.9
General corporate
expense, net (20.1) (21.1) (43.7) (42.5)
Interest, net (8.6) (6.5) (16.2) (15.0)
------- ------- ------- -------
Income (loss) before taxes
and minority interest $ 341.7 $ (14.7) $ 302.9 $ 63.6
======= ======= ======= =======
- 11 -
SUMMARY OF PRODUCTION VOLUMES
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------- ----------------
1998 1997 1998 1997
----- ----- ----- -----
Oriented strand board
panels and siding,
million square ft 3/8" basis 1,086 1,040 2,101 1,971
Softwood plywood,
million square ft 3/8" basis 270 312 501 593
Lumber, million board feet 288 319 574
621
Industrial panel products
(particleboard, medium density
fiberboard and hardboard),
million square ft 3/4" basis 148 154 293 293
Engineered I-joists,
million lineal feet 24 22 46 38
Laminated veneer lumber,
thousand cubic ft 2,016 1,800 3,647 3,100
Pulp,
thousand short tons 91 88 141 201
- 12 -
INDUSTRY PRODUCT PRICE TRENDS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
OSB PLYWOOD LUMBER PARTICLEBOARD
----------- -------- --------- -------------
N. CENTRAL SOUTHERN
7/16" BASIS PINE 2" FRAMING
24/16 BASIS LUMBER INLAND
SPAN CDX COMPOSITE INDUSTRIAL
RATING 3 PLY PRICES 3/4" BASIS
----------- -------- --------- -------------
Annual Average
1992 217 248 287 200
1993 236 282 394 258
1994 265 302 405 295
1995 245 303 337 290
1996 184 258 398 290
1997 143 265 417 276
1997 Second Quarter Average
126 256 443 265
1998 First Quarter Average
158 266 368 253
1998 Second Quarter Average
195 262 346 262
Source: Random Lengths
- 13 -
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The following sets forth the current status of certain legal
proceedings:
Environmental Proceedings
- -------------------------
In March 1995, L-P's subsidiary Ketchikan Pulp Company (KPC) entered
into agreements with the federal government to resolve the issues related to
water and air compliance problems experienced at KPC's pulp mill during the late
1980s and early 1990s. In addition to civil and criminal penalties that have
been paid, KPC also agreed to undertake up to $20 million in expenditures, which
are primarily capital in nature, including certain remedial and pollution
control related measures. While the Environmental Protection Agency (the "EPA")
and KPC have agreed that the closure of the pulp mill in May 1997 eliminated the
need for many of the pollution control related measures, court approval is
required for relief from these requirements.
As part of the agreements, KPC is in the process of studying Ward Cove,
the body of water adjacent to the former mill site, to determine whether cleanup
of cove sediments is necessary. KPC may be required to spend approximately $4
million in addition to the approximately $2 million already spent on this
project, as part of the $20 million discussed above.
KPC also signed an agreement with the State of Alaska and the EPA to
investigate and, if necessary, clean up the property on which the pulp mill was
formerly located. KPC has completed the investigative portion of this project at
a cost of $1 million. A determination of whether any cleanup is necessary and,
if so, the estimated costs involved has not yet been made.
KPC is in the final stages of the closure of a landfill near Thorne
Bay, Alaska. This closure, which is being performed pursuant to an agreement
with the U.S. Forest Service (the "USFS"), should be completed by the end of
September 1998. Costs of the project are anticipated to total approximately $7
million.
The EPA and the Department of Justice have indicated their intent to
seek penalties for alleged civil violations of the Clean Water Act at the KPC
facility. The maximum penalty associated with such an action could be as much as
$975,000. KPC is also defending an appeal of an earlier court decision
dismissing a citizens' suit by plaintiff Alaska Clean Water Alliance alleging
Clean Water Act violations. KPC is actively pursuing resolution of both of these
actions.
L-P's Missoula, Montana, particleboard facility is the subject of an
investigation by the EPA for alleged improper management of sander dust at the
facility. L-P is also conducting its own investigation. L-P's potential
liability, if any, is unknown at this time, but is not anticipated to have a
material adverse effect on L-P's business, financial position, results of
operations or liquidity.
In June 1998, L-P disclosed to the EPA and the State of Florida that it
had discovered possible improper disposal of ash and waste wood onto the ground
and into potential wetland areas at L-P's West Bay, Florida, facility. Potential
remediation costs are unknown at this time.
- 14 -
Certain L-P plant sites have, or are suspected of having, substances in
the ground or in the groundwater underlying the sites that are considered
pollutants. Appropriate corrective action or plans for corrective action are
underway. Where the pollutants were caused by previous owners of the property,
L-P is vigorously pursuing those parties through legal channels and is
vigorously pursuing insurance coverage under all applicable policies.
L-P maintains a reserve for estimated environmental loss contingencies.
As with all accounting estimates, significant uncertainty exists in the
reliability and precision of the estimates because the facts and circumstances
surrounding each contingency vary significantly from case to case. L-P
continually monitors its estimated exposure for environmental liabilities and
adjusts its accrual accordingly. As additional information about the
environmental contingencies becomes known, L-P's estimate of its liability for
environmental loss contingencies may change significantly, although no estimate
of the range of any potential adjustment of the liability can be made at this
time. L-P cannot estimate the time frame over which these accrued amounts are
likely to be paid out. A portion of L-P's environmental reserve is related to
liabilities for cleanup of properties which are currently owned or have been
owned in the past by L-P. Certain of these sites are subject to cost sharing
arrangements with other parties who were also involved in the site. L-P does not
believe that any of these cost sharing arrangements will result in additional
material liability to L-P due to non-performance by the other party. L-P has not
reduced its reserves for any anticipated insurance recoveries.
Although L-P's policy is to comply with all applicable environmental
laws and regulations, the company has, in the past, been required to pay fines
for non-compliance and sometimes litigation has resulted from contested
environmental actions. Also, L-P is involved in other environmental actions and
proceedings which could result in fines or penalties. Based on the information
currently available, management believes that any fines, penalties or other
losses resulting from the matters discussed above in excess of the reserve for
environmental loss contingencies will not have a material adverse effect on the
business, financial position, results of operations or liquidity of L-P.
Colorado Criminal Proceedings
- -----------------------------
In June 1995, a federal grand jury returned an indictment in the U.S.
District Court in Denver, Colorado, against L-P in connection with alleged
environmental violations, as well as alleged fraud in connection with the
submission of unrepresentative oriented strand board (OSB) product samples to an
industry product certification agency, by L-P's Montrose (Olathe), Colorado OSB
plant. A former superintendent and former plant manager at the mill were also
indicted and each pled guilty to one environmental count and were sentenced by
the court. On May 27, 1998, L-P pleaded guilty to 18 felony counts relating to
the Montrose plant, including 13 counts involving violations of the Clean Air
Act and five counts of making false statements in a matter within the
jurisdiction of an agency or department of the United States. L-P agreed to pay
total penalties of $37 million (including making $500,000 in charitable
contributions), of which $12 million has been paid, and was sentenced to five
years of probation. The $25 million balance of the fine will be paid over the
next five years and has been recorded as a note payable in L-P's financial
statements. All remaining charges against L-P were dismissed.
In December 1995, L-P received a notice of suspension from the EPA
stating that, because of the criminal proceedings pending against L-P in
Colorado, the Montrose facility would be prohibited from purchasing timber
- 15 -
directly from the USFS. In April 1998, L-P signed a Suspension and Debarment
Agreement with the EPA. This agreement formally lifted the 1995 suspension
imposed on the Montrose facility. The agreement obligates L-P to develop and
implement certain corporate policies and programs, including such measures as a
policy of cooperation with the EPA, an employee disclosure program and a policy
of nonretaliation against employees, and to report significant violations of law
to the EPA.
OSB Siding Matters
- ------------------
L-P has been named as a defendant in numerous class action and
non-class action proceedings, brought on behalf of various persons or purported
classes of persons (including nationwide classes in the United States and
Canada) who own or have purchased or used OSB siding manufactured by L-P,
because of alleged unfair business practices, breach of warranty,
misrepresentation, conspiracy to defraud, and other theories related to alleged
defects, deterioration, or failure of OSB siding products.
The United States District Court for the District of Oregon has given
final approval to a settlement between L-P and a nationwide class composed of
all persons who own, have owned, or subsequently acquire property on which L-P's
OSB siding was installed prior to January 1, 1996, excluding persons who timely
opted out of the settlement and persons who are members of the settlement class
in the Florida litigation described below. Under the settlement agreement, an
eligible claimant whose claim is filed prior to January 1, 2003 (or earlier in
certain cases), and is approved by an independent claims administrator will be
entitled to receive from the settlement fund established under the agreement a
payment equal to the replacement cost (to be determined by a third-party
construction cost estimator and currently estimated to be in the range of $2.20
to $6.40 per square foot depending on the type of product and geographic
location) of damaged siding, reduced by a specific adjustment (of up to 65
percent) based on the age of the siding. Class members who have previously
submitted or resolved claims under any other warranty or claims program of L-P
may be entitled to receive the difference between the amount which would be
payable under the settlement agreement and the amount previously paid.
Independent adjusters will determine the extent of damage to OSB siding at each
claimant's property in accordance with a specified protocol. There will be no
adjustment to settlement payments for improper maintenance or installation.
A claimant who is dissatisfied with the amount to be paid under the
settlement may elect to pursue claims against L-P in a binding arbitration
seeking compensatory damages without regard to the amount of payment calculated
under the settlement protocol. A claimant who elects to pursue an arbitration
claim must prove his entitlement to damages under any available legal theory,
and L-P may assert any available defense, including defenses that otherwise had
been waived under the settlement agreement. If the arbitrator reduces the damage
award otherwise payable to the claimant because of a finding of improper
installation, the claimant will be entitled to pursue a claim against the
contractor/builder to the extent the award was reduced.
L-P is required to pay $275 million into the settlement fund in seven
annual installments beginning in mid-1996: $100 million, $55 million, $40
million, $30 million, $20 million, $15 million, and $15 million. As of June 30,
1998, L-P had funded the first three installments. If at any time after the
fourth year of the settlement period the amount of approved claims (paid and
pending) equals or exceeds $275 million, then the settlement agreement will
terminate as to all claims in excess of $275 million unless L-P timely elects to
provide additional funding within 12 months equal to the lesser of (i) the
excess of unfunded claims over $275 million or (ii) $50 million and, if
necessary to satisfy unfunded claims, a second payment within 24 months equal to
the
- 16 -
lesser of (i) the remaining unfunded amount or (ii) $50 million. If the total
payments to the settlement fund are insufficient to satisfy in full all approved
claims filed prior to January 1, 2003, then L-P may elect to satisfy the
unfunded claims by making additional payments into the settlement fund at the
end of each of the next two 12-month periods or until all claims are paid in
full, with each additional payment being in an amount equal to the greater of
(i) 50 percent of the aggregate sum of all remaining unfunded approved claims or
(ii) 100 percent of the aggregate amount of unfunded approved claims, up to a
maximum of $50 million. If L-P fails to make any such additional payment, all
class members whose claims remain unsatisfied from the settlement fund may
pursue any available legal remedies against L-P without regard to the release of
claims provided in the settlement agreement.
If L-P makes all payments required under the settlement agreement,
including all additional payments as specified above, class members will be
deemed to have released L-P from all claims for damaged OSB siding, except for
claims arising under their existing 25-year limited warranty after termination
of the settlement agreement. The settlement agreement does not cover
consequential damages resulting from damage to OSB Inner-Seal siding or damage
to utility grade OSB siding (sold without any express warranty), either of which
could create additional claims. In addition to payments to the settlement fund,
L-P was required to pay fees of class counsel in the amount of $26.25 million,
as well as expenses of administering the settlement fund and inspecting
properties for damage and certain other costs. After accruing interest on
undisbursed funds and deducting class notification costs, prior claims costs
(including payments advanced to homeowners in urgent circumstances) and payment
of claims under the settlement, as of June 30, 1998, approximately $11 million
remained of the $195 million paid into the fund to date.
The claims submitted to the claims administrator to date substantially
exceed the $275 million of payments that L-P is required to make under the
settlement agreement. As calculated under the terms of the settlement, as of
June 30, 1998, claims submitted and inspected exceed $410 million. There are
insufficient data to project the future volume of claims or the total dollar
value of additional claims that may be made against the settlement fund. L-P has
not decided whether it will provide the optional funding discussed above in
excess of the required $275 million after the fourth year of the settlement.
Under the terms of the settlement, L-P must make that decision by August 2000.
As an alternative to making additional payments, L-P could elect to pursue other
options, including allowing the settlement agreement to terminate, thereby
entitling claimants with unsatisfied claims to pursue available legal remedies
against L-P.
A settlement of the Florida class action was approved by the Circuit
Court for Lake County, Florida, on October 4, 1995. Under the settlement, L-P
has established a claims procedure pursuant to which members of the settlement
class may report problems with L-P's OSB siding and have their properties
inspected by an independent adjuster, who will measure the amount of damage and
also determine the extent to which improper design, construction, installation,
finishing, painting, and maintenance may have contributed to any damage. The
maximum payment for damaged siding is $3.40 per square foot for lap siding and
$2.82 per square foot for panel siding, subject to reduction of up to 75 percent
for damage resulting from improper design, construction, installation,
finishing, painting, or maintenance, and also subject to reduction for age of
siding more than three years old. L-P has agreed that the deduction from the
- 17 -
payment to a member of the Florida class will be not greater than the deduction
computed for a similar claimant under the national settlement agreement
described above. Class members will be entitled to make claims until October 4,
2000.
L-P maintains reserves for the estimated costs of these siding
settlements, although, as with any estimate, there is uncertainty concerning the
actual costs to be incurred. The discussion herein notes some of the factors, in
addition to the inherent uncertainty of predicting the outcome of claims and
litigation, that could cause actual costs to vary materially from current
estimates. Due to the various uncertainties, L-P cannot predict to what degree
actual payments under the settlement agreements, or any alternative strategies
adopted by L-P, will materially exceed the recorded liability related to these
matters, although it is possible that, in the near term, total estimated
payments will significantly exceed the recorded liabilities.
Other OSB Matters
- -----------------
Three separate purported class actions on behalf of owners and
purchasers of properties in which L-P's OSB panels are used for flooring,
sheathing, or underlayment have been consolidated in the United States District
Court for the Northern District of California under the caption Agius v.
Louisiana-Pacific Corporation. The actions seek damages and equitable relief for
alleged fraud, misrepresentation, breach of warranty, negligence, and improper
trade practices related to alleged improprieties in testing, product
certification, and marketing of OSB structural panels, and alleged premature
deterioration of such panels. A separate state court action entitled Carney v.
Louisiana-Pacific Corporation is pending in the Superior Court of the State of
California for the City and County of San Francisco, seeking relief under
California consumer protection statutes based on similar allegations. On
February 27, 1998, the United States District Court for the Northern District of
California entered an order approving a settlement that would resolve the above
actions. A final order approving the settlement is expected pending resolution
of an appeal by a single claimant.
The settlement class, other than persons who opted out, is generally
composed of all persons who purchased L-P OSB sheathing or acquired real
property or structures in the United States containing L-P OSB sheathing between
January 1, 1984, and October 22, 1997, but only if they have retained ownership
of the product. Under the settlement agreement, an eligible claimant who files a
claim prior to October 22, 2017, upon review of the claim by the claims
administrator, will be entitled to recover the reasonable cost of repair or
replacement of any L-P OSB sheathing determined to have failed to perform its
essential function as warranted and not occasioned by misuse, negligent or
intentional misconduct of a third party or an event over which L-P had no
control. The settlement agreement also provides for payment of a $1.5 million
grant to the University of California Forest Products Laboratory and reasonable
attorney fees of class counsel.
L-P maintains a reserve for its estimate of the cost of these other OSB
matters, including the sheathing settlement, although as with any estimate,
there is uncertainty concerning the actual costs to be incurred. Based on a
review of its claims records to date, L-P believes that known reports of damage
to installed L-P OSB sheathing have been immaterial in number and amount.
Other
- -----
L-P and its subsidiaries are parties to other legal proceedings.
Management believes that the outcome of such proceedings will not have a
- 18 -
material adverse effect on the business, financial position, results of
operations or liquidity of L-P.
Contingency Reserves
- --------------------
L-P maintains contingency reserves in addition to the environmental
reserves discussed above. As L-P receives additional information regarding
actual claim rates and average claim amounts, L-P monitors its estimated
exposure and adjusts its accrual accordingly. The amounts ultimately paid for
these contingencies could differ materially from the amount currently recorded,
although no estimate of the timing or range of any potential adjustment can be
made at this time.
Item 4. Submission of Matters to a Vote of Security Holders.
The Registrant held its annual meeting of stockholders on May 4, 1998.
The following summarizes the matters voted upon at the meeting and the results
of the voting:
Directors elected for a term of office expiring in 2001:
Shares
Name of Director Shares Voted For Individually Withheld
---------------- ---------------- ---------------------
John W. Barter 90,088,358 112,461
William C. Brooks 90,101,960 98,859
Patrick F. McCartan 89,483,927 716,892
Lee C. Simpson 89,977,421 223,398
Description Shares Shares Broker
of Proposal Shares For Against Abstained Non-Votes
----------- ---------- ------- --------- ---------
Approval of 1998 Employee Stock
Purchase Plan 85,774,190 3,604,618 822,011 0
Stockholder proposal relating to
compensation of directors
10,399,107 69,377,373 2,136,508 8,287,831
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits filed as part of this report or
incorporated by reference herein are listed in
the accompanying exhibit index.
(b) Reports on Form 8-K. During the quarter ended
June 30, 1998, the registrant filed a Report on
Form 8-K dated May 26, 1998, reporting the
issuance of preferred share purchase rights to
replace similar rights expiring on June 6,
1998, with respect to the registrant's common
shares.
Subsequent to June 30, 1998, the registrant
filed a Report on Form 8-K dated June 30, 1998,
as amended by Amendment No. 1 filed on August
7, 1998, reporting the sale of the registrant's
redwood timberlands and associated sawmill and
manufacturing and distribution operations in
Northern California, and including pro forma
financial information reflecting such sale.
- 19 -
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
By /s/ Curtis M. Stevens
Curtis M. Stevens
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
DATED: August 14, 1998
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
3 Bylaws of the registrant as amended as of July 25,
1998.
4 Note Purchase Agreement among L-P SPV2, LLC, the
registrant and the Purchasers listed therein dated
June 30, 1998.
27 Financial Data Schedule.