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, 1997
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: 109,543,295 shares of Common Stock, $1 par value,
outstanding as of September 30, 1997.
<PAGE>
FORWARD LOOKING STATEMENTS
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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.
<PAGE>
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1997 1996 1997 1996
------- ------- -------- --------
Net sales $ 619.5 $ 676.3 $1,807.4 $1,918.7
------- ------- -------- --------
Costs and expenses:
Cost of sales 537.6 565.3 1,602.8 1,617.0
Depreciation, amortization
and depletion 49.5 52.4 136.5 147.4
Selling and administrative 46.2 36.7 125.2 102.4
Settlements and other
unusual items, net 154.4 350.0 32.5 350.0
Interest expense 8.4 4.9 24.2 9.2
Interest income (.3) (1.0) (1.1) (4.8)
------- ------- -------- --------
Total costs and expenses 795.8 1,008.3 1,920.1 2,221.2
------- ------- -------- --------
Income (loss) before taxes and
minority interest (176.3) (332.0) (112.7) (302.5)
Provision (benefit) for
income taxes (62.9) (128.2) (28.7) (117.1)
Minority interest in
net income (loss) of
consolidated subsidiaries (1.0) (.4) (3.5) .6
------- ------- -------- --------
Net income (loss) $(112.4) $(203.4) $ (80.5) $ (186.0)
======= ======= ======== ========
Net income (loss) per share $ (1.03) $ (1.89) $ (.74) $ (1.73)
======= ======= ======== ========
Cash dividends per share $ .14 $ .14 $ .42 $ .42
======= ======= ======== ========
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CONSOLIDATED SUMMARY BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
SEPT. 30, 1997 DEC. 31, 1996
-------------- -------------
Cash and cash equivalents $ 32.2 $ 27.8
Accounts receivable, net 155.6 102.5
Inventories 258.2 264.3
Prepaid expenses 13.7 12.0
Income tax refund 23.8 99.5
Deferred income taxes 73.1 73.1
-------- --------
Total current assets 556.6 579.2
-------- --------
Timber and timberlands 637.1 648.6
Property, plant and equipment 2,508.8 2,486.0
Less accumulated depreciation (1,269.7) (1,207.5)
-------- --------
Net property, plant and equipment 1,239.1 1,278.5
Other assets 155.6 82.4
-------- --------
Total assets $2,588.4 $2,588.7
======== ========
Current portion of long-term debt $ 19.3 $ 18.7
Short-term notes payable 22.0 35.4
Accounts payable and accrued liabilities 245.3 190.6
Current portion of contingency reserves 80.0 100.0
-------- --------
Total current liabilities 366.6 344.7
-------- --------
Long-term debt, excluding current portion 508.5 458.6
Deferred income taxes 139.9 163.2
Contingency reserves, excluding current portion 220.3 159.8
Other long-term liabilities and minority interest 24.6 34.8
Stockholders' equity:
Common Stock 117.0 117.0
Additional paid-in capital 472.1 472.7
Retained earnings 1,014.0 1,140.0
Treasury stock (164.2) (183.3)
Loans to Employee Stock Ownership Trusts (43.7) (61.6)
Other (66.7) (57.2)
-------- --------
Total stockholders' equity 1,328.5 1,427.6
-------- --------
Total liabilities and equity $2,588.4 $2,588.7
======== ========
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CONSOLIDATED SUMMARY STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996
------- -------
Cash flows from operating activities:
Net income (loss) $ (80.5) $(186.0)
Depreciation, amortization and depletion 136.5 147.4
Cash settlements of contingencies (128.5) (169.1)
Other adjustments, net including adjustment
of litigation reserves and other unusual
non-cash charges 168.2 353.4
Decrease (increase) in certain working
capital components and deferred taxes 61.1 (30.8)
------- -------
Net cash provided by operating activities 156.8 114.9
------- -------
Cash flows from investing activities:
Capital spending, including acquisitions (180.6) (220.0)
Other investing activities, net 36.5 47.2
------- -------
Net cash used in investing activities (144.1) (172.8)
------- -------
Cash flows from financing activities:
New borrowing, including net increase in credit line 149.5 114.5
Repayment of long-term debt and short-term notes (114.3) (37.2)
Cash dividends (45.5) (45.1)
Other financing activities, net 2.0 4.0
------- -------
Net cash provided by (used in)
financing activities (8.3) 36.2
------- -------
Net increase (decrease) in cash
and cash equivalents 4.4 (21.7)
Cash and cash equivalents at beginning of year 27.8 75.4
------- -------
Cash and cash equivalents at end of period $ 32.2 $ 53.7
======= =======
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<PAGE>
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 Louisiana-Pacific
Corporation ("L-P"), necessary for a fair statement of the results of the
respective interim periods. Such adjustments, except as discussed
elsewhere in this report, 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. It is suggested that these summary
financial statements be read in conjunction with the financial statements
and the notes thereto included in L-P's 1996 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.
2. Earnings per share is based on the weighted average number of shares of
common stock outstanding during the periods (108,330,000 in 1997 and
107,410,000 in 1996). The effect of common stock equivalents is not
material.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" ("SFAS 128"). This standard requires the
calculation and disclosure of Basic Earnings per Share and Diluted
Earnings per Share for interim and annual periods ending after December
15, 1997. Basic Earnings per Share are computed by dividing net income
(loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted Earnings per Share are computed by
dividing net income (loss) by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period,
calculated by applying the treasury stock method as defined in SFAS 128.
The effect of L-P's common stock equivalents has historically been
immaterial (less than three percent dilution) and therefore L-P's
historical reported earnings per share will become Basic Earnings per
Share under SFAS 128. L-P will be required to additionally report Diluted
Earnings per Share which will differ from Basic Earnings per Share by less
than three percent.
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 annual 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. 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
"settlements and other unusual items, net."
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<PAGE>
7. In October 1997, L-P announced that it intends to sell assets management
considers non-strategic to L-P's business. These assets include, among
others, the remaining California timberlands and related lumber
businesses, the Samoa, California pulp mill, the Weather-Seal window and
door manufacturing business, the Creative Point, Inc. subsidiary, the Red
Bluff, California cement fiber roof shake plant and the fiber gypsum plant
in Nova Scotia.
8. In June 1997, the Financial Accounting Standards Board adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 will be effective for L-P in 1998. Based on
an initial review of SFAS 130, L-P does not expect that it will have a
significant impact on the Company's financial statements and related
disclosures.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
- ---------------------
General
- -------
Continued oversupply in oriented strand board (OSB) markets which caused
depressed sales prices throughout the first nine months of 1997 has resulted in
lower sales and earnings before settlements and other unusual items in 1997
compared to 1996. The net loss before unusual items for the first nine months of
1997 was $59.9 million ($.55 per share) compared to net income before unusual
items in 1996 of $28.6 million ($.27 per share). The net loss before unusual
items in the third quarter of 1997 was $18.1 million ($.16 per share) compared
to net income before unusual items of $11.2 million ($.11 per share) in the
third quarter of 1996. Sales have declined by six percent in the first nine
months of the year and eight percent in the third quarter compared to 1996.
Unusual charges recorded in the third quarter of each year are discussed below.
L-P operates in two segments: building products and pulp. Building
products is the most significant segment, accounting for more than 85 percent of
sales in both the first nine months of 1997 and 1996. 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 Profit by Major Product Group," "Operating
Volumes" and "Industry Product Price Trends."
Building Products Segment
- -------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------------
1997 1996 % Chg 1997 1996 % Chg
------ ------ ----- -------- ------- -----
(Dollar amounts in millions)
Sales:
Structural panels $222.4 $277.6 -20% $ 628.9 $ 791.8 -21%
Lumber 169.5 170.3 --% 512.4 472.9 +8%
Industrial panel products 43.9 51.8 -15% 134.5 149.7 -10%
Other building products 153.1 139.3 +10% 423.7 375.6 +13%
------ ------ -------- --------
Total building products $588.9 $639.0 -8% $1,699.5 $1,790.0 -5%
====== ====== ======== ========
Building products profit $ 11.4 $ 68.0 -83% $ 28.2 $ 170.3 -83%
====== ====== ======== ========
The decrease in structural panel (OSB and plywood) sales is primarily
attributable to a decline in average selling prices of approximately 17 percent
for the first nine months of 1997 compared to 1996 (14 percent decline in the
third quarter). While plywood prices have increased slightly in 1997, OSB prices
continue to suffer from industry-wide excess production capacity, and have
fallen more than 30 percent from average 1996 levels. During the third quarter
of 1997, L-P's net sales realizations were also negatively impacted by increased
shipping costs caused by interrupted rail service. Structural panel sales
volumes decreased 6 percent for the nine month period (decreased 8 percent for
the third quarter) due to weather-related production outages early in the year,
unsteady raw material supply in the Southern region and permanent closures of
one plywood facility and four small capacity OSB facilities. Increased
production at newer OSB plants helped to offset the volume decreases.
Average lumber sales prices have increased approximately 8 percent for the
first nine months of 1997 (no significant change during the third quarter)
compared to 1996. Lumber volume sold was virtually unchanged for both the nine
month and the third quarter periods. Lumber markets have experienced good demand
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<PAGE>
in 1997, particularly in the first six months of the year, benefiting from a
robust U.S. economy, relatively low interest rates and strong housing starts.
However, weakening currencies in the Far East have limited shipments from North
America to those markets and put supply pressure on domestic markets, causing
lumber prices to decline in the second half of 1997.
Average selling prices for industrial panel products (particleboard,
medium-density fiberboard (MDF) and hardboard) have declined approximately 10
percent in the first nine months of 1997 (decreased 15 percent for the third
quarter) compared to 1996. The price decreases are due to increased industry
production relative to demand. The volume of industrial panels sold decreased
approximately 5 percent in the nine months of 1997 (9 percent for the third
quarter) as inventory volumes grew due to slow demand.
The increase in other building products sales is primarily due to the
acquisition of Associated Chemists, Inc. (coatings and chemicals) in mid-1996,
GreenStone Industries, Inc. (cellulose insulation) and the assets of Tecton
Laminates (engineered I-Joists and LVL) in early 1997.
The decrease in building products segment operating profit in the third
quarter and nine month periods in 1997 compared to 1996 is primarily
attributable to the decrease in OSB and industrial panel prices and sales
volumes and due to mechanical and raw material related production outages in the
third quarter of 1997 at certain OSB plants. Partially offsetting these
decreases, the profitability of L-P's lumber operations improved for the nine
month period in 1997 due to higher average selling prices. The performance of
the engineered I-Joist and LVL operations also improved significantly for the
third quarter and nine month periods. Also impacting building products profits,
log costs have increased in most regions of the country in 1997 by up to 10
percent.
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 the 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. Subsequent to the end
of the third quarter, prices for most of L-P's major products have decreased
modestly, except for plywood and OSB which have increased modestly (see
"Industry Product Price Trends"). L-P expects that prices for structural panel
products will weaken in the late fall and winter, which is a seasonal slow
period for construction. Also, L-P believes that further permanent closures of
structural panel plants across the industry are needed before higher and more
stable pricing of structural panels products will occur.
Pulp Segment
- ------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1997 1996 % Chg 1997 1996 % Chg
------ ------ ----- ------ ------ -----
(Dollar amounts in millions)
Pulp sales $ 30.6 $ 37.3 -18% $107.9 $128.7 -16%
====== ====== ====== ======
Pulp profit (loss) $ (2.8) $(26.5) n.m. $(20.4) $(78.9) n.m.
====== ====== ====== ======
Pulp segment sales decreased in both the third quarter and first nine
months of 1997 compared to 1996, primarily as a result of the permanent closure
of the Ketchikan Pulp Company mill at the end of the first quarter of 1997. At
the two remaining pulp mills, volume has increased in 1997, while average prices
have decreased. Pulp prices were high during the first quarter of 1996 and fell
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<PAGE>
later in the year. In 1997, prices have risen steadily throughout the year, but
still lag the average prices of 1996.
Pulp segment losses have moderated in 1997 despite lower pricing due to
elimination of the Ketchikan Pulp Company mill loss by the permanent closure of
the mill. Also, the Samoa and Chetwynd facilities have successfully implemented
cost reduction programs. Raw material costs have decreased in 1997 due to lower
wood chip pricing. As discussed in Note 7 to the interim financial statements,
L-P has announced plans to sell the Samoa, California pulp mill.
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. 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.
Settlements and Other Unusual Items, Net
- ----------------------------------------
In the third quarter of 1997, L-P recorded unusual charges, net of unusual
gains, of $154.4 million ($94.3 million after taxes, or $.87 per share). This
included a $210.0 million charge to reflect the write-down of certain properties
which L-P has announced are for sale, to adjust reserves for litigation
settlements and to accrue for severance and certain other costs. Also included
were gains on the sale of 79,000 acres of Northern California timberland of
$55.6 million.
In the first quarter of 1997, L-P's Ketchikan Pulp Company subsidiary
recorded a net gain of $122 million ($74 million after taxes, or $.68 per share)
to reflect the initial proceeds received under a settlement agreement with the
U.S. Government over claims related to the long-term timber supply contract in
Alaska of $135 million. Adjustments to pulp mill closure-related accruals were
netted against this gain.
In the third quarter of 1996, L-P recorded charges of $350.0 million
($214.6 million after tax, or $2.00 per share) to reflect the shutdown of the
Ketchikan Pulp Company pulp mill, the settlement of outstanding shareholder
securities class action claims, a reserve for other litigation and a reserve for
the planned fourth quarter shutdown and costs related to certain other
non-strategic facilities.
General Corporate Expense, Net
- ------------------------------
The increase in general corporate expense for the first nine months of
1997 is primarily due to asset sale gains of approximately $15 million netted
against general corporate expense in 1996. For the third quarter, the increase
is related to higher general administrative costs.
Interest Income (Expense)
- -------------------------
L-P's interest expense (net of interest income and capitalized interest)
has increased in 1997 primarily as a result of increased borrowing levels.
Higher borrowing levels were attributable to losses sustained in late 1996 and
the first nine months of 1997 as well as significant capital expenditures in the
latter part of 1996 and early 1997.
Legal and Environmental Matters
- -------------------------------
Refer to the "Legal Proceedings" section of this Form 10-Q for a
discussion of certain environmental and other litigation and its potential
impact on L-P.
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<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
Cash provided by operations has increased in 1997 due to the $135 million
settlement received from the U.S. Government (see discussion above under
"Settlements and Other Unusual Items, Net"), income tax refunds received and
lower cash settlements of contingencies. Excluding the settlements and unusual
items, operating cash flow decreased significantly in 1997 compared to 1996
primarily due to the change in operating income (loss). Cash used for investing
activities has decreased in 1997 as many major construction projects underway in
the first half of 1996 were completed prior to 1997. Financing activities
resulted in a net use of cash in 1997 compared to a source of cash in 1996. The
primary difference was new borrowings, net of repayments, which were
approximately $35 million in 1997 and approximately $77 million in 1996.
L-P's cash levels have not changed significantly in 1997 while borrowings
have increased as discussed above. The ratio of long-term debt to total capital
is approximately 28 percent (excluding contingency reserves) at September 30,
1997. Although L-P's $300 million revolving credit facility was fully drawn at
September 30, the company believes that because of its conservative financial
structure and policies, it has substantial financial flexibility to generate
additional funds should the need arise. Subsequent to the end of the quarter,
L-P partially paid down the revolving credit facility with the proceeds of other
borrowings and proceeds from asset sales. Other assets in the balance sheet
increased primarily due to $50 million of notes receivable taken as partial
proceeds for timber and timberland sales.
YEAR 2000
- ---------
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 and management has not yet fully
analyzed the potential impacts on L-P. The Company therefore cannot currently
estimate the financial impact of correcting this problem.
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<PAGE>
SALES AND PROFIT BY MAJOR PRODUCT GROUP
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- -------- -------
Sales:
Structural panel products $ 222.4 $ 277.6 $ 628.9 $ 791.8
Lumber 169.5 170.3 512.4 472.9
Industrial panel products 43.9 51.8 134.5 149.7
Other building products 153.1 139.3 423.7 375.6
------- ------- -------- --------
Total building products 588.9 639.0 1,699.5 1,790.0
Pulp 30.6 37.3 107.9 128.7
------- ------- -------- --------
Total sales $ 619.5 $ 676.3 $1,807.4 $1,918.7
======= ======= ======== ========
Export sales $ 61.5 $ 59.0 $ 189.1 $ 196.8
======= ======= ======== ========
Profit (loss):
Building products $ 11.4 $ 68.0 $ 28.2 $ 170.3
Pulp (2.8) (26.5) (20.4) (78.9)
Settlements and other
unusual items, net* (154.4) (350.0) (32.5) (350.0)
General corporate expense, net (22.4) (19.6) (64.9) (39.5)
Interest income (expense), net (8.1) (3.9) (23.1) (4.4)
------- ------- -------- --------
Income (loss) before taxes and
minority interest $(176.3) $(332.0) $ (112.7) $ (302.5)
======= ======= ======== ========
* In the third quarter of 1997, the net charge of $154.4 million is composed
of a $210.0 million charge for asset write-downs, adjustment of litigation
reserves, and accrual of certain other expenses primarily related to the
building products segment and a gain on the sale of timber and timberland
in California of $55.6 million. L-P does not allocate its timber assets to
building products or pulp segments. In the first quarter of 1997, an L-P
subsidiary recorded a net gain of $121.9 million from a settlement with
the U.S. Government over claims related to the long-term timber supply
contract in Alaska. Prior to this settlement, this subsidiary engaged in
the production of pulp and building products, and therefore this
settlement gain cannot be allocated to either segment.
In 1996, of the total $350.0 million charge, $170.5 million relates to the
pulp segment and $134.5 million relates to the building products segment.
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<PAGE>
OPERATING VOLUMES
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(VOLUME AMOUNTS STATED IN MILLIONS, UNLESS OTHERWISE NOTED)
QUARTER ENDED NINE MONTHS ENDED
SEPT 30 SEPT 30
---------------- ----------------
1997 1996 1997 1996
----- ----- ----- ----
Oriented strand board panels,
million square ft 3/8" basis 933 1,031 2,753 2,696
Oriented strand board siding,
million square ft 3/8" basis 68 101 218 297
Softwood plywood,
million square ft 3/8" basis 318 420 911 1,252
Lumber, million board feet 323 287 943 894
Medium density fiberboard,
million square ft 3/4" basis 53 56 159 158
Particleboard,
million square ft 3/4" basis 84 89 253 259
Hardboard,
million square ft 1/8" basis 55 56 165 167
Engineered I-Joists,
million lineal feet 21 15 60 39
Laminated Veneer Lumber,
thousand cubic ft 1,600 900 4,700 2,800
Pulp, thousand short tons* 93 111 294 319
* Includes production of the Ketchikan Pulp Company mill in 1996 and
first quarter 1997.
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<PAGE>
INDUSTRY PRODUCT PRICE TRENDS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
OSB PLYWOOD LUMBER PARTICLEBOARD
----------- -------- --------- -------------
N. CENTRAL SOUTHERN
7/16" BASIS PINE 1/2" 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 184 258 398 276
1996 Third Quarter Average 198 261 426 277
1997 First Quarter Average 134 266 438 265
1997 Second Quarter Average 126 256 443 265
1997 Third Quarter Average 145 263 414 262
Weekly Average
October 3 155 270 370 255
October 10 140 268 372 255
October 17 141 272 378 255
Source: Random Lengths
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<PAGE>
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 further expenditures, which are primarily
capital in nature, including certain remedial and pollution control related
measures, with an estimated cost of up to approximately $20 million. With the
recent closure of the pulp mill, KPC is currently seeking the EPA's and court's
guidance regarding the necessity of these expenditures. KPC has also agreed to
undertake a study of whether a clean-up of Ward Cove, the body of water adjacent
to the pulp mill, is needed. If the study determines that such clean-up is
needed, KPC may be required to spend up to $6 million on the clean-up, including
the cost of the study, as part of the overall $20 million of expenditures. At
this time, the company cannot estimate what portion, if any, of the clean-up
expenditures will be required. The USFS has named KPC as a potentially
responsible party for costs related to the capping of a landfill near Thorne
Bay, Alaska, and KPC has agreed to a consent order obligating it to cap the
landfill, the total costs of which are estimated to be approximately $6.5
million.
The State of Texas has issued a notice of violation to L-P relating to
alleged failure to timely conduct required air emissions testing at L-P's
Silsbee, Texas, plant, and L-P has agreed to resolve the matter by paying a
penalty of approximately $137,000.
Certain of L-P's plant sites have or are suspected of having substances in
the ground or in the groundwater 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.
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. 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, liquidity or
results of operations of L-P. See "Colorado Criminal Proceedings" for further
discussion of an environmental action against the company.
Colorado Criminal Proceedings
- -----------------------------
L-P began an internal investigation at L-P's Montrose (Olathe), Colorado,
oriented strand board (OSB) plant of various matters, including certain
environmental matters, in the summer of 1992 and reported its initial finding of
irregularities to governmental authorities in September 1992. Shortly
thereafter, a federal grand jury commenced an investigation of L-P concerning
alleged environmental violations at that plant, which was subsequently expanded
to include the taking of evidence and testimony relating to alleged fraud in
connection with the submission of unrepresentative OSB Inner-Seal(R) product
- 13 -
<PAGE>
samples to the APA-The Engineered Wood Association (APA), an industry product
certification agency, by L-P's Montrose plant and certain of its other OSB
plants. L-P then commenced an independent investigation, which was concluded in
1995, under the direction of former federal judge Charles B. Renfrew concerning
irregularities in sampling and quality assurance in its OSB operations. In June
1995, the grand jury returned an indictment in the U.S. District Court in
Denver, Colorado, against L-P, a former manager of the Montrose mill, and a
former superintendent at the mill. L-P is now facing 23 felony counts related to
environmental matters at the Montrose mill, including alleged conspiracy,
tampering with opacity monitoring equipment, and making false statements under
the Clean Air Act. The indictment also charges L-P with 25 felony counts of
fraud relating to alleged use of the APA trademark on OSB Inner-Seal structural
panel products produced by the Montrose mill as a result of L-P's allegedly
improper sampling practices in connection with the APA quality assurance
program.
In December 1995, L-P received a notice of suspension from the EPA stating
that, because of criminal proceedings pending against L-P in Colorado, agencies
of the federal government would be prohibited from purchasing from or selling
directly to L-P's Montrose, Colorado, facility. L-P is negotiating to have the
EPA preliminary suspension lifted. L-P expects a final compliance agreement to
be reached by December 1997.
L-P maintains a reserve as part of its contingency reserves for its
estimate of the cost of the Montrose criminal proceedings, although as with any
estimate, there is uncertainty concerning the actual costs to be incurred. At
the present time, L-P cannot predict whether or to what extent the circumstances
described above will result in further civil litigation or investigation by
government authorities, or the potential financial impact of any such current or
future proceedings, in which case the resolution of the above matters could have
a materially adverse impact on L-P.
OSB Inner-Seal(R) 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 Inner-Seal(R) 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 Inner-Seal 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, who have owned, or who subsequently acquire property on
which L-P's OSB Inner-Seal 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 $2.20 to $6.40 per square foot depending on the type of
product and geographic location) of damaged Inner-Seal 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 Inner-Seal 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.
- 14 -
<PAGE>
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. 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 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 Inner-Seal 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 the event all claims filed prior to January
1, 2003, that are approved have been paid without exhausting the settlement
fund, any amounts remaining in the settlement fund revert to L-P. In addition to
payments to the settlement fund, L-P will be 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. As of November 7, 1997, approximately $5 million remained of the $155
million paid into the fund to date, 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 November 7, 1997, approximately 129,000 claims forms had been
requested and mailed and approximately 65,000 claims had been submitted;
approximately 21,700 class settlement checks had been mailed totaling
approximately $130 million. Based on claims experience to date, L-P believes it
is likely that total claims will exceed the $275 million of payments required
under the settlement agreement, but due to the uncertainties of evaluating
future claims activity, L-P is unable to predict the amount of excess claims.
Approximately 1,400 opt out notices were timely submitted, including about
1,200 individual property owners (a number of whose claims have subsequently
been resolved) and about 200 developers/owners of commercial properties; this
has resulted in additional claims being filed by those who opted out,
predominantly by owners/developers of commercial properties, most of which have
been settled.
- 15 -
<PAGE>
A settlement of a Florida class action has been approved by the Circuit
Court for Lake County, Florida. 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 Inner-Seal 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 will be $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
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 for up to five
years after October 4, 1995. As of October 31, 1997, approximately 31,700 claims
forms had been requested, and approximately 21,000 claims had been paid at an
aggregate cost of approximately $48.7 million, including adjustments to conform
to the national settlement.
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, APA 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.
In October 1997, the United States District Court for the Northern
District of California granted preliminary approval of a settlement agreement
that would resolve the above actions. The agreement is subject to final court
approval at a fairness hearing after notice to class members. Under the
settlement agreement, OSB structural panels manufactured by L-P and installed in
structures in the United States owned by class members (persons who purchased
OSB structural panels or structures containing such structural panels from
January 1, 1984, through October 22, 1997), or subsequent purchasers, would be
warranted to perform its intended functions under normal conditions for 20 years
after October 22, 1997. The settlement would establish a claims and inspection
procedure; L-P would be obligated to pay the reasonable costs of full
replacement of any L-P OSB structural panels that are determined to have failed
to perform their essential functions as warranted. Based on a review of its
claims records to date, L-P believes that known reports of damage to installed
L-P OSB structural panels have been immaterial in number and amount.
Additionally, the settlement agreement provides that L-P will pay a $1.5
million grant to the University of California Forest Products Laboratory, will
pay reasonable attorneys' fees of class counsel, and will consent to an
injunction prohibiting it from failing to comply with product testing protocols
or falsely representing that its products comply with certain testing
requirements.
At the present time, L-P cannot predict the potential financial impact of
the above actions.
- 16 -
<PAGE>
Other
- -----
L-P and its subsidiaries are parties to other legal proceedings.
Management believes that the outcome of such proceedings will not have a
material adverse effect on the business, financial position, liquidity or
results of operations of L-P.
- 17 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibit 27: Financial Data Schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended September 30, 1997. Subsequent to September 30, 1997,
the registrant filed a Form 8-K dated October 26, 1997, reporting a
change in auditors.
- 18 -
<PAGE>
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 Officer)
DATED: November 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Summary Financial Statements and Notes included in this Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 32,200
<SECURITIES> 0
<RECEIVABLES> 155,600
<ALLOWANCES> 0
<INVENTORY> 258,200
<CURRENT-ASSETS> 556,600
<PP&E> 2,508,800
<DEPRECIATION> (1,269,700)
<TOTAL-ASSETS> 2,588,400
<CURRENT-LIABILITIES> 366,600
<BONDS> 508,500
0
0
<COMMON> 117,000
<OTHER-SE> 1,211,500
<TOTAL-LIABILITY-AND-EQUITY> 2,588,400
<SALES> 1,807,400
<TOTAL-REVENUES> 1,807,400
<CGS> 1,602,800
<TOTAL-COSTS> 1,896,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,700
<INCOME-PRETAX> (112,700)
<INCOME-TAX> (28,700)
<INCOME-CONTINUING> (80,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (80,500)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> 0
</TABLE>
