10-Q 1 lpx2014331-10q.htm 10-Q LPX 2014.3.31 - 10Q


 

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

 
FORM 10-Q
 
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 2014
Commission File Number 1-7107
 
 LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
93-0609074
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
414 Union Street, Nashville, TN 37219
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (615) 986-5600
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filers” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 141,130,878 shares of Common Stock, $1 par value, outstanding as of May 8, 2014.
Except as otherwise specified and unless the context otherwise requires, references to "LP", the “Company”, “we”, “us”, and “our” refer to Louisiana-Pacific Corporation and its subsidiaries.
 




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

2



Item 1.
Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) 
 
Three Months Ended March 31,
 
2014
 
2013
Net sales
$
444.7

 
$
531.1

Operating costs and expenses:
 
 
 
Cost of sales
388.4

 
387.2

Depreciation and amortization
25.6

 
18.6

Selling and administrative
40.9

 
35.2

Other operating credits and charges, net

 
1.6

Total operating costs and expenses
454.9

 
442.6

Income (loss) from operations
(10.2
)
 
88.5

 
 
 
 
Non-operating income (expense):
 
 
 
Interest expense, net of capitalized interest
(7.7
)
 
(10.6
)
Investment income
1.8

 
3.5

Other non-operating items
(4.3
)
 
(0.7
)
Total non-operating income (expense)
(10.2
)
 
(7.8
)
 
 
 
 
Income (loss) from continuing operations before taxes and equity in income of unconsolidated affiliates
(20.4
)
 
80.7

Provision (benefit) for income taxes
(5.6
)
 
22.9

Equity in income of unconsolidated affiliates
(0.6
)
 
(7.2
)
Income (loss) from continuing operations
(14.2
)
 
65.0

 
 
 
 
Income from discontinued operations before taxes

 
0.3

Provision for income taxes

 
0.2

Income from discontinued operations

 
0.1

 
 
 
 
Net income (loss)
$
(14.2
)
 
$
65.1

Income (loss) per share of common stock (basic):
 
 
 
Income (loss) from continuing operations
$
(0.10
)
 
$
0.47

Income from discontinued operations

 

Net income (loss) per share
$
(0.10
)
 
$
0.47

Net income (loss) per share of common stock (diluted):
 
 
 
Income (loss) from continuing operations
$
(0.10
)
 
$
0.45

Income from discontinued operations

 

Net income (loss) per share
$
(0.10
)
 
$
0.45

 
 
 
 
Average shares of stock outstanding - basic
140.8

 
138.4

Average shares of stock outstanding - diluted
140.8

 
144.4

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

3



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
 
 
Three Months Ended March 31,
 
2014
 
2013
Net income (loss)
(14.2
)
 
$
65.1

Other comprehensive income (loss)
 
 
 
Foreign currency translation adjustments
(1.8
)
 
1.9

Unrealized gain on marketable securities, net of reversals
0.1

 
0.3

Defined benefit pension plans
1.3

 
1.4

Other comprehensive income (loss), net of tax
(0.4
)
 
3.6

 
 
 
 
Comprehensive income (loss)
$
(14.6
)
 
$
68.7

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

4



CONSOLIDATED BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
 
 
March 31, 2014
 
December 31, 2013
ASSETS
 
 
 
Cash and cash equivalents
$
551.7

 
$
656.8

Receivables, net of allowance for doubtful accounts of $1.1 million at March 31, 2014 and December 31, 2013
143.0

 
78.1

Inventories
276.3

 
224.4

Other current assets
5.2

 
7.7

Deferred income taxes
47.3

 
50.9

Assets held for sale
16.3

 
16.3

Total current assets
1,039.8

 
1,034.2

Timber and timberlands
69.2

 
71.6

Property, plant and equipment, at cost
2,305.5

 
2,294.6

Accumulated depreciation
(1,422.5
)
 
(1,407.8
)
Net property, plant and equipment
883.0

 
886.8

Goodwill
9.7

 
9.7

Notes receivable from asset sales
432.2

 
432.2

Long-term investments
3.8

 
3.7

Restricted cash
11.4

 
11.3

Investments in and advances to affiliates
3.8

 
3.2

Deferred debt costs
6.5

 
6.8

Other assets
34.7

 
33.8

Total assets
$
2,494.1

 
$
2,493.3

LIABILITIES AND EQUITY
 
 
 
Current portion of long-term debt
$
2.3

 
$
2.3

Accounts payable and accrued liabilities
192.7

 
161.9

Current portion of contingency reserves
2.0

 
2.0

Total current liabilities
197.0

 
166.2

Long-term debt, excluding current portion
761.2

 
762.7

Contingency reserves, excluding current portion
12.8

 
13.3

Other long-term liabilities
133.8

 
136.1

Deferred income taxes
177.6

 
188.7

Stockholders’ equity:
 
 
 
Common stock
152.0

 
152.0

Additional paid-in capital
502.3

 
508.0

Retained earnings
873.5

 
887.7

Treasury stock
(226.5
)
 
(232.2
)
Accumulated comprehensive loss
(89.6
)
 
(89.2
)
Total stockholders’ equity
1,211.7

 
1,226.3

Total liabilities and stockholders’ equity
$
2,494.1

 
$
2,493.3

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

5



CONSOLIDATED STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
 
 
Three Months Ended March 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
(14.2
)
 
$
65.1

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
25.6

 
18.6

Income from unconsolidated affiliates
(0.6
)
 
(7.2
)
Other operating credits and charges, net

 
1.6

Stock-based compensation related to stock plans
2.1

 
2.1

Exchange gain (loss) on remeasurement
5.2

 
(0.3
)
Cash settlement of contingencies
(0.5
)
 
(0.1
)
Cash settlements of warranties, net of accruals
(2.7
)
 
(2.0
)
Pension expense, net of cash payments
0.6

 
1.5

Non-cash interest expense, net
0.5

 
0.4

Other adjustments, net
(0.2
)
 
0.8

Increase in receivables
(64.4
)
 
(52.4
)
Increase in inventories
(51.3
)
 
(48.6
)
Decrease in other current assets
2.5

 
1.4

Increase in accounts payable and accrued liabilities
32.4

 
12.1

Increase (decrease) in deferred income taxes
(8.0
)
 
23.8

Net cash provided by (used in) operating activities
(73.0
)
 
16.8

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Property, plant and equipment additions
(24.0
)
 
(13.2
)
Investments in and advances to joint ventures

 
6.8

Proceeds from sales of assets
0.1

 

(Increase) decrease in restricted cash under letters of credit/credit facility
(0.2
)
 
1.5

Net cash used in investing activities
(24.1
)
 
(4.9
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayment of long-term debt
(1.1
)
 
(1.0
)
Taxes paid related to net share settlement of equity awards
(1.4
)
 
(11.8
)
Other, net

 
0.1

Net cash used in financing activities
(2.5
)
 
(12.7
)
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
(5.5
)
 
0.4

Net decrease in cash and cash equivalents
(105.1
)
 
(0.4
)
Cash and cash equivalents at beginning of period
656.8

 
560.9

Cash and cash equivalents at end of period
$
551.7

 
$
560.5

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

6




CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)
 
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Comprehensive
Loss
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, December 31, 2013
152.0

 
$
152.0

 
(10.9
)
 
$
(232.2
)
 
$
508.0

 
$
887.7

 
$
(89.2
)
 
$
1,226.3

Net income

 

 

 

 

 
(14.2
)
 

 
(14.2
)
Issuance of shares for employee stock plans and stock-based compensation

 

 
0.3

 
7.1

 
(7.8
)
 

 

 
(0.7
)
Taxes paid related to net share settlement of equity awards

 

 
(0.1
)
 
(1.4
)
 

 

 

 
(1.4
)
Compensation expense associated with stock awards

 

 

 

 
2.1

 

 

 
2.1

Other comprehensive loss

 

 

 

 

 

 
(0.4
)
 
(0.4
)
Balance, March 31, 2014
152.0

 
$
152.0

 
(10.7
)
 
$
(226.5
)
 
$
502.3

 
$
873.5

 
$
(89.6
)
 
$
1,211.7

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


7



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS FOR PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments, except for other operating credits and charges, net referred to in Note 9) necessary to present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of LP and its subsidiaries for the interim periods presented. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in LP’s Annual Report on Form 10-K for the year ended December 31, 2013.
NOTE 2 – STOCK-BASED COMPENSATION
At March 31, 2014, LP had stock-based employee compensation plans as described below. The total compensation expense related to all of LP’s stock-based compensation plans was $2.1 million for the three months ended March 31, 2014 and $2.1 million for the three months ended March 31, 2013.
Stock Compensation Plans
LP grants options to purchase LP common stock and stock settled stock appreciation rights (SSARs) to key employees and directors. On exercise, LP generally issues shares from treasury to settle these awards. The options and SSARs are granted at market price at the date of grant. For employees, SSARs become exercisable ratably over a three year period and expire ten years after the date of grant. For directors, these options historically have become exercisable in 10% increments every three months, starting three months after the date of grant, and expire ten years after the date of grant. At March 31, 2014, 5.2 million shares were available under the current stock award plans for stock-based awards.
The following table sets out the weighted average assumptions used to estimate the fair value of the options and SSARs granted using the Black-Scholes option-pricing model in the first three months of the respective years noted: 
 
2014
 
2013
Expected stock price volatility
57.5%
 
69.2%
Expected dividend yield
—%
 
—%
Risk-free interest rate
1.5%
 
0.9%
Expected life of options (in years)
5 years
 
5 years
Weighted average fair value of options and SSARs granted
$9.03
 
$11.68

8



The following table summarizes stock options and SSARs outstanding as of March 31, 2014, as well as activity during the three month period then ended.
Share amounts in thousands
Options and
SSARs
 
Weighted Average
Exercise Price
 
Weighted
Average
Contractual Term
(in years)
 
Aggregate
Intrinsic Value
(in millions)
Options outstanding at January 1, 2014
6,937

 
$
14.26

 
 
 
 
Options granted
490

 
18.09

 
 
 
 
Options exercised
(3
)
 
15.27

 
 
 
 
Options canceled
(345
)
 
21.31

 
 
 
 
Options outstanding at March 31, 2014
7,079

 
$
14.18

 
5.3

 
$
34.4

Vested and expected to vest at March 31, 2014(1)
6,725

 

 

 
$
32.6

Options exercisable at March 31, 2014
6,022

 
$
13.96

 

 
$
31.5

_______________
(1) 
Options or SSARS expected to vest based upon historical forfeiture rate
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between LP's closing stock price on the last trading day of the first quarter of 2014 and the exercise price, multiplied by the number of in-the-money options and SSARs) that would have been received by the holders had all holders exercised their awards on March 31, 2014. This amount changes based on the market value of LP's stock as reported by the New York Stock Exchange.
As of March 31, 2014, there was $3.4 million of total unrecognized compensation costs related to stock options and SSARs. These costs are expected to be recognized over a weighted-average period of 2.0 years. LP recorded compensation expense related to these awards in the first three months of 2014 of $0.7 million.
Incentive Share Awards
LP has granted incentive share stock awards (restricted stock units) to certain key employees and directors. The employee awards vest three years from date of grant and awards to directors vest one year from date of grant. The awards entitle the participant to receive a specified number of shares of LP common stock at no cost to the participant. The market value at the time of grant approximates the fair value. LP recorded compensation expense related to these awards in the first three months of 2014 of $0.8 million. As of March 31, 2014, there was $4.9 million of total unrecognized compensation cost related to unvested incentive share awards. This expense will be recognized over a weighted-average period of 1.5 years.
The following table summarizes incentive share awards outstanding as of March 31, 2014 as well as activity during the three months then ended.
 
Shares
 
Weighted
Average
Contractual Term
(in years)
 
Aggregate
Intrinsic Value
(in millions)
Incentive share awards outstanding at January 1, 2014
752,595

 
 
 
 
Incentive share awards granted
145,345

 
 
 
 
Incentive share awards vested
(248,724
)
 
 
 
 
Incentive share awards canceled
(2,974
)
 
 
 
 
Incentive shares outstanding at March 31, 2014
646,242

 
1.5

 
$
10.9

Vested and expected to vest at March 31, 2014(1)
613,930

 

 
$
10.4

_______________
(1) 
Incentive shares expected to vest based upon historical forfeiture rate

9



Restricted Stock
LP grants restricted stock to certain senior employees. The shares for employees vest three years from the date of grant and for directors vest five years from date of grant. During the vesting period, the participants have voting rights and receive dividends, but the shares may not be sold, assigned, transferred, pledged or otherwise encumbered. Additionally, granted but unvested shares are forfeited upon termination of employment. The fair value of the restricted shares on the date of the grant is amortized ratably over the vesting period. As of March 31, 2014, there was $4.0 million of total unrecognized compensation costs related to restricted stock. This expense will be recognized over the next 1.5 years.
The following table summarizes the restricted stock outstanding as of March 31, 2014 as well as activity during the three months then ended.
 
Number of Shares
 
Weighted Average
Grant Date
Fair Value
Restricted stock awards outstanding at January 1, 2014
512,085

 
$
11.48

Restricted stock awards granted
117,412

 
18.09

Restrictions lapsed
(139,239
)
 
10.30

Restricted stock awards at March 31, 2014
490,258

 
$
13.40

Compensation expense related to these awards recognized in the first three months of 2014 was $0.5 million.
Performance share awards
In connection with Mr. Stevens' appointment to Chief Executive Officer on May 4, 2012, he was awarded 300,000 performance shares. LP recorded compensation expense related to these awards of $0.1 million in the first three months of 2014. As of March 31, 2014, there was $0.7 million of total unrecognized compensation costs related to this award. This expense will be recognized over the next 2.1 years.
Phantom stock
During 2011 and 2012, LP made annual grants of phantom stock units to its directors. Subsequent to the approval of the 2013 Omnibus Plan, phantom stock units are no longer granted to directors. The director does not receive rights of a shareholder, nor is any stock transfered. The units will be paid out in cash at the end of the five year vesting period. The value of one unit is based on the market value of one share of common stock on the vesting date. The cost of the grants are recognized over the vesting period and is included in stock-based compensation expense. Since these awards are settled in cash, such awards are required to be remeasured based upon the changes in LP's stock price. As of March 31, 2014, LP had 75,816 shares outstanding under this program.
NOTE 3 – FAIR VALUE MEASUREMENTS
LP’s investments that are measured at fair value on a recurring basis are categorized below using the fair value hierarchy. LP also measures the contingent consideration associated with the business combination using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant non-observable inputs.

10



The following table summarizes assets and liabilities measured on a recurring basis for each of the three hierarchy levels presented below.
Dollar amounts in millions
March 31, 2014
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Available for sale securities
$
3.8

 
$

 
$

 
$
3.8

Trading securities
2.1

 
2.1

 

 

Contingent consideration
3.6

 

 

 
3.6

 
 
 
 
 
 
 
 
Dollar amounts in millions
December 31, 2013
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Available for sale securities
$
3.7

 
$

 
$

 
$
3.7

Trading securities
2.0

 
2.0

 

 

Contingent consideration
3.8

 

 

 
3.8

Due to the lack of observable market quotations on a portion of LP’s auction rate securities (ARS) portfolio, LP evaluates the structure of its ARS holdings and current market estimates of fair value, including fair value estimates from issuing banks that rely exclusively on Level 3 inputs. These inputs include those that are based on expected cash flow streams and collateral values, including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of LP’s ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact LP’s valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity.
The following table summarizes changes in assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2014 and 2013.
Dollar amounts in millions
Available for
sale securities
Contingent consideration
Balance at December 31, 2012
$
2.0

$

Total unrealized gains included in other comprehensive income
0.5


Balance at March 31, 2013
$
2.5

$

 
 
 
Balance at December 31, 2013
$
3.7

$
3.8

Total unrealized gains included in other comprehensive income
0.1


Foreign currency loss

(0.2
)
Balance at September March 31, 2014
$
3.8

$
3.6

LP estimated the Senior Notes maturing in 2020 to have a fair value of $386.8 million at March 31, 2014 and $390.3 million at December 31, 2013 based upon market quotations.
Carrying amounts reported on the balance sheet for cash, cash equivalents, receivables and accounts payable approximate fair value due to the short-term maturity of these items.


11



NOTE 4 – EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings per share are based upon the weighted-average number of shares of common stock outstanding plus all potentially dilutive securities that were assumed to be converted into common shares at the beginning of the period under the treasury stock method. This method requires that the effect of potentially dilutive common stock equivalents (stock options, stock settled stock appreciation rights, incentive shares and warrants) be excluded from the calculation of diluted earnings per share for the periods in which LP recognizes losses from continuing operations or at such time that the exercise prices of such awards are in excess of the weighted average market price of LP's common stock during these periods because the effect is anti-dilutive. Performance share awards are included in the calculation of earnings per share using the contingently issuable method. The following table sets forth the computation of basic and diluted earnings per share:
Dollar and share amounts in millions, except per
share amounts
Three Months Ended March 31,
2014
 
2013
Numerator:
 
 
 
Income (loss) attributed to LP common shares:
 
 
 
Income (loss) from continuing operations
$
(14.2
)
 
$
65.0

Income from discontinued operations

 
0.1

Net income (loss)
$
(14.2
)
 
$
65.1

Denominator:
 
 
 
Basic - weighted average common shares outstanding
140.8

 
138.4

Dilutive effect of stock warrants

 
3.0

Dilutive effect of stock plans

 
3.0

Diluted shares outstanding
140.8

 
144.4

Basic earnings per share:
 
 
 
Income (loss) from continuing operations
$
(0.10
)
 
$
0.47

Income from discontinued operations

 

Net income (loss) per share
$
(0.10
)
 
$
0.47

Diluted earnings per share:
 
 
 
Income (loss) from continuing operations
$
(0.10
)
 
$
0.45

Income from discontinued operations

 

Net income (loss) per share
$
(0.10
)
 
$
0.45

For the three months ended March 31, 2014, stock options, warrants and SSARs relating to approximately 3.6 million shares of LP common stock were considered anti-dilutive for purposes of LP's earnings per share calculation due to LP's loss position from continuing operations. For the three months ended March 31, 2013, stock options and SSARs related to approximately 2.2 million shares of LP common stock were considered not in-the-money for purposes of LP's earnings per share calculation.
At March 31, 2014, outstanding warrants were exercisable to purchase approximately 1,462,119 shares.

12



NOTE 5 – RECEIVABLES
Receivables consist of the following:
Dollar amounts in millions
March 31, 2014
 
December 31, 2013
Trade receivables
$
135.9

 
$
69.2

Interest receivables
0.7

 
0.2

Income tax receivable
0.5

 
1.2

Other receivables
7.0

 
8.6

Allowance for doubtful accounts
(1.1
)
 
(1.1
)
Total
$
143.0

 
$
78.1

Other receivables at March 31, 2014 and December 31, 2013 primarily consist of sales tax receivables, receivables from our joint venture, miscellaneous receivables and other items.
NOTE 6 – INVENTORIES
Inventories are valued at the lower of cost or market. Inventory cost includes materials, labor and operating overhead. The major types of inventories are as follows (work in process is not material):
Dollar amounts in millions
March 31, 2014
 
December 31, 2013
Logs
$
66.4

 
$
46.9

Other raw materials
20.4

 
27.8

Semi finished inventory
19.0

 
11.1

Finished products
170.5

 
138.6

Total
$
276.3

 
$
224.4

NOTE 7 – ASSETS HELD FOR SALE
Over the last several years, LP has adopted and implemented plans to sell selected assets in order to improve its operating results. LP is required to classify assets held for sale which are not part of a discontinued business separately on the face of the financial statements outside of “Property, plant and equipment.” As of March 31, 2014 and December 31, 2013, LP included two OSB mills and various non-operating sites in its held for sale category. The current book values of assets held for sale by category is as follows:
Dollars in millions
March 31, 2014
 
December 31, 2013
Property, plant and equipment, at cost:
 
 
 
Land, land improvements and logging roads, net of road amortization
$
6.9

 
$
6.9

Buildings
6.2

 
6.2

Machinery and equipment
99.1

 
99.1

 
112.2

 
112.2

Accumulated depreciation
(95.9
)
 
(95.9
)
Net property, plant and equipment
$
16.3

 
$
16.3


13



NOTE 8 – INCOME TAXES
Accounting standards state that companies account for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards and other tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are recorded as necessary to reduce deferred tax assets to the amount thereof that is more likely than not to be realized. The likelihood of realizing deferred tax assets is evaluated by, among other things, estimating future taxable income, considering the future reversal of existing deferred tax liabilities to which the deferred tax assets may be applied and assessing the impact of tax planning strategies.
For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate to year-to-date results unless this method does not result in a reliable estimate of year-to-date income tax expense.  Each quarter the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted to the current quarter.
The income tax components and associated effective income tax rates for the three months ended March 31, 2014 and 2013 are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Tax Benefit
 
Tax Rate
 
Tax Provision
 
Tax Rate
Continuing operations
$
(5.6
)
 
(28
)%
 
$
22.9

 
26
%
Discontinued operations

 
35
 %
 
0.2

 
35
%
 
$
(5.6
)
 
(28
)%
 
$
23.1

 
26
%
For the first three months of 2014, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to the effect of foreign tax rates and adjustments to reserves for uncertain tax positions.  For the first three months of 2013, the primary differences between the U.S. statutory rate of 35% and the effective rate applicable to LP’s continuing operations relate to the effect of foreign tax rates and decreases in valuation allowances attributed to net operating loss carryforwards in various jurisdictions.
LP periodically reviews the need for valuation allowances against deferred tax assets and recognizes these deferred tax assets to the extent that the realization is more likely than not. Based upon its review of available positive and negative evidence, LP believes that the valuation allowances provided are appropriate. If LP were to determine that it would not be able to realize a portion of an existing net deferred tax asset in excess of an existing valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period in which such determination was made. Conversely, if it were to make a determination that it is more likely than not that an existing deferred tax asset for which there is currently a valuation allowance would be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded in the period in which such determination was made.
As a result of certain recognition requirements of ASC 718 Compensation -- Stock Compensation, certain deferred tax assets as of March 31, 2014 are not recognized in relation to amounts of tax deductions for equity compensation that are greater than the compensation recognized for financial reporting. Equity will be increased by $13.2 million if and when such deferred tax assets are ultimately realized. LP uses the "with and without" method for determining when excess tax benefits have been realized.
LP and its domestic subsidiaries are subject to U.S. federal income tax as well as income taxes of multiple state jurisdictions. Its foreign subsidiaries are subject to income tax in Canada, Chile, Peru and Brazil. During 2011, the U.S. Internal Revenue Service (IRS) initiated an audit of tax years 2007 - 2009 for which field work has been completed. LP has protested certain proposed adjustments and requested review by the IRS Appeals Office. During the third quarter of 2013, LP deposited $17.1 million with the IRS to suspend the accrual of interest pending the

14



resolution of this matter. The deposit is included within other assets on the Condensed Consolidated Balance Sheet. All U.S. federal audits of prior years have been completed. LP remains subject to state and local tax examinations for the tax years 2007 through 2012. Canadian federal income tax returns have been audited and effectively settled through 2008, and no examinations are currently in progress. Quebec provincial audits have been effectively settled through 2011 and 2012 is currently under review. As of March 31, 2014, the Chilean Tax Office was in the process of auditing tax year 2011.
NOTE 9 – OTHER OPERATING CREDITS AND CHARGES, NET
The major components of “Other operating credits and charges, net” in the Consolidated Statements of Income for the three months ended March 31, 2013 is reflected in the table below and is described in the paragraphs following the table:
 
Three Months Ended March 31,
Dollar amounts in millions
2014
 
2013
Other operating charges and credits net:
 
 
 
   Adjustment related to prior year inventory
$

 
$
(1.6
)
 
$

 
$
(1.6
)
During the first quarter of 2013, LP recorded a loss of $1.6 million related to a prior year inventory adjustment.
NOTE 10 – TRANSACTIONS WITH AFFILIATES
LP has an equity investment in Abitibi-LP, a manufacturer of I-joists with Resolute Forest Products. LP sells products and raw materials to Abitibi-LP and purchases products for resale from Abitibi-LP. LP eliminates profits on these sales and purchases, to the extent the inventory has not been sold through to third parties, on the basis of its 50% interest. For the three months ended March 31, 2014 and 2013, LP sold $2.5 million and $3.5 million of products to Resolute-LP and purchased $12.2 million and $11.0 million of I-joists from Resolute-LP. Included in LP’s Consolidated Balance Sheets at March 31, 2014 and December 31, 2013 are $1.4 million and $0.8 million in accounts receivable from this affiliate.
LP purchased $60.2 million of OSB from Canfor-LP during the quarter ended March 31, 2013 associated with our previous joint venture which was subsequently purchased.
NOTE 11 – LEGAL AND ENVIRONMENTAL MATTERS
Certain environmental matters and legal proceedings are discussed below.
Environmental Matters
LP maintains a reserve for undiscounted estimated environmental loss contingencies. This reserve is primarily for estimated future costs of remediation of hazardous or toxic substances at numerous sites currently or previously owned by the Company. LP's estimates of its environmental loss contingencies are based on various assumptions and judgments, the specific nature of which varies in light of the particular facts and circumstances surrounding each environmental loss contingency. These estimates typically reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and/or monitoring activities and the probable cost of these activities, and in some cases reflect assumptions and judgments as to the obligation or willingness and ability of third parties to bear a proportionate or allocated share of the cost of these activities. Due to the numerous uncertainties and variables associated with these assumptions and judgments, and the effects of changes in governmental regulation and environmental technologies, both the precision and reliability of the resulting estimates of the related contingencies are subject to substantial uncertainties. LP regularly monitors its estimated exposure to environmental loss contingencies and, as additional information becomes known, may change its estimates significantly.

15



Other Proceedings
LP and its subsidiaries are parties to other legal proceedings. Based on the information currently available, management believes that the resolution of such proceedings will not have a material adverse effect on the financial position, results of operations, cash flows or liquidity of LP.
NOTE 12 – SELECTED SEGMENT DATA
LP operates in four segments: Oriented Strand Board (OSB), Siding, Engineered Wood Products (EWP) and South America. LP’s business units have been aggregated into these four segments based upon the similarity of economic characteristics, customers and distribution methods. LP’s results of operations are summarized below for each of these segments separately as well as for the “other” category which comprises other products that are not individually significant. Segment information was prepared in accordance with the same accounting principles as those described in Note 1 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2013.
 
Three Months Ended March 31,
Dollar amounts in millions
2014
 
2013
Net sales:
 
 
 
OSB
$
194.9

 
$
286.7

Siding
143.5

 
133.8

Engineered Wood Products
66.4

 
63.4

South America
36.6

 
45.1

Other
3.7

 
2.7

Intersegment Sales
(0.4
)
 
(0.6
)
 
$
444.7

 
$
531.1

Operating profit (loss):
 
 
 
OSB
$
(1.9
)
 
$
98.1

Siding
19.2

 
20.7

Engineered Wood Products
(3.1
)
 
(3.5
)
South America
4.2

 
6.3

Other
(0.7
)
 
(1.8
)
Other operating credits and charges, net

 
(1.6
)
General corporate and other expenses, net
(27.3
)
 
(22.5
)
Foreign currency losses
(4.3
)
 
(0.7
)
Investment income
1.8

 
3.5

Interest expense, net of capitalized interest
(7.7
)
 
(10.6
)
Income (loss) from continuing operations before taxes
(19.8
)
 
87.9

Provision (benefit) for income taxes
(5.6
)
 
22.9

Income (loss) from continuing operations
$
(14.2
)
 
$
65.0


16



NOTE 13 – POTENTIAL IMPAIRMENTS
LP continues to review certain operations and investments for potential impairments. LP’s management currently believes it has adequate support for the carrying value of each of these operations and investments based upon the anticipated cash flows that result from estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures. As of March 31, 2014, there were no indications of impairment for the asset grouping that includes the company's indefinitely curtailed facilities. As of March 31, 2014, the fair value of facilities that have not been indefinitely curtailed are substantially in excess of its carrying value and supports the conclusion that no impairment is necessary for those facilities.
LP also reviews from time to time possible dispositions of various assets in light of current and anticipated economic and industry conditions, its strategic plan and other relevant circumstances. Because a determination to dispose of particular assets can require management to make assumptions regarding the transaction structure of the disposition and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, LP may be required to record impairment charges in connection with decisions to dispose of assets.
NOTE 14 – CONTINGENCY RESERVES
LP maintains reserves for various contingent liabilities as follows: 
Dollar amounts in millions
March 31, 2014
 
December 31, 2013
Environmental reserves
$
14.5

 
$
14.9

Other reserves
0.3

 
0.4

Total contingency reserves
14.8

 
15.3

Current portion of contingency reserves
(2.0
)
 
(2.0
)
Long-term portion of contingency reserves
$
12.8

 
$
13.3

See Note 11 for discussion of environmental matters.

NOTE 15 – DEFINED BENEFIT PENSION PLANS
The following table sets forth the net periodic pension cost for LP’s defined benefit pension plans during the quarter ended March 31, 2014 and 2013. The net periodic pension cost included the following components:
 
Three Months Ended March 31,
Dollar amounts in millions
2014
 
2013
Service cost
$
0.9

 
$
0.8

Interest cost
3.7

 
3.2

Expected return on plan assets
(4.2
)
 
(4.1
)
Amortization of prior service cost

 
0.1

Amortization of net loss
1.4

 
1.8

Net periodic pension cost
$
1.8

 
$
1.8

During the three months ended March 31, 2014 and 2013, LP recognized $1.8 million of pension expense for all of LP's defined benefit pension plans.
During the three months ended March 31, 2014, LP made $1.2 million in pension contributions for LP's Canadian benefit plans. LP expects to contribute $5.0 million to $7.0 million to its pension plans in 2014.
NOTE 16 – GUARANTEES AND INDEMNIFICATIONS
LP is a party to contracts in which LP agrees to indemnify third parties for certain liabilities that arise out of or relate to the subject matter of the contract. In some cases, this indemnity extends to liabilities arising out of the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct of the indemnified parties. LP cannot estimate the potential amount of future payments under these agreements until

17



events arise that would trigger the liability. See Note 21 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion of LP’s guarantees and indemnifications.
LP provides warranties on the sale of most of its products and records an accrual for estimated future claims. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The activity in warranty reserves for the first three months of 2014 and 2013 are summarized in the following table:
 
Three Months Ended March 31,
Dollar amounts in millions
2014
 
2013
Beginning balance
$
29.3

 
$
21.4

Accrued to expense
0.2

 
0.3

Foreign currency translation
(0.4
)
 

Payments made
(2.9
)
 
(2.3
)
Total warranty reserves
26.2

 
19.4

Current portion of warranty reserves
(12.0
)
 
(12.0
)
Long-term portion of warranty reserves
$
14.2

 
$
7.4

The current portion of the warranty reserve is included in the caption “Accounts payable and accrued liabilities” and the long-term portion is included in the caption “Other long-term liabilities” on LP’s Condensed Consolidated Balance Sheets.
NOTE 17 - OTHER COMPREHENSIVE INCOME

Other comprehensive income activity, net of tax, is provided in the following table for the three months ended March 31, 2014:
Dollar amounts in millions
 
Foreign currency translation adjustments
 
Pension adjustments
 
Unrealized gain (loss) on investments
 
Other
 
Total
Balance at December 31, 2013
 
$
(19.2
)
 
$
(70.3
)
 
$
2.0

 
$
(1.7
)
 
$
(89.2
)
Other comprehensive income before reclassifications
 
(1.8
)
 
2.6

 
0.1

 

 
$
0.9

Amounts reclassified from accumulated comprehensive income
 

 
(1.3
)
 

 

 
$
(1.3
)
Net current-period other comprehensive income
 
(1.8
)
 
1.3

 
0.1

 

 
(0.4
)
Balance at March 31, 2014
 
$
(21.0
)
 
$
(69.0
)
 
$
2.1

 
$
(1.7
)
 
$
(89.6
)


18



Other comprehensive income activity, net of tax, is provided in the following table for the three months ended March 31, 2013:
Dollar amounts in millions
 
Foreign currency translation adjustments
 
Pension adjustments
 
Unrealized gain (loss) on derivative instruments
 
Unrealized gain (loss) on investments
 
Other
 
Total
Balance at December 31, 2012
 
$
(7.6
)
 
$
(99.0
)
 
$
(0.3
)
 
$
1.0

 
$
(2.0
)
 
$
(107.9
)
Other comprehensive income before reclassifications
 
1.9

 
2.7

 

 
0.3

 

 
4.9

Amounts reclassified from accumulated comprehensive income
 

 
(1.3
)
 

 

 

 
(1.3
)
Net current-period other comprehensive income
 
1.9

 
1.4

 

 
0.3

 

 
3.6

Balance at March 31, 2013
 
$
(5.7
)
 
$
(97.6
)
 
$
(0.3
)
 
$
1.3

 
$
(2.0
)
 
$
(104.3
)

 
Reclassifications from accumulated other comprehensive loss for the three months ended March 31, 2014 and March 31, 2013 are summarized, in millions of dollars, in the following table:
 
 
Amount reclassified from accumulated comprehensive income
 
 
 
 
Three Months Ended March 31,
 
 
Details about accumulated other comprehensive income components
 
2014
 
2013
 
Affected line item in the statement where net income (loss) is presented
Amortization of defined benefit pension plans
 
 
 
 
 
 
     Prior service cost
 
$

 
$
0.1

 
(a) 
     Actuarial loss
 
1.4

 
1.8

 
(a) 
     Transition obligation
 
0.4

 
(0.1
)
 
(a) 
 
 
1.8

 
1.8

 
Total before tax
 
 
0.5

 
0.5

 
Tax (provision) benefit
Total reclassifications
 
$
1.3

 
$
1.3

 
Net of tax
____________
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost, see Note 15 for additional details. The net periodic pension cost is included in Cost of sales and Selling and administrative line items in the Consolidated Statements of Income.

NOTE 18 - PROPOSED ACQUISITION OF AINSWORTH LUMBER CO. LTD.

In September of 2013, LP entered into an Arrangement Agreement (the “Arrangement”) with Ainsworth
Lumber Co. Ltd., a British Columbia corporation (“Ainsworth”), providing an arrangement under British
Columbia law whereby a wholly owned subsidiary of the Company will acquire all of the outstanding shares of
Ainsworth capital stock in exchange for 0.114 shares of LP common stock (“LP Shares”) and C$1.94 in cash per
Ainsworth common share (“Ainsworth Shares”) subject to certain terms and conditions. Although the
Arrangement provides for Ainsworth shareholders to elect among cash consideration, share consideration and
mixed consideration, proration provisions will ensure that the aggregate amounts of cash and LP Shares issued in
the Transaction are fixed at approximately C$467.0 million and 27.5 million LP Shares, respectively.
The requisite approvals of the Transaction by Ainsworth shareholders and the Supreme Court of British Columbia were obtained on October 29, 2013 and October 31, 2013, respectively. As of the date of this report, the

19



consummation of the Transaction remains subject to other closing conditions, including the receipt of certain regulatory approvals and clearances.

LP and Ainsworth have entered into timing agreements with each of the Canadian Competition Bureau (the “CCB”) and the Antitrust Division of the U.S. Department of Justice (the “DOJ”) pursuant to which LP and Ainsworth agreed, subject to certain conditions, that they will not consummate the Transaction before giving the CCB and DOJ at least 14 days' prior written notice. LP and Ainsworth have also amended the Arrangement Agreement to extend the outside date for completion of the Transaction from April 18, 2014 to June 2, 2014. The Arrangement Agreement permits either party to extend the outside date if required to obtain certain regulatory approvals.

As of the date of this report, the CCB and DOJ have indicated that they are unwilling to permit the Transaction to be completed in the absence of divestitures that would go beyond those contemplated in the Arrangement Agreement. Although LP and Ainsworth continue to explore possible solutions and alternatives, LP is currently unable to conclude as to whether, when or the terms upon which a transaction may be completed. Because of their indicated positions, it may require LP and Ainsworth prevailing in litigation to complete the transaction under the current terms of the Arrangement Agreement. To complete a transaction, it may be necessary to make one or more divestitures of existing operations of LP and/or Ainsworth, to make changes to the Arrangement Agreement, including possible changes to the purchase price payable by LP and / or to engage in litigation with the CCB and / or DOJ.
The Arrangement Agreement contains certain termination rights for each of LP and Ainsworth. Either party may terminate the Arrangement Agreement if: (i) the parties mutually agree; (ii) the Transaction has not been consummated by the outside date; (iii) a governmental authority issues a law or order prohibiting the Transaction; (iv) the other party materially breaches its representations, warranties or covenants such that the applicable closing condition would not to be satisfied; or (v) the other party has incurred a Material Adverse Effect (as defined in the Arrangement Agreement).

LP expects to fund the cash portion of the purchase price contemplated by the Arrangement agreement (as the same be modified) and related fees and expenses through a combination of cash on hand at LP and Ainsworth and borrowings under our revolving credit facility.

On October 17, 2013, Ainsworth issued a press release announcing that it had received the requisite consents in connection with its consent solicitation (the “Consent Solicitation”) from holders of Ainsworth’s 7.5% Senior Secured Notes due 2017 (the “Notes”) . The press release also announced that Ainsworth has entered into a supplemental indenture relating to the Notes, which modified certain definitions in the indenture relating to the Notes (the “Indenture”) so that the consummation of the Transaction pursuant to the Arrangement Agreement, and the designation by LP of members of Ainsworth’s board of directors upon and after the consummation of the Transaction, will not constitute a “Change of Control” under the Indenture and Ainsworth will not be required to make a “Change of Control Offer” under the Indenture in connection with the Transaction. Subject to the satisfaction or waiver of the conditions set forth in the solicitation statement distributed by Ainsworth to holders of the Notes, LP will make the consent payments contemplated thereby as and when they become due. Promptly following the consummation of the Transaction, LP will unconditionally guarantee the prompt payment and performance of the obligations of Ainsworth under the Indenture and the Notes.

The transaction contemplated by the Arrangement Agreement is expected to have a material effect on LP’s consolidated financial position, results of operations and cash flows.


20



NOTE 19 - GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in goodwill for the three months ended March 31, 2014 and March 31, 2013 are provided in the following table:
Dollar amounts in millions
 
2014
 
2013
Beginning balance, December 31,
 
$
9.7

 
$

Additions
 

 

Total goodwill
 
$
9.7

 
$


LP has recorded other intangible assets in its Consolidated Balance Sheets, as follows:
Dollar amounts in millions
 
March 31, 2014
 
December 31, 2013
Timber licenses (recorded as part of Timber and timberlands)
 
$
67.3

 
$
68.2

Other
 
0.1

 
0.1

Total
 
$
67.4

 
$
68.3


Customer relationships and other intangibles are included in Other assets in the Consolidated Balance Sheet.

Amortization of the above intangible assets over the next five years is as follows:
Dollar amounts in millions
 
2014
$
3.5

2015
3.5

2016
4.2

2017
4.2

2018
4.2


During the second quarter of 2013, LP completed the acquisition of the Peace Valley OSB joint venture. The acquisition resulted in the recognition of $9.7 million of goodwill and included timber licenses of $34.1 million.

NOTE 20 - DISCONTINUED OPERATIONS

Over the last several years, LP has adopted and implemented plans to sell selected businesses and assets in order to improve its operating results. For all periods presented, these operations include residual losses of mills divested in past years and associated warranty and other liabilities associated with these operations.

Sales and operating profit included in discontinued operations are as follows:
Dollars amounts in millions
 
Three Months Ended March 31,
 
 
2014
 
2013
Sales
 
$

 
$
6.3

Operating profit
 

 
0.3


NOTE 21 - RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11 "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss ("NOL") Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." The amendment requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for an NOL or tax credit carryforward whenever the

21



NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. The new disclosure requirements were effective for all periods beginning after December 15, 2013. The adoption of the amendment impacts presentation only and did not have an effect on LP's financial condition, results of operations or cash flows.

22



Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
Our products are used primarily in new home construction, repair and remodeling, and manufactured housing. We also market and sell our products in light industrial and commercial construction and we have a modest export business. Our manufacturing facilities are primarily located in the U.S. and Canada, but we also operate two facilities in Chile and one facility in Brazil.
To serve our markets, we operate in four segments: Oriented Strand Board (OSB), Siding, Engineered Wood Products (EWP) and South America.
Demand for our products correlates to a significant degree to the level of residential construction activity in North America, which historically has been characterized by significant cyclicality. For the first three months of 2014, the U.S. Department of Census reported that actual U.S. single and multi-family housing starts were 2% lower than for the first quarter of 2013. OSB is sold as a commodity for which sales prices fluctuate daily based on market factors over which we have little or no control. We cannot predict whether the prices of our OSB products will remain at current levels or increase or decrease in the future. OSB prices (NC 7/16"), as reported by Random Lengths, were 47% lower for the first quarter of 2014 than for the same period in 2013.
For additional factors affecting our results, refer to the Management Discussion and Analysis overview contained in our Annual Report on Form 10-K for the year ended December 31, 2013 and to “About Forward-Looking Statements” and “Risk Factors” in this report.
PLANNED ACQUISTION OF AINSWORTH LUMBER CO. LTD.
On September 4, 2013, LP entered into an Arrangement Agreement (the “Arrangement Agreement”) with Ainsworth Lumber Co. Ltd., a British Columbia corporation (“Ainsworth”), providing an arrangement under British Columbia law whereby a wholly owned subsidiary of the Company would acquire all of the outstanding shares of Ainsworth capital stock in exchange for 0.114 shares of LP common stock (“LP Shares”) and C$1.94 in cash per Ainsworth common share (“Ainsworth Shares”) on the terms and subject to the conditions set forth therein (the “Transaction”). Although the Arrangement Agreement provides for Ainsworth shareholders to elect among cash consideration, share consideration and mixed consideration, proration provisions would ensure that the aggregate amounts of cash and LP Shares issued in the Transaction are fixed at approximately C$467 million and 27.5 million LP Shares, respectively.

The requisite approvals of the Transaction by Ainsworth shareholders and the Supreme Court of British Columbia were obtained on October 29, 2013 and October 31, 2013, respectively. As of the date of this report, the consummation of the Transaction remains subject to other closing conditions, including the receipt of certain regulatory approvals and clearances,

LP and Ainsworth have entered into timing agreements with each of the Canadian Competition Bureau (the “CCB”) and the Antitrust Division of the U.S. Department of Justice (the “DOJ”) pursuant to which LP and Ainsworth agreed, subject to certain conditions, that they will not consummate the Transaction before giving the CCB and DOJ at least 14 days' prior written notice. LP and Ainsworth have also amended the Arrangement Agreement to extend the outside date for completion of the Transaction from April 18, 2014 to June 2, 2014. The Arrangement Agreement permits either party to extend the outside date for an additional 45 days if required to obtain certain regulatory approvals.

Since entering into the Arrangement Agreement, LP and Ainsworth have been in regular contact with the DOJ and the CCB with respect to antitrust matters and, in an effort to persuade them that the Transaction should be permitted to proceed, LP and Ainsworth have provided the CCB and DOJ with significant amounts of information and analysis and met with them on multiple occasions. As of the date of this report, the CCB and DOJ have indicated that they are unwilling to permit the Transaction to be completed in the absence of divestitures that would go beyond those contemplated in the Arrangement Agreement. Because of their indicated positions, it may require LP and Ainsworth prevailing in litigation to complete the transaction under the current terms of the Arrangement Agreement. Although LP and Ainsworth continue to explore possible solutions and alternatives, LP is currently unable to assu

23



re you as to whether, when or the terms upon which a transaction may be completed. To complete a transaction, it may be necessary to make one or more divestitures of existing operations of LP and/or Ainsworth, to make changes to the Arrangement Agreement, including possible changes to the purchase price payable by LP and / or to engage in litigation with the CCB and / or DOJ.
The Arrangement Agreement contains certain termination rights for each of LP and Ainsworth. Either party may terminate the Arrangement Agreement if: (i) the parties mutually agree; (ii) the Transaction has not been consummated by the outside date; (iii) a governmental authority issues a law or order prohibiting the Transaction; (iv) the other party materially breaches its representations, warranties or covenants such that the applicable closing condition would not to be satisfied; or (v) the other party has incurred a Material Adverse Effect (as defined in the Arrangement Agreement).
We expect to fund the cash portion of the purchase price contemplated by the Arrangement agreement (as the same be modified) and related fees and expenses through a combination of cash on hand at LP and Ainsworth and borrowings under our revolving credit facility.

On October 17, 2013, Ainsworth issued a press release announcing that it had received the requisite consents in connection with its consent solicitation (the “Consent Solicitation”) from holders of Ainsworth’s 7.5% Senior Secured Notes due 2017 (the “Notes”) . The press release also announced that Ainsworth has entered into a supplemental indenture relating to the Notes, which modified certain definitions in the indenture relating to the Notes (the “Indenture”) so that the consummation of the Transaction pursuant to the Arrangement Agreement, and the designation by LP of members of Ainsworth’s board of directors upon and after the consummation of the Transaction, will not constitute a “Change of Control” under the Indenture and Ainsworth will not be required to make a “Change of Control Offer” under the Indenture in connection with the Transaction. Subject to the satisfaction or waiver of the conditions set forth in the solicitation statement distributed by Ainsworth to holders of the Notes, LP will make the consent payments contemplated thereby as and when they become due. Promptly following the consummation of the Transaction, LP will unconditionally guarantee the prompt payment and performance of the obligations of Ainsworth under the Indenture and the Notes.

The transaction contemplated by the Arrangement Agreement (as the same may be modified) is expected to have a material effect on LP’s consolidated financial position, results of operations and cash flows.


CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Presented in Note 1 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2013 is a discussion of our significant accounting policies and significant accounting estimates and judgments. Throughout the preparation of the financial statements, we employ significant judgments in the application of accounting principles and methods. These judgments are primarily related to the assumptions used to arrive at various estimates. For the first quarter of 2014, these significant accounting estimates and judgments include:
Legal Contingencies. Our estimates of loss contingencies for legal proceedings are based on various judgments and assumptions regarding the potential resolution or disposition of the underlying claims and associated costs. In making judgments and assumptions regarding legal contingencies for ongoing class action settlements, we consider, among other things, discernible trends in the rate of claims asserted and related damage estimates and information obtained through consultation with statisticians and economists, including statistical analysis of potential outcomes based on experience to date and the experience of third parties who have been subject to product-related claims judged to be comparable. Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates significantly.
Environmental Contingencies. Our estimates of loss contingencies for environmental matters are based on various judgments and assumptions. These estimates typically reflect judgments and assumptions relating to the probable nature, magnitude and timing of required investigation, remediation and/or monitoring activities and the probable cost of these activities, and in some cases reflect judgments and assumptions relating to the obligation or willingness

24



and ability of third parties to bear a proportionate or allocated share of the cost of these activities, including third parties who purchased assets from us subject to environmental liabilities. We consider the ability of third parties to pay their apportioned cost when developing our estimates. In making these judgments and assumptions related to the development of our loss contingencies, we consider, among other things, the activity to date at particular sites, information obtained through consultation with applicable regulatory authorities and third-party consultants and contractors and our historical experience at other sites that are judged to be comparable. Due to the numerous variables associated with these judgments and assumptions, and the effects of changes in governmental regulation and environmental technologies, both the precision and reliability of the resulting estimates of the related contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to environmental loss contingencies and, as additional information becomes known, may change our estimates significantly. At March 31, 2014, we excluded from our estimates approximately $2.1 million of potential environmental liabilities that we estimate will be allocated to third parties pursuant to existing and anticipated future cost sharing arrangements.
Impairment of Long-Lived Assets. We review the long-lived assets held and used by us (primarily property, plant and equipment and timber and timberlands) for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. We consider the necessity of undertaking such a review at least quarterly, and also when certain events or changes in circumstances occur. Events and changes in circumstances that may necessitate such a review include, but are not limited to: a significant decrease in the market price of a long-lived asset or group of long-lived assets; a significant adverse change in the extent or manner in which a long-lived asset or group of long-lived assets is being used or in its physical condition; a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or group of long-lived assets, including an adverse action or assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or group of long-lived assets; current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or group of long-lived assets; and current expectation that, more likely than not, a long-lived asset or group of long-lived assets will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Identifying these events and changes in circumstances, and assessing their impact on the appropriate valuation of the affected assets under accounting principles generally accepted in the U.S., requires us to make judgments, assumptions and estimates.
In general, for assets held and used in our operations, impairments are recognized when the carrying amount of the long-lived asset or groups of long-lived assets is not recoverable and exceeds the fair value of the asset or group of assets. The carrying amount of a long-lived asset or groups of long-lived assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets or group of assets. The key assumptions in estimating these cash flows relate to future production volumes, pricing of commodity or specialty products and future estimates of expenses to be incurred as reflected in our long-range internal planning models. Our assumptions regarding pricing are based upon the average pricing over the commodity cycle (generally five years) due to the inherent volatility of commodity product pricing, and reflect our assessment of information gathered from industry research firms, research reports published by investment analysts and other published forecasts. Our assumptions regarding expenses reflect our expectation that we will continue to reduce production costs to offset inflationary impacts.
When impairment is indicated for assets held and used in our operations, the book values of the affected assets are written down to their estimated fair value, which is generally based upon discounted future cash flows associated with the affected assets. When impairment is indicated for assets to be disposed of, the book values of the affected assets are written down to their estimated fair value, less estimated selling costs. Consequently, a determination to dispose of particular assets can require us to estimate the net sales proceeds expected to be realized upon such disposition, which may be less than the estimated undiscounted future net cash flows associated with such assets prior to such determination, and thus require an impairment charge. In situations where we have experience in selling assets of a similar nature, we may estimate net sales proceeds on the basis of that experience. In other situations, we hire independent appraisers to estimate net sales proceeds.
Due to the numerous variables associated with our judgments and assumptions relating to the valuation of assets in these circumstances, and the effects of changes in circumstances affecting these valuations, both the precision and

25



reliability of the resulting estimates of the related impairment charges are subject to substantial uncertainties and, as additional information becomes known, we may change our estimates significantly.
Income Taxes. The determination of the provision for income taxes, and the resulting current and deferred tax assets and liabilities, involves significant management judgment, and is based upon information and estimates available to management at the time of such determination. The final income tax liability to any taxing jurisdiction with respect to any calendar year will ultimately be determined long after our financial statements have been published for that year. We maintain reserves for known estimated tax exposures in federal, state and international jurisdictions; however, actual results may differ materially from our estimates.
Judgment is also applied in determining whether deferred tax assets will be realized in full or in part. When we consider it to be more likely than not that all or some portion of a deferred tax asset will not be realized, a valuation allowance is established for the amount of the deferred tax asset that is estimated not to be realizable. As of March 31, 2014, we had established valuation allowances against certain deferred tax assets, primarily related to state carryovers of net operating losses and credits and capital losses in state and foreign jurisdictions. We have not established valuation allowances against other deferred tax assets based upon our review of the evidence supporting their realization. Accordingly, changes in facts or circumstances affecting the likelihood of realizing a deferred tax asset could result in the need to record additional valuation allowances.
Pension Plans. Most of our U.S. employees and many of our Canadian employees participate in defined benefit pension plans sponsored by LP. We account for the consequences of our sponsorship of these plans in accordance with accounting principles generally accepted in the U.S., which require us to make actuarial assumptions that are used to calculate the related assets, liabilities and expenses recorded in our financial statements. While we believe we have a reasonable basis for these assumptions, which include assumptions regarding long-term rates of return on plan assets, life expectancies, rates of increase in salary levels, rates at which future values should be discounted to determine present values and other matters, the amounts of our pension related assets, liabilities and expenses recorded in our financial statements would differ if we used other assumptions.
Workers’ Compensation. We are self insured for most of our U.S. employees’ workers compensation claims. We account for these plans in accordance with accounting principles generally accepted in the U.S., which require us to make actuarial assumptions that are used to calculate the related assets, liabilities and expenses recorded in our financial statements. While we believe we have a reasonable basis for these assumptions, which include assumptions regarding rates at which future values should be discounted to determine present values, expected future health care costs and other matters, the amounts of our liabilities and related expenses recorded in our financial statements would differ if we used other assumptions.
Warranty Obligations. Customers are provided with a limited warranty against certain defects associated with our products for periods of up to fifty years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the historical and anticipated rates of warranty claims and the cost of resolving such. We periodically assess the adequacy of our recorded warranty liability for each product and adjust the amounts as necessary. While we believe we have a reasonable basis for these assumptions, actual warranty costs in the future could differ from our estimates.
NON-GAAP FINANCIAL MEASURES
In evaluating our business, we utilize several non-GAAP financial measures. A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so excluded or included under applicable GAAP guidance. In this report on Form 10-Q, we disclose earnings (loss) from continuing operations before interest expense, taxes, depreciation and amortization (“EBITDA from continuing operations”) which is a non-GAAP financial measure. Additionally, we disclose "Adjusted EBITDA from continuing operations" which further adjusts EBITDA from continuing operations to exclude stock based compensation expense, (gain) loss on sales or impairment of long lived assets, other operating charges and credits, net, cost of acquisitions, depreciation included in equity in (income) loss of unconsolidated affiliates and investment income. Neither EBITDA from continuing operations nor Adjusted EBITDA from continuing operations is a substitute for the GAAP measures of net income or operating cash flows or for any other GAAP measures of operating performance or liquidity.

26



We have included EBITDA from continuing operations and Adjusted EBITDA from continuing operations in this report on Form 10-Q because we use them as important supplemental measures of our performance and believe that they are frequently used by securities analysts, investors and other interested persons in the evaluation of companies in our industry, some of which present EBITDA when reporting their results. We use EBITDA from continuing operations and Adjusted EBITDA from continuing operations to evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates. It should be noted that companies calculate EBITDA and Adjusted EBITDA differently and, therefore, our EBITDA and Adjusted EBITDA measures may not be comparable to EBITDA and Adjusted EBITDA reported by other companies. Our EBITDA and Adjusted EBITDA measures have material limitations as performance measures because they exclude interest expense, income tax (benefit) expense, depreciation and amortization and other costs and expenses, which are necessary to operate our business or which we otherwise incurred or experienced in connection with the operation of our business.
The following table represents significant items by operating segment and reconciles income (loss) from continuing operations to Adjusted EBITDA from continuing operations:
Three Months Ended March 31, 2014 (Dollar amounts in millions)
OSB
 
Siding
 
EWP
 
South America
 
Other
 
Corporate
 
Total
Sales
$
194.9

 
$
143.5

 
$
66.4

 
$
36.6

 
$
3.7

 
$
(0.4
)
 
$
444.7

Depreciation and amortization
13.6

 
4.2

 
4.6

 
2.3

 

 
0.9

 
25.6

Cost of sales and selling and administrative
183.2

 
120.1

 
65.5

 
30.1

 
4.4

 
26.0

 
429.3

Total operating costs
196.8

 
124.3

 
70.1

 
32.4

 
4.4

 
26.9

 
454.9

Income (loss) from operations
(1.9
)
 
19.2

 
(3.7
)
 
4.2

 
(0.7
)
 
(27.3
)
 
(10.2
)
Total non-operating expense

 

 

 

 

 
(10.2
)
 
(10.2
)
Income (loss) before income taxes and equity in income of unconsolidated affiliates
(1.9
)
 
19.2

 
(3.7
)
 
4.2

 
(0.7
)
 
(37.5
)
 
(20.4
)
Income tax benefit

 

 

 

 

 
(5.6
)
 
(5.6
)
Equity in income of unconsolidated affiliates

 

 
(0.6
)
 

 

 

 
(0.6
)
Income (loss) from continuing operations
$
(1.9
)
 
$
19.2

 
$
(3.1
)
 
$
4.2

 
$
(0.7
)
 
$
(31.9
)
 
$
(14.2
)
Reconciliation of income (loss) from continuing operations to Adjusted EBITDA from continuing operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(1.9
)
 
$
19.2

 
$
(3.1
)
 
$
4.2

 
$
(0.7
)
 
$
(31.9
)
 
$
(14.2
)
Income tax benefit

 

 

 

 

 
(5.6
)
 
(5.6
)
Interest expense, net of capitalized interest

 

 

 

 

 
7.7

 
7.7

Depreciation and amortization
13.6

 
4.2

 
4.6

 
2.3

 

 
0.9

 
25.6

EBITDA from continuing operations
11.7

 
23.4

 
1.5

 
6.5

 
(0.7
)
 
(28.9
)
 
13.5

Stock based compensation expense
0.2

 
0.2

 
0.1

 

 

 
1.6

 
2.1

Investment income

 

 

 

 

 
(1.8
)
 
(1.8
)
Expenses associated with proposed acquisition of Ainsworth Lumber Co. Ltd.

 

 

 

 

 
9.1

 
9.1

Adjusted EBITDA from continuing operations
$
11.9

 
$
23.6

 
$
1.6

 
$
6.5

 
$
(0.7
)
 
$
(20.0
)
 
$
22.9


27



Three Months Ended March 31, 2013
(Dollar amounts in millions)
OSB
 
Siding
 
EWP
 
South America
 
Other
 
Corporate
 
Total
Sales
$
286.7

 
$
133.8

 
$
63.4

 
$
45.1

 
$
2.7

 
$
(0.6
)
 
$
531.1

Depreciation and amortization
8.4

 
3.9

 
3.3

 
2.6

 

 
0.4

 
18.6

Cost of sales and selling and administrative
188.2

 
109.2

 
63.4

 
36.2

 
3.9

 
21.5

 
422.4

Other operating credits and charges, net

 

 

 

 

 
1.6

 
1.6

Total operating costs
196.6

 
113.1

 
66.7

 
38.8

 
3.9

 
23.5

 
442.6

Income (loss) from operations
90.1

 
20.7

 
(3.3
)
 
6.3

 
(1.2
)
 
(24.1
)
 
88.5

Total non-operating expense

 

 

 

 

 
(7.8
)
 
(7.8
)
Income (loss) before income taxes and equity in (income) loss of unconsolidated affiliates
90.1

 
20.7

 
(3.3
)
 
6.3

 
(1.2
)
 
(31.9
)
 
80.7

Provision for income taxes

 

 

 

 

 
22.9

 
22.9

Equity in (income) loss of unconsolidated affiliates
(8.0
)
 

 
0.2

 

 
0.6

 

 
(7.2
)
Income (loss) from continuing operations
$
98.1

 
$
20.7

 
$
(3.5
)
 
$
6.3

 
$
(1.8
)
 
$
(54.8
)
 
$
65.0

Reconciliation of income (loss) from continuing operations to Adjusted EBITDA from continuing operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
98.1

 
$
20.7

 
$
(3.5
)
 
$
6.3

 
$
(1.8
)
 
$
(54.8
)
 
$
65.0

Provision for income taxes

 

 

 

 

 
22.9

 
22.9

Interest expense, net of capitalized interest

 

 

 

 

 
10.6

 
10.6

Depreciation and amortization
8.4

 
3.9

 
3.3

 
2.6

 

 
0.4

 
18.6

EBITDA from continuing operations
106.5

 
24.6

 
(0.2
)
 
8.9

 
(1.8
)
 
(20.9
)
 
117.1

Stock based compensation expense
0.2

 
0.1

 
0.1

 

 

 
1.7

 
2.1

Investment income

 

 

 

 

 
(3.5
)
 
(3.5
)
Other operating credits and charges, net

 

 

 

 

 
1.6

 
1.6

Depreciation included in equity in income (loss) of unconsolidated affiliates
2.0

 

 

 

 
0.8

 

 
2.8

Adjusted EBITDA from continuing operations
$
108.7

 
$
24.7

 
$
(0.1
)
 
$
8.9

 
$
(1.0
)
 
$
(21.1
)
 
$
120.1

RESULTS OF OPERATIONS
(Dollar amounts in millions, except per share amounts)
Our net loss for the first three months of 2014 was $14.2 million, or $0.10 per diluted share, on sales of $444.7 million, compared to net income for the first three months of 2013 of $65.1 million, or $0.45 per diluted share, on sales of $531.1 million. For the first three months of 2014, loss from continuing operations was $14.2 million, or $0.10 per diluted share, compared to income of $65.0 million, or $0.45 per diluted share.
Our results of operations for each of our segments are discussed below as well as for the “other” category, which comprises products that are not individually significant.
OSB
Our OSB segment manufactures and distributes commodity and value-added OSB structural panels.
Segment sales, operating income, and Adjusted EBITDA from continuing operations for this segment are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Change
Net sales
$
194.9

 
$
286.7

 
(32
)%
Operating income (loss)
(1.9
)
 
98.1

 
(102
)%
Adjusted EBITDA from continuing operations
11.9

 
108.7

 
(89
)%

28



Percent changes in average sales prices and unit shipments for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 are as follows:
 
Three Months Ended March 31,
2014 versus 2013
 
Average Net
Selling Price
 
Unit
Shipments
OSB
(38
)%
 
6
%
For the three months ended March 31, 2014, OSB prices decreased as compared to the corresponding period in 2013. The decline in OSB prices, for the three month period, was likely due to more available capacity and the housing market being hampered by poor weather across North America. The decrease in selling price unfavorably impacted operating results and Adjusted EBITDA from continuing operations by approximately $113 million for the three months ended March 31, 2014 as compared to the comparable period in 2013. Sales volumes for the three month period showed an increase over the comparable period of 2013.
SIDING
Our siding segment produces and markets wood-based siding and related accessories, together with commodity OSB products from one mill.
Segment sales, operating income and Adjusted EBITDA from continuing operations for this segment are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Change
Net sales
$
143.5

 
$
133.8

 
7
 %
Operating income
19.2

 
20.7

 
(7
)%
Adjusted EBITDA from continuing operations
23.6

 
24.7

 
(4
)%
Sales in this segment by product line are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Change
SmartSide Siding
$
124.8

 
$
106.3

 
17
 %
Commodity OSB
5.2

 
13.1

 
(60
)%
CanExel siding
13.5

 
14.4

 
(6
)%
Total
$
143.5

 
$
133.8

 
7
 %
Percent changes in average sales prices and unit shipments for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 are as follows:
 
Three Months Ended March 31,
2014 versus 2013
 
Average Net
Selling Price
 
Unit
Shipments
SmartSide Siding
6
 %
 
12
 %
Commodity OSB
(38
)%
 
(31
)%
CanExel siding
(8
)%
 
13
 %
For the three months ended March 31, 2014 compared to the corresponding period in 2013, sales volumes increased in our SmartSide siding line due to continued penetration in several key focus markets including retail, repair and remodel markets and sheds. Sales prices in our SmartSide siding product line for the three month period ended March 31, 2014 as compared to the corresponding period in 2013 were higher due to a price increase as well as changes in product mix.

29



For CanExel, the sales volumes increased in the first three months of 2014 as compared to the corresponding period in 2013 was due to customers increasing the volumes purchased through our annual winter promotional program which encourages customers to buy products in advance of the building season at a discounted price. Sales prices were lower for the three month period of 2014 as compared to the corresponding period in 2013 due to the impact of the promotional program as well as product mix. Sales prices were also lower due to the impact of the Canadian dollar weakening as a majority of these sales are made in Canada.
For the first three months of 2014, sales prices decreased as compared to the same period in the prior year, for our commodity OSB products as discussed in the OSB segment above. The decrease in selling price unfavorably impacted operating results and Adjusted EBITDA from continuing operations by approximately $3 million for the three months ended March 31, 2014 as compared to the corresponding period of 2013. Volumes of commodity OSB were lower for the three months ended March 31, 2014 as compared to the comparable period of 2013 due to increases in siding volume which reduced the production capacity available for OSB.
Overall, the reduction in operating results for our siding segment for the three month period ended March 31, 2014, compared to the same period in 2013, was primarily due to decreased OSB pricing which was offset by higher siding sales.
ENGINEERED WOOD PRODUCTS
Our engineered wood products (EWP) segment manufactures and distributes laminated veneer lumber (LVL), I-Joists, laminated strand lumber (LSL) and other related products. This segment also includes the sale of I-Joist and LVL products produced by AbitibiBowater-LP or under a sales arrangement with a third party producer.
Segment sales, operating losses and Adjusted EBITDA from continuing operations for this segment are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Change
Net sales
$
66.4

 
$
63.4

 
5
%
Operating losses
(3.1
)
 
(3.5
)
 
11
%
Adjusted EBITDA from continuing operations
1.6

 
(0.1
)
 
NM

Sales in this segment by product line are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Change
LVL/LSL
$
31.5

 
28.6

 
10
 %
I-Joist
22.2

 
19.8

 
12
 %
Related products
12.7

 
15.0

 
(15
)%
Total
$
66.4

 
$
63.4

 
5
 %
Percent changes in average sales prices and unit shipments for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 are as follows:  
 
Three Months Ended March 31,
2014 versus 2013
 
Average Net
Selling Price
 
Unit
Shipments
LVL/LSL
8
%
 
2
%
I-Joist
11
%
 
3
%
For the three months ended March 31, 2014, sales volumes of LVL/LSL and I-joists increased over the prior year due to improved market demand. Sales prices for LVL/LSL and I-joists for the three months ended March 31, 2014 increased due to price increases implemented to offset higher raw material costs.

30



Our focus in the EWP segment continues to be on reductions in conversion costs, better geographic manufacturing and distribution, and maintaining key customer relationships. Included in this segment is a plywood operation, which primarily produces plywood as a by-product from the LVL production process.
For the three months ended March 31, 2014, compared to the same period in 2013, the results of operations were flat with the prior period due to increases in depreciation expense of approximately $1.2 million associated with our Houlton mill due to higher production.
SOUTH AMERICA
Our South America segment manufactures and distributes OSB panels and siding products in South America and selected export markets. This segment operates in two countries, Chile and Brazil.
Segment sales, operating income and Adjusted EBITDA from continuing operations for this segment are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Change
Net sales
$
36.6

 
$
45.1

 
(19
)%
Operating income
4.2

 
6.3

 
(33
)%
Adjusted EBITDA from continuing operations
6.5

 
8.9

 
(27
)%
Sales in this segment by production location were as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Change
Chile
$
21.5

 
$
30.3

 
(29
)%
Brazil
15.1

 
14.8

 
2
 %
Total
$
36.6

 
$
45.1

 
(19
)%
Percent changes in average sales prices and unit shipments for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 are as follows:  
 
Three Months Ended March 31,
2014 versus 2013
 
Average Net
Selling Price
 
Unit
Shipments
Chile
(13
)%
 
(18
)%
Brazil
(5
)%
 
7
 %
For the three month periods ended March 31, 2014, compared to the same period in 2013, sales volumes in Chile were lower due to reduced production related to maintenance work completed. For the same period, sales volumes in Brazil are higher due to increased export sales.
Sales prices in Chile and Brazil declined for the three month period ended March 31, 2014 as compared to the corresponding period in 2013 due to the impact of the fluctuations in the Chilean Peso and Brazilian Real relative to the U.S. dollar as a majority of these sales are in local markets. Local currency selling prices in Chile increased for the quarter by 2% and local currency selling prices in Brazil increased by 11% for the three month period as compared to the corresponding period in 2013.
OTHER PRODUCTS
Our other products segment includes our remaining timber and timberlands, trucking operations and other minor products, services and closed operations which are not classified as discontinued operations. Additionally, our other products category included our U.S. Greenfiber joint venture interest which was sold during the fourth quarter of 2013.

31



Segment sales, operating losses and Adjusted EBITDA from continuing operations for this category are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Change
Net sales
$
3.7

 
$
2.7

 
37
%
Operating losses
(0.7
)
 
(1.8
)
 
61
%
Adjusted EBITDA from continuing operations
(0.7
)
 
(1.0
)
 
30
%
For the three months ended March 31, 2014, compared to the same period in 2013, operating results in our other products businesses were lower due to reduced costs associated with non-operating sites and elimination of the losses associated with U.S. Greenfiber due to the sale of this joint venture.
GENERAL CORPORATE AND OTHER EXPENSE, NET
For the three months ended March 31, 2014, compared to the same period in 2013, general corporate expenses increased by 21% and overall selling and administrative expenses increased by 16%. General corporate and other expenses primarily consist of corporate overhead such as wages and benefits for corporate and sales personnel, professional fees, insurance and other expenses. The increase in general corporate expenses as well as overall selling and administrative costs is primarily due to the cost of an information technology system upgrade, marketing expenses in our siding business and expenses associated with the planned acquisition of Ainsworth.
INTEREST EXPENSE AND INVESTMENT INCOME
Components of interest expense, net of investment income, are as follows:  
 
Three Months Ended March 31,
Dollar amounts in millions
2014
 
2013
Investment income
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