Description
Louisiana Pac. Director ARCHIE W DUNHAM bought 383,500 shares on 6-05-2012 at $ 8.63
BUSINESS OVERVIEW
General
Our company, founded in 1973 and headquartered in Nashville, Tennessee, is a leading manufacturer of building products. As of December 31, 2011 , we had approximately 3,900 employees. We currently own 21 modern, strategically located facilities in the U.S. and Canada. We also own two facilities in Chile and one facility in Brazil. We also operate three facilities through joint ventures, for which we are the exclusive provider of product distribution for North America. Additionally, we participate in a joint venture operation that produces cellulose insulation in multiple facilities. Our focus is on delivering innovative, high-quality commodity and specialty building products to retail, wholesale, home building and industrial customers. Our products are used primarily in new home construction, repair and remodeling, and manufactured housing.
Business Segments
We operate in four segments: North America Oriented Strand Board (OSB); Siding; Engineered Wood Products (EWP); and South America. In general, our businesses are affected by the level of housing starts; the level of home repairs; the availability and cost of financing; changes in industry capacity; changes in the prices we pay for raw materials and energy; changes in foreign exchange rates (primarily the Canadian dollar); and other operating costs.
OSB
Our OSB segment manufactures and distributes OSB structural panel products.
OSB is an innovative, affordable and environmentally smart product made from wood strands arranged in layers and bonded with resin. OSB serves many of the same uses as plywood, including roof decking, sidewall sheathing and floor underlayment, but can be produced at a significantly lower cost. In the past decade, land use regulations, endangered species and environmental concerns have resulted in reduced supplies and higher costs for domestic timber, causing many plywood mills to close or divert their production to other uses. OSB has replaced most of the volume lost from these mills. It is estimated for 2011 that OSB accounted for approximately 57% of the structural panel consumption in North America with plywood accounting for the remainder. We estimate that the overall North American structural panel market (based upon 2011 housing starts) was 26.7 billion square feet with the OSB market comprising an estimated 15.3 billion square feet of this market. Based upon our production in 2011 of 3.3 billion square feet (including our joint venture OSB mill with Canfor Corporation and OSB produced in our siding segment), we estimate that we account for 22% of the North American OSB market and 12% of the overall North American structural panel market. We believe we have the largest installed capacity and are one of the most efficient producers of OSB in North America.
Siding
Our siding offerings fall into two categories: SmartSide ® siding products and related accessories; and Canexel siding and accessory products. Our SmartSide ® products consist of a full line of wood-based sidings, trim, soffit and fascia. These products have quality and performance characteristics similar to solid wood at more attractive prices due to lower raw material and production costs. Our Canexel siding and accessory product offerings include a number of mainly pre-finished lap, panel and trim products in a variety of patterns and textures.
Additionally, as market demand warrants, amounts of commodity OSB are produced and sold in this segment.
Engineered Wood Products
Our Engineered Wood Products (EWP) segment manufactures and distributes laminated veneer lumber (LVL), I-Joists, laminated strand lumber (LSL) (which began production in the first half of 2008) and other related products. This segment also includes the sale of I-Joist and LVL products produced by our joint venture with AbitibiBowater or under a contract manufacturing arrangement. We believe that in North America we are one of the top three producers (including our joint venture production) of I-Joists, LVL and LSL. A plywood mill associated with our LVL operations in British Columbia is also included in this segment.
We believe that our engineered I-joists, which are used primarily in residential and commercial flooring and roofing systems and other structural applications, are stronger, lighter and straighter than conventional lumber joists.
Our LVL and LSL are high-grade, value-added structural products used in applications where extra strength and quality is required, such as headers and beams. It is also used, together with OSB and lumber, in the manufacture of engineered I-joists.
South America
Our South American segment manufactures and distributes OSB and siding products in South America and certain export markets. This segment also distributes and sells related products to augment the transition to wood frame construction. We believe we are the only producer of OSB in South America.
Other Products
Our other products category includes our decorative moulding and our joint venture that produces cellulose insulation. Additionally, our other products category includes our remaining timber and timberlands, and other minor products, services and closed operations.
Sales, Marketing and Distribution
Our sales and marketing efforts are primarily focused on traditional two-step distribution, professional building products dealers, home centers, third-party wholesale buying groups and other retailers. The wholesale distribution channel includes a variety of specialized and broad-line wholesale distributors and dealers focused primarily on the supply of products for use by professional builders and contractors. The retail distribution channel includes large retail chains catering to the do-it-yourself (DIY) and repair and remodeling markets as well as smaller independent retailers.
Customers
We seek to maintain a broad customer base and a balanced approach to national distribution through both wholesale and retail channels. In 2011 , our top 10 customers accounted for approximately 48% of our sales. Because a significant portion of our sales are from OSB, a commodity product sold primarily on the basis of price and availability, we are not dependent on any one customer. Our principal customers include the following:
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Wholesale distribution companies, which supply building materials to retailers on a regional, state or local basis;
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Two-step distributors, who provide building materials to smaller retailers, contractors and others;
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Building materials professional dealers, that specialize in sales to professional builders, remodeling firms and trade contractors that are involved in residential home construction and light commercial building;
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Retail home centers, that provide access to consumer markets with a broad selection of home improvement materials and increasingly serve professional builders, remodelers and trade contractors; and
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Manufactured housing and shed producers, who design, construct and distribute prefabricated residential and light commercial structures, including fully manufactured, modular and panelized structures, for consumer and professional markets.
Seasonality
Our business is subject to seasonal variances, with demand for many of our products tending to be greater during the building season, which generally occurs in the second and third quarters in North America and the fourth and first quarters in South America. From time to time, we engage in promotional activities designed to stimulate demand for our products, such as reducing our selling prices and providing extended payment terms, particularly at times when demand is otherwise relatively soft. We do this in an effort to better balance our inventory levels with demand, manage the logistics of our product shipments, allow our production facilities to run efficiently, be competitive, and/or obtain initial orders from customers.
Competitors / Competition
The building products industry is highly competitive. We compete internationally with several thousand forest and building products firms, ranging from very large, fully integrated firms to smaller enterprises that may manufacture only one or a few items. We also compete less directly with firms that manufacture substitutes for wood building products. Some competitors have substantially greater financial and other resources than we do that could, in some instances, give them a competitive advantage over us.
In terms of our commodity OSB, we compete based upon price, quality and availability of products. In terms of our specialty products, including EWP, siding and various value added OSB products, we compete based upon price, quality, and availability of products as well as performance features offered.
Raw Materials
Wood fiber is the primary raw material used in most of our operations, and the primary source of wood fiber is timber. The primary end-markets for timber harvested in the U.S. are manufacturers who supply: (1) the housing market, where it is used in the construction of new housing and the repair and remodeling of existing housing; (2) the pulp and paper market; (3) commercial and industrial markets; (4) export markets; and (5) emerging biomass energy production markets. The supply of timber is limited by access to timber and by the availability of timberlands. The availability of timberlands, in turn, is limited by several factors, including forest management policies, alternate uses of land, and loss to urban or suburban real estate development.
In Canada, we harvest enough timber annually under long-term harvest rights with various Canadian governments and other third parties to support our Canadian production facilities.
We purchase approximately 76% of our wood fiber requirements on the open market, through either private cutting contracts or purchased wood arrangements. Our remaining wood fiber requirements ( 24% ) are fulfilled through government contracts, principally in Canada. Because wood fiber is subject to commodity pricing, the cost of various types of timber that we purchase in the market has at times fluctuated greatly due to weather, governmental, economic or other industry conditions. However, our mills are generally located in areas that are in close proximity to large and diverse supplies of timber. Our mills generally have the ability to procure wood fiber at competitive prices from third-party sources.
In addition to wood fiber, we use a significant quantity of various resins in our manufacturing processes. Resin product costs are influenced by changes in the prices of raw materials used to produce resin, primarily petroleum products, as well as competing demand for resin products. Currently, we purchase the majority of our resin from three major suppliers and believe our relationships with those suppliers to be good. However there can be no assurance that pricing or availability of resins will not be impacted based upon competing demand.
While the majority of our energy requirements are generated at our plants through the conversion of wood waste, we also purchase substantial amounts of energy in our operations, primarily electricity and natural gas. Energy prices have experienced significant volatility in recent years, particularly in deregulated markets. We attempt to mitigate our exposure to energy price changes through the selective use of long-term supply agreements.
Environmental Compliance
Our operations are subject to many environmental laws and regulations governing, among other things, discharges of pollutants and other emissions on or into land, water and air, the disposal of hazardous substances or other contaminants, the remediation of contamination and the restoration and reforestation of timberlands. In addition, certain environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. Compliance with environmental laws and regulations can significantly increase the costs of our operations and otherwise result in significant costs and expenses. In some cases, plant closures can result in more onerous compliance requirements becoming applicable to a facility or a site. Violations of environmental laws and regulations can subject us to additional costs and expenses, including defense costs and expenses and civil and criminal penalties. We cannot assure you that the environmental laws and regulations to which we are subject will not become more stringent, or be more stringently implemented or enforced, in the future.
Our policy is to comply fully with all applicable environmental laws and regulations. We devote significant management attention to achieving full compliance. In addition, from time to time, we undertake construction projects for environmental control equipment or incur other environmental costs that extend an asset’s useful life, improve its efficiency or improve the marketability of certain properties.
Additional information concerning environmental matters is set forth under item 3, Legal Proceedings, and in Note 18 of the Notes to the financial statements included in item 8 of this report.
Employees
We employ approximately 3,900 people, about 1,000 of whom are members of unions, primarily in Canada. We consider our relationship with our employees generally to be good. As of December 31, 2011 , we were operating under an expired collective bargaining agreement at one forestry operation in Canada. While we do not currently anticipate any work stoppage, there can be no assurance that work stoppages will not occur.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov . You may also read and copy any document we file at the SEC’s public reference room at 100 F Street, NE., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330.
In addition, we will make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act through our internet website at http://www.lpcorp.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
CEO BACKGROUND
E. Gary Cook Nominee for Term Expiring 2014
E. Gary Cook, age 66, became a director of LP in 2000 and was appointed Chairman of the Board of Directors on November 1, 2004. Currently, Mr. Cook is Chief Executive Officer and Chairman of InEnTec Chemical, LLC. Mr. Cook was Chairman, President and Chief Executive Officer of Witco Corporation, a global specialty chemicals company, from 1996 until his retirement in 1999. Until 1996, he was President, Chief Operating Officer, and a director of Albemarle Corporation, a global specialty chemicals company spun off from Ethyl Corporation in 1994, where Mr. Cook had been a Senior Vice President and director since 1992. Mr. Cook was previously a director of Trimeris Corporation. Mr. Cook was selected to serve as a director because of his leadership abilities and broad experience in specialty and commodity products. Mr. Cook’s experience at a number of large publicly traded companies affords him significant expertise in finance, capital markets and mergers and acquisitions. Mr. Cook serves as the nonexecutive Chairman, the Chair of both the Nominating and Corporate Governance Committee and the Executive Committee, and as a member of the Finance and Audit Committee. In these roles he applies his significant leadership capabilities in developing and maintaining a strong, diverse and independent Board with committees that work effectively to protect the integrity of the corporation as well as stockholder interests.
Kurt M. Landgraf Nominee for Term Expiring 2014
Kurt M. Landgraf, age 64, became a director of LP in 2005. Mr. Landgraf has been President and Chief Executive Officer of Educational Testing Service, a private, nonprofit educational testing and measurement organization based in Princeton, New Jersey, since August 2000. Prior to that, he was Executive Vice President and Chief Operating Officer of E.I. du Pont de Nemours and Company (“du Pont”), a science and technology company based in Wilmington, Delaware. Mr. Landgraf is also a director of Corning, Inc., a technology manufacturing company. Mr. Landgraf was previously a director of IKON Office Solutions, Inc. He has chaired the National Pharmaceutical Council, United Way of Delaware, the Delaware Association for Rights of Citizens with Mental Retardation, and Delaware CarePlan. He recently completed a term as President of the National Consortium for Graduate Degrees for Minorities in Engineering and Sciences, Inc. Mr. Landgraf was selected to serve as a director because he possesses valuable financial expertise, including extensive experience with capital markets transactions and investment in both public and private companies. He has held director and senior positions in global industrial and technology-dependent businesses, which provides the Company with informed judgment and unique history for risk assessment. His experience on Corning’s Finance and Audit Committee and as Chief Financial Officer of du Pont is valuable to the Board. Mr. Landgraf serves on the Finance and Audit Committee and the Compensation Committee.
John W. Weaver Nominee for Term Expiring 2014
John W. Weaver, age 65, became a director of LP in February 2010. Mr. Weaver served as President and Chief Executive Officer of Abitibi-Consolidated, Inc., a manufacturer of building products and paper products from 1999 until it merged with Bowater, Inc. in October 2007, at which time he became the Executive Chairman of AbitibiBowater, Inc. Mr. Weaver resigned as Executive Chairman of AbitibiBowater, Inc. as of February 1, 2009 and from the Board of AbitibiBowater, Inc. as of October 31, 2009. AbitibiBowater, Inc. filed for protection and reorganization under the Bankruptcy laws of Canada and the United States in April 2009 and emerged in December 2010. Mr. Weaver held a number of senior executive positions in operations and sales prior to being appointed President and Chief Executive Officer of Abitibi-Consolidated, Inc. He has over 30 years of experience in the forest products industry. Mr. Weaver was a member of the Abitibi-Consolidated, Inc. board of directors, and has been the chair of both the Forest Products Association of Canada and FP Innovations and a director of the U.S. Endowment for Forestry and Communities. Mr. Weaver was selected to serve as a director because he possesses valuable operational expertise in the forest products industry. The Board believes it is important to have an independent director on the Board with direct industry operating knowledge. Further, Mr. Weaver has significant forest products experience in Canada and provides a political, regulatory, and economic perspective in a country where a significant portion of LP’s operations take place. Mr. Weaver serves on the Nominating and Corporate Governance Committee and the Environmental and Compliance Committee.
MANAGEMENT DISCUSSION FROM LATEST 10K
OVERVIEW
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 these markets, we operate in four segments: North America Oriented Strand Board (OSB); Siding; Engineered Wood Products (EWP); and South America. OSB is the most significant segment, accounting for 40% of continuing sales in 2011 , 44% in 2010 and 39% in 2009 .
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 products will remain at current levels, increase or decrease in the future.
During 2011, we continued to experience low demand for all of our products. The overall housing market improved slightly from the severe weakness experienced in 2010, but single family housing starts, which significantly affect demand for our products, fell 9% from 2010 levels. The market channel continued to experience numerous site closures and location consolidations. Continued high unemployment, disruption in the credit markets and the continuing overall economic pessimism adversely affected the sales of our products.
Factors Affecting Our Results
Revenues and Operating Costs.
We derive our revenues from sales of our products. The unit volumes of products sold and the prices at which sales are made determine the amount of our revenues. These volumes and prices are affected by the overall level of demand for, and supply of, products of the type we sell and comparable or substitute products, and by competitive conditions.
Our operating results reflect the relationship between the amount of our revenues and our costs of production and other operating costs and expenses. Our costs of production are affected by, among other factors, costs of raw materials (primarily wood fiber and various petroleum-based resins) and energy costs, which in turn are affected by the overall market supply of and demand for these manufacturing inputs.
Demand for Building Products
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. This activity can be further delineated into three areas: (1) new home construction; (2) repair and remodeling; and (3) manufactured housing.
New Home Construction . Demand for our products correlates to a significant degree to the level of new home construction activity in North America, which historically has been characterized by significant cyclicality. The U.S. Census Bureau reported that actual single and multi-family housing starts in 2011 were about 4% higher than 2010, which were about 6% higher than such housing starts in 2009. However when comparing 2011 housing starts to the average of the last ten years as reported by the U.S. Census Bureau, 2011 housing starts were about 55% lower than that average. As reported by the U.S. Census Bureau, single family housing starts in 2011 were 9% lower than such housing starts in 2010 and the lowest level reported in the last 50 years. We believe that the reduced level of building is due to the increase in unemployment, delayed household formations due to the poor economy, foreclosure activity and a much more restrictive mortgage market. Building activity is unlikely to improve until the level of employment increases, foreclosure activity subsides and housing prices stop declining.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
A discussion of our significant accounting policies and significant accounting estimates and judgments is presented in Note 1 of the Notes to the financial statements in item 8 of this report. 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 2011, 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 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 December 31, 2011 , we excluded from our estimates approximately $1.8 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 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 December 31, 2011 , we had established valuation allowances against certain deferred tax assets, primarily related to state and foreign carryovers of net operating losses, credits and capital losses. We have not established valuation allowances against other deferred tax assets based upon tax strategies implemented or deferred tax liabilities which we anticipate to reverse within the carry forward period. 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. See further discussion related to pension plans below under the heading “Defined Benefit Pension Plans” and in Note 13 of the Notes to the financial statements included in item 8 of this report.
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-K, 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, other-than-temporary investment impairment, (gain) loss on early debt extinguishment, investment income and realized gain on sale of long-term investments and goodwill impairment. Neither EBITDA from continuing operations nor Adjusted EBITDA from continuing operations is a substitute for the GAAP measure of net income or operating cash flows or for any other GAAP measures of operating performance or liquidity.
We have included EBITDA from continuing operations and Adjusted EBITDA from continuing operations in this report on Form 10-K 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 and depreciation and amortization which are necessary to operate our business or which we otherwise incur or experience in connection with the operation of our business.
RESULTS OF OPERATIONS
We reported a net loss attributable to LP of $181.3 million ( $1.36 per diluted share) in 2011 , which was comprised of a loss from continuing operations attributed to LP of $172.1 million ( $1.29 per diluted share) and a loss from discontinued operations of $9.2 million ( $0.07 per diluted share). This includes $73.9 million of loss on sale or impairment of long-lived assets and compares to a net loss attributable to LP of $39.0 million ( $0.30 per diluted share) in 2010 , which was comprised of a loss from continuing operations attributed to LP of $32.6 million ( $0.25 per diluted share) and a loss from discontinued operations of $6.4 million ( $0.05 per diluted share). We reported a net loss attributable to LP of $120.9 million ( $1.11 per diluted share) in 2009 , which was comprised of loss from continuing operations attributed to LP of $115.6 million ( $1.06 per diluted share) and a loss from discontinued operations of $5.3 million ( $0.05 per diluted share).
Net sales in 2011 were $1.36 billion , a decrease of 2% from 2010 net sales of $1.38 billion . Net sales in 2010 as compared to 2009 were higher by 30% . Sales in 2011 were negatively impacted by decreases in OSB selling prices relative to 2010, and more positively impacted by increases in OSB selling prices relative to 2009.
Our results of operations for each of our segments are discussed below, as are results of operations for the “other” category which comprises other products that are not individually significant. See Note 24 of the Notes to the financial statements included in item 8 of this report for further information regarding our segments.
OSB
Our OSB segment manufactures and distributes OSB structural panel products in North America and certain export markets. OSB is an innovative, affordable and environmentally smart product made from wood strands arranged in layers and bonded with resin. We believe we are the largest and one of the most efficient producers of OSB in North and South America.
According to FEA, it is estimated for 2011 that OSB accounted for approximately 57% of the structural panel consumption in North America with plywood accounting for the remainder. We estimate that the overall North American structural panel market (based upon 2011 housing starts) was 26.7 billion square feet with the OSB market comprising an estimated 15.3 billion square feet of this market. Based upon our production in 2011 of 3.3 billion square feet (including our joint venture OSB mill with Canfor Corporation as well as OSB produced in our siding segment), we estimate that we account for 22% of the North American OSB market and 12% of the overall North American structural panel market.
To enhance our industry leading position in the OSB business, we plan to: (1) leverage our expertise in OSB to capitalize on new opportunities for revenue growth through new product lines; (2) improve net realizations relative to weighted-average OSB regional pricing; (3) reduce costs and improve throughput and recovery by continuing to focus on efficiency, raw materials cost reductions and logistics; and (4) manage our capacity to meet our customers' expected needs for OSB demand.
OSB is manufactured through the use of wood strands arranged in layers and bonded with resins and wax. Significant cost inputs to produce OSB and approximate breakdown percentages for the year ended December 31, 2011 include wood ( 31% ), resin and wax ( 22% ), labor and burden ( 16% ), utilities ( 7% ) and manufacturing and other ( 24% ).
MANAGEMENT DISCUSSION FOR LATEST QUARTER
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 quarter of 2012 , the U.S. Department of Census reported that actual single and multi-family housing starts were 19% higher than for the first quarter of 2011 . While building activity has improved, it is unlikely to return to “normal” levels until pending foreclosure activity subsides, employment grows, access to credit for home buyers improves and housing prices stabilize further.
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. For the first quarter of 2012 , OSB prices (NC 7/16"), as reported by Random Lengths, were 3% higher than the same period in 2011 .
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, 2011 and to “About Forward-Looking Statements” and “Risk Factors” in this report.
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, 2011 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 2012 , 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 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, 2012 , we excluded from our estimates approximately $1.8 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 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, 2012 , we had established valuation allowances against certain deferred tax assets, primarily related to state and foreign carryovers of net operating losses, credits and capital losses. We have not established valuation allowances against other deferred tax assets based upon tax strategies implemented or deferred tax liabilities which we anticipate to reverse within the carry forward period. 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, depreciation included in equity in 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.
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 and depreciation and amortization which are necessary to operate our business or which we otherwise incurred or experienced in connection with the operation of our business.
LEGAL AND ENVIRONMENTAL MATTERS
For a discussion of legal and environmental matters involving us and the potential impact thereof on our financial position, results of operations and cash flows, see Items 3, 7 and 8 in our Annual Report on Form 10-K for the year ended December 31, 2011 and Note 18 to the Notes to the financial statements contained therein.
HARDBOARD TRIM LITIGATION
We have been named in four putative class action lawsuits filed against us in United States District Courts during the first quarter of 2012 related to nontreated hardboard trim product formerly manufactured at our Roaring River, North Carolina hardboard plant: Prevett v. Louisiana-Pacific , Case No. 6:12-CV-348-ORL-18-KRS (M.D. Fla.) (filed March 5, 2012, as a state-wide putative class); Brown v. Louisiana-Pacific Corporation. , Case No. 4:12-CV-00102-RP-TJS (S.D. Iowa) (filed March 8, 2012, as a state-wide putative class); Holbrook v. Louisiana-Pacific Corporation, et al. , Case No. 3:12-CV-00484-JGC (N.D. Ohio) (filed February 28, 2012, as a state-wide putative class); and Bristol Village Inc. v. Louisiana-Pacific Corporation, et al. , Case No. 1:12-CV-00263 (W.D.N.Y.) (filed March 30, 2012, as a state-wide putative class or, alternatively, as a nation-wide putative class). These lawsuits follow two state-wide putative class action lawsuits previously filed against us in United States District Courts: Ellis, et al. v. Louisiana-Pacific Corp. , Case No. 3:11-CV-191 (W.D.N.C.); and Hart, et al. v. Louisiana-Pacific Corp. , Case No. 2:08-CV-00047 (E.D.N.C.). The Ellis case was dismissed by the District Court, which dismissal has been appealed by the plaintiffs to the United States Court of Appeals for the Fourth Circuit, and the Hart case has been certified by the District Court as a class action.
The plaintiffs in these lawsuits seek to certify classes consisting of all persons that own structures within the respective states in which the lawsuit were filed (or, in the Bristol Village case, within the United States) on which the hardboard trim in question is installed, and have filed a motion to have the putative class claims consolidated in multi-district litigation. The plaintiffs seek unspecified damages and injunctive and other relief under various state law theories, including negligence, violations of consumer protection laws, breaches of implied and express warranties, fraud, and unjust enrichment. While some individual owners of structures within the putative classes may have valid warranty claims, we believe that the claims asserted on a class basis are without merit and we intend to defend these matters vigorously. We have established warranty reserves for the hardboard trim in question pursuant to our normal business practices, and we do not believe that the resolution of these lawsuits will have a material adverse effect on our financial condition, results of operations, cash flows or liquidity.
HARDBOARD SIDING LITIGATION UPDATE
The following update should be read in conjunction with the discussion of our hardboard siding litigation set forth in Note 18 of the Notes to financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 .
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our principal sources of liquidity are existing cash and investment balances, cash generated by our operations and our ability to borrow under credit facilities. We may also from time to time issue and sell equity, debt or hybrid securities or engage in other capital market transactions.
Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness and making capital expenditures. We may also from time to time prepay or repurchase outstanding indebtedness, repurchase shares of our common stock and acquire assets or businesses that are complementary to our operations. Any such repurchases may be commenced, suspended, discontinued or resumed, and the method or methods of effecting any such repurchases may be changed, at any time or from time to time without prior notice.
We expect to be able to meet the future cash requirements of our existing businesses through cash expected to be generated from operations, existing cash and investment balances, existing credit facilities and other capital resources. The following discussion provides further details of our liquidity and capital resources.
OPERATING ACTIVITIES
During the first three months of 2012 , we used 64.4 million of cash in operating activities compared to cash used of $68.4 million during the first three months of 2011 . The decrease in cash used by operating activities in the first three months of 2012 was primarily related to lower net loss offset by the absence in 2012 of a $8.7 million tax refund received in the first three months of 2011 .
During the first three months of 2012 , our accounts receivable increased due to higher sales volume across all product lines as well as higher OSB pricing. No substantial change in credit terms or number of days outstanding. Inventory increased based on our requirements to increase log inventory due to the inability to harvest logs during the spring break up. Accounts payable increased slightly.
INVESTING ACTIVITIES
During the first three months of 2012 , cash provided from investing activities was approximately $4.2 million . Capital expenditures in the first three months of 2012 were $2.6 million . Additionally, we contributed $3.0 million to our joint ventures for working capital requirements and received $8.9 million in the sale of assets. Included in “Accounts payable” is $0.5 million related to capital expenditures that had not yet been paid as of March 31, 2012 .
During the first three months of 2011 , cash provided from investing activities was approximately $3.9 million . Capital expenditures in the first three months of 2011 were $2.4 million . Additionally, we contributed $2.0 million to our joint ventures for working capital requirements. We also reduced our restricted cash under letters of credit or credit facility requirements by $8.3 million . Included in “Accounts payable” was $0.6 million related to capital expenditures that had not yet been paid as of March 31, 2011 .
Capital expenditures in 2012 are expected not to exceed $25 million related to projects critical for continuing operations.
CREDIT AGREEMENTS We have a credit facility which provides for a committed asset-based borrowing capacity of up to $100 million, with a $60 million sublimit for U.S. letters of credit and a $10 million sublimit for Canadian letters of credit. The credit facility is scheduled to end in October 2016.
The availability of credit under the credit facility is subject to a borrowing base, which is calculated based on certain percentages of accounts receivable and inventory and at any given time may limit the amount of borrowings and letters of credit otherwise available under the facility. In addition, the credit facility contains a covenant requiring us to maintain a fixed charge coverage ratio of at least 1.1 to 1.0 at any time that our unused borrowing base capacity after adjustment to exclude certain past due trade payables falls below $15 million. This covenant effectively precludes us from using all or a portion of the last $15 million of our unused borrowing base capacity, if, before or immediately after such use, we would not satisfy the minimum fixed charge coverage ratio. The credit facility allows us to pledge, as security for our reimbursement obligations in respect of letters of credit issued under the facility, cash collateral in an amount not less than 105% of the of the stated amount of such letters of credit. The above-described preclusion to our utilization of $15 million of the capacity otherwise available under the facility does not apply to such cash collateralized letters of credit. At March 31, 2012, we had $100 million of unused borrowing base capacity under the facility and no borrowings outstanding under the facility. Outstanding under this facility at March 31, 2012, were $9.2 million in letters of credit which were collateralized by $10.0 million of cash. Based upon our available cash balances, we do not currently anticipate using this facility except to obtain and maintain letters of credit. At March 31, 2012, we anticipate that our fixed charge coverage ratio will remain below 1.1 to 1.0 for the foreseeable future, and, accordingly we will be subject to the limitation on our ability to fully utilize our adjusted borrowing base capacity as described above during such time. As a result, our ability to obtain and maintain non-cash collateralized letters of credit under this facility may remain constrained to an amount that does not exceed the excess of our adjusted borrowing base over $15 million.
Subject to certain exceptions, obligations under the credit facility are secured by, among other things, a first-priority lien on our present and future receivables, inventory and certain general intangibles, and by a second-priority lien on substantially all of our domestic property, plant and equipment, and are guaranteed by certain of our subsidiaries.
The credit facility contains customary covenants applicable to us and our subsidiaries, other than certain unrestricted subsidiaries, including certain financial covenants as well as restrictions on, among other things, our ability to: incur debt; incur liens; declare or make distributions to our stockholders; make loans and investments; repay debt; enter into mergers, acquisitions and other business combinations; form or acquire subsidiaries; amend or modify our governing documents; enter into hedging arrangements; engage in other businesses other than our business as currently conducted; and enter into transactions with affiliates. The credit facility also contains customary events of default, the occurrence of which could result in the acceleration of our obligation to repay the indebtedness outstanding thereunder.
Obligations under the indenture governing our Senior Secured Notes due 2017 are, in general, secured by a first-priority lien on the collateral that secures obligations under the credit facility on a second-priority basis, and by a second-priority lien on the collateral that secures obligations under the credit facility on a first-priority basis, subject to the terms of an intercreditor agreement, and are guaranteed by the subsidiaries that guarantee obligations under the credit facility.
The indenture contains customary covenants applicable to us and our subsidiaries, other than certain unrestricted subsidiaries, including restrictions on actions and activities that are restricted under the credit facility. The indenture also contains customary events of default, the occurrence of which could result in acceleration of our obligations to repay the indebtedness outstanding thereunder.
OTHER LIQUIDITY MATTERS
As of March 31, 2012 , we had $1.0 million ($23.4 million, par value) of principal invested in auction rate securities (ARS). The ARS held by us are securities with long-term nominal maturities for which the interest rates were historically reset through a Dutch auction each month.
We review our marketable securities routinely for other-than-temporary impairment. The primary factors LP uses to determine if an impairment charge must be recorded because a decline in value of the security is other than temporary include (i) whether the fair value of the investment is significantly below its cost basis, (ii) the financial condition of the issuer of the security (including its credit rating), (iii) the length of time that the cost of the security has exceeded its fair value and (iv) LP’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value.
If uncertainties in the credit and capital markets continue, these markets deteriorate further or we experience any ratings downgrades on any investments in our portfolio (including on ARS), we may incur additional impairments to our investment portfolio, which could negatively affect our financial condition, results of operations and cash flow.
POTENTIAL IMPAIRMENTS
We continue to review several mills and investments for potential impairments. Management currently believes we have adequate support for the carrying value of each of these assets based upon the anticipated cash flows that result from our estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures. As of March 31, 2012 , the undiscounted cash flows for the facilities indefinitely curtailed support the conclusion that no impairment is necessary for those facilities. However, should the markets for our products continue to remain at levels significantly below cycle average pricing or should we decide to invest capital in alternative projects, it is possible that we will be required to record further impairment charges.
We also review from time to time possible dispositions of various assets in light of current and anticipated economic and industry conditions, our strategic plan and other relevant factors. Because a determination to dispose of particular assets can require management to make assumptions regarding the transaction structure of the disposition and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, we may be required to record impairment charges in connection with decisions to dispose of assets.
CONF CALL
Sallie B. Bailey
Thank you very much, Stephanie, and good morning. Thank you for joining our conference call to discuss LP's financial results for the first quarter of 2012. I'm Sallie Bailey, LP's Chief Financial Officer, and with me today are Curt Stevens, LP's Chief Executive Officer; as well as Mike Kinney and Becky Barckley, our primary Investor Relations contacts.
I will begin the discussion with a review of the financial results for the first quarter of 2012. This will be followed by some comments on the performance of the individual segments and selected balance sheet items. After I finish my comments, Curt will discuss the general market environment in which LP has been operating, provide his perspective on our operating results for the first quarter of 2012 and give some thoughts on the outlook for 2012.
As we have done in the past, we have opened up this call to the public and are doing a webcast. The webcast can be accessed at www.lpcorp.com. Additionally, to help with the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I'll be referencing these slides in my comments this morning. We have also filed an 8-K this morning with some supplemental information, as well as our first quarter 10-Q.
I want to remind all of the participants about the forward looking statements comment on Slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on Slide 3 of the presentation. The appendix attached to the presentation has some of the necessary reconciliations, which have been supplemented by the Form 8-K filing we made this morning. Rather than reading these 2 statements, I incorporate them with this reference.
Before I get started on the detailed discussion of LP's financial results for the first quarter, I want to make some higher-level comments and observations.
On a March year-to-date basis, single-family and multifamily housing starts are up 19% over the same period in 2011. This is also true for new home sales and sales of existing homes. As we stated on our call in February, housing activity is beginning to show some signs of life.
Our operating results for the first quarter show improvement. Adjusted EBITDA of $21 million is 58% higher than the first quarter of 2011. Starting this quarter, we have revised our approach in non-GAAP financial results. Adjusted EBITDA now includes the depreciation from our unconsolidated affiliates, primarily Peace Valley and U.S. GreenFiber, all prior period non-GAAP results have been adjusted as well and the details are in the Form 8-K we filed this morning with our press release.
We have also calculated the non-GAAP adjusted diluted earnings per share from continuing operations using a normalized tax rate of 35%. This tax rate is calculated using the weighted average rate of the statutory tax rate of the United States, U.S. state and local jurisdictions, Canada, Chile and Brazil, assuming profitability in each of these jurisdictions. The impact of using a normalized tax rate along with the adjustments, is also detailed in the reconciliation of non-GAAP information provided this morning.
With that, let me go into the details.
Please refer to Slide 4 of the presentation for a discussion of the first quarter 2012 results compared to the fourth quarter of 2011 and the first quarter of 2011. We reported net sales of $362 million for the first quarter of 2012, a 9% increase from the sales reported for the first quarter of 2011.
In the first quarter of 2012, we recorded a net loss of $11 million, or $0.08 per diluted share. In the first quarter of 2011, we reported -- excuse me, I'm sorry, in the first quarter of 2012, we recorded a net loss of $11 million, or $0.08 per diluted share. In the first quarter of 2011, we reported a net loss of $23 million, or $0.18 per diluted share and $332 million of net sales. The adjusted months from continuing operations for the quarter is $9 million, or $0.06 per share compared to $60 million, or $0.12 per share in the first quarter of 2011.
Adjusted EBITDA from continuing operations was $21 million in the quarter compared to $13 million in the first quarter of 2011, a solid improvement quarter-over-quarter, as well as consecutively, a 9% improvement in net sales and a 58% improvement in adjusted EBITDA compared to the first quarter of 2011, and a $33 million improvement in adjusted EBITDA from the fourth quarter of 2011 and an increase of $50 million of net sales.
Moving to Slide 5 and a review of our business unit results, starting with OSB. OSB recorded an operating loss of $300,000 in the quarter compared to a loss of $9 million in the first quarter of 2011. For the quarter, in terms of adjusted EBITDA, we are reporting $11 million of income as compared to $2 million in the first quarter of 2011. For the quarter, we had a 4% increase in volume and our average sales price was 6% higher. The increase in selling price favorably impacted operating results and adjusted EBITDA from continuing operations by approximately $8 million for the quarter as compared to the corresponding period in 2011. Sales volumes also increased as we continue to sell more products into value-added applications.
Slide 6 reports the results of the Siding business. This segment includes our SmartSide and CanExel Siding products and commodity OSB produced in our Hayward mill. The Siding segment reported net sales of $113 million in the first quarter of 2012, an increase of 6% from $106 million reported in the first quarter of 2011. The Siding segment reported operating income of $17 million as compared to $13 million in the first quarter of 2011, and adjusted EBITDA of $21 million, an increase of $4 million compared to the first quarter of 2011.
For the quarter, SmartSide average sales price was up 2% and volumes increased 9%. Volume increase in our SmartSide siding line to the continued penetration into several key focus markets including retail, repair and remodel and sheds. CanExel prices showed a decrease of 6% and volume was down 5%. Sales volume declined in our CanExel Siding lines due to some weakening in the Canadian housing market and lower shipments to Europe.
Please turn to Slide 7 of the presentation, which shows the results from our Engineered Wood Products segment. This segment includes I-Joist, Laminated Strand Lumber, Laminated Veneer Lumber, plus other related products. This also includes the sale of I-Joist and LVL products produced by the Abitibi joint venture or under a sales arrangement with Murphy Plywood.
The Engineered Wood Products segment's operating loss decreased to $3 million in the first quarter of 2012 from $6 million in the first quarter of 2011. For the first quarter of 2012, EWP realized an increase in adjusted EBITDA from continuing operations of $1 million as compared to the first quarter of 2011.
Volumes of I-Joist were up 2%, while volumes of LVL and LSL were up 14% compared to the same quarter last year, primarily due to increases in domestic demand. Pricing was up 3% in I-Joist and down 1% in LVL and LSL due to changes in mix in both product lines with individual product pricing remaining relatively flat.
Moving on to Slide 8 of the presentation. For the quarter, South American operating income decreased by $500,000 for the first quarter of 2012 compared to the first quarter of 2011. For the first quarter, South America's adjusted EBITDA from continuing operations was $6 million as compared to $6.5 million reported in the first quarter of 2011.
Volumes in Chile were up 14%, while volumes in Brazil were up 2% compared to the same quarter last year. Changes in volume were primarily due to increases related to continued rebuilding associated with the Chilean earthquake in 2010. The sales volume increase in Chile was primarily sourced by import.
Pricing was up 10% in Chile and down 6% in Brazil. These changes in price were primarily related to the change in foreign exchange rates. While there is no slide for Other Building products, let me make a few comments.
These results are from our Molding business, U.S. GreenFiber Joint Venture and various other nonoperating facilities. Overall, we are showing a loss of $1 million in the first quarter of 2012, which is comparable to the first quarter of 2011. For the quarter, sales were $10 million, which is slightly below the first quarter of 2011.
Total SG&A costs were $31 million in the first quarter of 2012 as compared to $29 million in the same quarter in 2011. The increase in SG&A is primarily due to the accrual of 2012 management bonuses. We did not record any bonus accruals in 2011. We had $100,000 foreign exchange loss in the quarter compared to a $1.8 million gain in the same quarter last year.
Interest expense was $12.6 million in the quarter compared to $14 million in the first quarter of 2011. This reduction was primarily related to the change on one of our uncertain tax position, which caused us to reverse accrued interest associated with this position. This amount was excluded from our non-GAAP results calculation.
Please refer to Slide 9 of the presentation. At the end of the first quarter of 2012, we had cash, cash equivalents, investments and restricted cash of $294 million; working capital of $517 million; net cash of $48 million. In addition to the $281 million of cash on our balance sheet, we had $85 million of availability on our asset-based loan facility, and we generated cash through the first 4 weeks of the second quarter.
Capital expenditures for the 3 months were $3 million and we contributed $3 million to our joint venture. And as we discussed in our fourth quarter conference call, we are planning to spend approximately $25 million for capital expenditures in 2012.
Now I'd like to turn the call over to Curt for his comments.
Curtis M. Stevens
Thanks, Sallie. That was a very good review. Today is my first full day as CEO of LP. As we have reported, last Friday, I was elected to the Board of Directors of LP and officially became only the fourth Chief Executive Officer in LP's history.
After nearly 15 years of participating on the quarterly calls as the CFO, this will be my first time talking to you as LP's CEO. I thought it would be useful for me to share with you today what the change in leadership means to LP and where I will be focusing my time and attention. I will also provide some comments on the market.
First and foremost, there will be no change to our vision, values and customer principle within LP. The LP values will remain consistent and continue to drive our actions and how we work together. Safety, as Rick has said and I will continue to say, there is nothing more important than safety at LP. "No one should have to get hurt while working at LP" are words that we live by, and drive a culture focused on 0 incidents. For the first quarter we ended with a total incident rate of 0.48 across the entire company. In OSB, our largest business, we didn't have a signal recordable injury in Q1.
Protection of the environment. This is a legal requirement and necessary to be good members of our communities. Compliance with all laws and ethically with high integrity in all we do, simply put, it means doing the right thing. Providing quality products and services to our customers. This is a must-have to achieve our objective of being the supplier of choice. We respect people within our organization, and we have a commitment to teamwork. We have a commitment to continuous improvement. With Lean Six Sigma firmly embedded in LP, we've seen the tangible benefits of the many process improvement projects that have been completed using these tools.
Commitments to our communities. LP people are leaders in the communities in which we operate. This is a responsibility that we must embrace: being good environmental stewards, providing safe and rewarding jobs, and helping make our locations a better place to live. The LP customer principle is that everyone at LP is responsible for providing a consistent, quality customer experience. That will not change, but will gain traction.
The LP organization that I inherit is in very good shape and has shown an amazing ability to be agile, productive, efficient and effective in a very difficult market. There is no need for major restructuring. However, there are a few changes that are implemented today to recognize the organizational importance of the business teams and continue the progress we've made toward satisfying LP's customer principle.
Brad Southern and Brian Luoma have been promoted to Senior Vice President of their respective businesses, Siding and Engineered Wood. This is an important acknowledgment to the GM roles critical to the success of LP. Both Brad and Brian have long served LP in a variety of roles and have excelled in every position they've held.
In sales and marketing, I'm institutionalizing our "one LP" from the customer and marketing perspective by having Rick Olszewski more directly involved in OSB sales and all the marketing functions within the business. This will make Rick the single point of contact for sales leadership at LP.
From a business strategy perspective, Rick Frost and I have worked together with our management team and Board of Directors for 15 years. During this time, we have brought different skills, viewpoints and opinions to the table, but we've always agreed on the strategic direction of LP. As the housing market recovers, LP is well positioned to take advantage of the increased demand. We have excess capacity available in each one of our businesses. We have improved operational efficiencies through the adoption of Lean Six Sigma, productivity enhancements and our focus on agility. We have solid customer relationships that can benefit from having a supplier with multiple product lines.
So the big question is when will the housing market recover? At LP, we continue to be cautiously optimistic that the recovery is actually starting. Let me leave you with a few anecdotes. Housing starts were up 19% quarter-to-quarter with permits keeping pace. The inventory of new homes for sale is at the lowest level since statistics began to be captured, it's at 121,000. Vacancy rates, both for apartments and vacant homes for sale, continue to decline. The settlement with the 5 big banks in the various government programs under the mantle of make home affordable, seems to be having a positive effect on short sales and the bundling of foreclosures for investment purposes. This is reducing the risk of the foreclosure overhang.
Pending home for sales are on the rise. And there have been recent articles talking about bidding wars happening again in certain markets between home buyers and sellers. I can personally vouch for this as my daughter, who lives in San Francisco, and son, who lives in Portland, were involved in competitive transactions that ended with selling, buying a house above the asking price.
This earnings season has been positive for the homebuilders, and with the reporting of improved financial results and strong backlogs. The current consensus for 2012 stands at 711,000 single and multifamily housing starts, an increase of 17% compared to last year. For 2013, the consensus now stands at 875,000, a 23% increase over 2012.
For LP, Sallie just reported our results which were much better than last year and clearly above our internal expectation as we budgeted based on 625,000 housing starts for this year. This increased activity led to improved OSB pricing and stronger siding sales.
While we have been concerned the second quarter activity would follow last year's negative trend, I am pleased that our April activity has remained robust and OSB pricing has held.
So where will I be spending my time over the next several quarters? Principally, I will be focusing my time on the market. While the indications I just reviewed with you would imply that the housing market is improving, that we had faced in the past which has led us to be more conservative in our thinking and actions. But if the market is getting better, it is this important that we are ready for the recovery. In particular, we, at LP, will be spending a lot of time and effort on the full supply chain.
What are the potential pinch points for raw materials? Is there enough logging capacity? Can the resin suppliers respond to increased demand? The transportation infrastructure has contracted quite a bit during the downturn. Will there be sufficient truck and rail capacity, both incoming and outgoing? What steps should we be taking at LP to increase our access to cost-effective transportation services? At our mills, we have significant unused capacity, both in the underutilization of our running facility and in indefinitely curtailed mills. Do we have a detailed plan for adding shifts at each of our operating mills? Have we identified the critical talent necessary to ship these operations? Is the incremental capital required?
While we have no near-term plans to bring out indefinitely curtailed capacity, it is only prudent to have a comprehensive robust start-up plan for these facilities to respond to the future market demand. On the customer distribution side of the business, we need to have regular and deep discussions with our channel partners' unexpected demands in their markets.
Over the last 6 years, the channel has leaned out their inventories and relied more heavily on the manufacturers to supply incremental demand. In the recovery, the channel needs to provide this buffer. As an example, I was walking through a new house here in Nashville last weekend, and the OSB sheathing installed in the wall had been manufactured in our Hanceville, Alabama facility only 2 weeks ago, clearly not a buffer.
If we can manage this better than our competition, we should get more than our fair share of the immediate recovery and that is my goal.
With that, let me hand it back to Sallie to lead the question-and-answer session.
Sallie B. Bailey
Great. Thank you, Curt. Stephanie, we're now ready to go to the queue for questions.
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