| LOUISIANA-PACIFIC CORP ITEM 1A Risk Factors You should be aware that the occurrence of any of the events described in this Risk Factors section and elsewhere in this report or in any other of our filings with the SEC could have a material adverse effect on our business, financial position, results of operations and cash flows |
| In evaluating us, you should consider carefully, among other things, the risks described below and the matters described in “About Forward-Looking Statements |
| ” Cyclical industry conditions and commodity pricing have and may continue to adversely affect our financial conditions and results of operations |
| Our operating results reflect the general cyclical pattern of the building products industry |
| 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 cyclicality is influenced by a number of factors, including longer-term interest rates, which in recent years have been at relatively low levels |
| A significant increase in longer-term interest rates, or the occurrence of other events that reduce levels of residential construction activity, could have a material adverse effect on our financial condition, results of operations and cash flows |
| Our primary product, OSB, and a significant portion of our raw materials are globally traded commodity products |
| In addition, our products are subject to competition from manufacturers worldwide |
| Historical prices for our products have been volatile, and we, like other participants in the building products industry, have limited influence over the timing and extent of price changes for our products |
| Product pricing is significantly affected by the relationship between supply and demand in the building products industry |
| Product supply is influenced primarily by fluctuations in available manufacturing capacity |
| Demand is affected by the state of the economy in general and a variety of other factors |
| The level of new residential construction activity and home repair and remodeling activity primarily affects the demand for our building products |
| Demand is also subject to fluctuations due to changes in economic conditions, interest rates, population growth, weather conditions and other factors |
| We are not able to predict with certainty market conditions and selling prices for our products |
| We cannot assure you that prices for our products will not decline from current levels |
| A prolonged and severe weakness in the markets for one or more of our principal products, particularly OSB, could seriously harm our financial condition and results of operations and our ability to satisfy our cash requirements, including the payment of interest and principal on our debt |
| We have a high degree of product concentration |
| Concentration of our business in the OSB market further increases our sensitivity to commodity pricing and price volatility |
| We cannot assure you that pricing for OSB or our other products will not decline from current levels |
| Increased industry production capacity for OSB could constrain our operating margins for the foreseeable future |
| (RISI), an industry market research organization, total North American OSB annual production capacity increased by about 7 billion square feet from 2000 to 2005 on a 3¤8 -inch equivalent basis and is projected to increase by approximately 8 billion square feet in the 2006 to 2010 period |
| RISI has projected that total North American demand for OSB will increase by about 8 billion square feet during the same 2006 to 2010 period |
| If increases in OSB production capacity exceed increases in OSB demand, OSB could have constrained operating margins in the foreseeable future |
| Intense competition in the building products industry could prevent us from increasing or sustaining our net sales and from sustaining profitability |
| The markets for our products are highly competitive |
| Our competitors range from very large, fully integrated forest and building products firms to smaller firms that may manufacture only one or a few types of products |
| We also compete less directly with firms that manufacture substitutes for wood building products |
| Many of our competitors have greater financial and other resources than we do, and certain of the mills operated by our competitors may be lower-cost producers than the mills operated by us |
| 9 ______________________________________________________________________ Our results of operations may be harmed by potential shortages of raw materials and increases in raw material costs |
| The most significant raw material used in our operations is wood fiber |
| We currently obtain about 59prca of our wood fiber requirements in the open market |
| Wood fiber is subject to commodity pricing, which fluctuates on the basis of market factors over which we have no control |
| In addition, the cost of various types of wood fiber that we purchase in the market has at times fluctuated greatly because of governmental, economic or industry conditions |
| In addition to wood fiber, we also use a significant quantity of various resins in our manufacturing processes |
| Resin product costs are influenced by changes in the prices or availability of raw materials used to produce resins, primarily petroleum products, as well as demand for and availability of resin products |
| Selling prices of our products have not always increased in response to raw material cost increases |
| We are unable to determine to what extent, if any, we will be able to pass any future raw material cost increases through to our customers through product price increases |
| Our inability to pass increased costs through to our customers could have a material adverse effect on our financial condition, results of operations and cash flows |
| Many of the Canadian forestlands also are subject to the constitutionally protected treaty or common-law rights of the aboriginal peoples of Canada |
| Most of BC is not covered by treaties and, as a result, the claims of BC’s aboriginal peoples relating to forest resources are largely unresolved, although many aboriginal groups are actively engaged in treaty discussions with the governments of BC and Canada |
| Final or interim resolution of claims brought by aboriginal groups are expected to result in additional restrictions on the sale or harvest of timber and may increase operating costs and affect timber supply and prices in Canada |
| It is possible that, over the long term, such claims could have an adverse effect on LP’s business and results of operations |
| Our operations require substantial capital |
| Capital expenditures for expansion or replacement of existing facilities or equipment or to comply with future changes in environmental laws and regulations may be substantial |
| Although we maintain our production equipment with regular periodic and scheduled maintenance, we cannot assure you that key pieces of equipment in our various production processes will not need to be repaired or replaced or that we will not incur significant additional costs associated with environmental compliance |
| The costs of repairing or replacing such equipment and the associated downtime of the affected production line could have a material adverse effect on our financial condition, results of operations and cash flow |
| Based on our current operations, we believe our cash flow from operations and other capital resources will be adequate to meet our operating needs, capital expenditures and other cash requirements for the foreseeable future |
| If for any reason we are unable to provide for our operating needs, capital expenditures and other cash requirements on economic terms, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows |
| We are subject to significant environmental regulation and environmental compliance expenditures and liabilities |
| Our businesses are subject to many environmental laws and regulations, particularly with respect to discharges of pollutants and other emissions on or into land, water and air, and the disposal, remediation of hazardous substances or other contaminants and, in the past, the restoration and reforestation of timberlands |
| Compliance with these laws and regulations is a significant factor in our business |
| We have incurred and expect to continue to incur significant expenditures to comply with applicable environmental laws and regulations |
| Moreover, some or all of the environmental laws and regulations to which we are subject could become more stringent in the future |
| Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions |
| Some 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 |
| In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures |
| Investigations undertaken in connection 10 ______________________________________________________________________ with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities |
| Consequently, we cannot assure you that existing or future circumstances or developments with respect to contamination will not require significant expenditures by us |
| We are involved in various environmental matters and legal proceedings |
| The outcome of these matters and proceedings and the magnitude of related costs and liabilities are subject to uncertainties |
| The conduct of our business involves the use of hazardous substances and the generation of contaminants and pollutants |
| In addition, the end-users of many of our products are members of the general public |
| We currently are and from time to time in the future will be involved in a number of environmental matters and legal proceedings, including legal proceedings involving warranty or non-warranty product liability claims and other claims, including claims for wrongful death, personal injury and property damage alleged to have arisen out of the use or release by us or our predecessors of hazardous substances |
| Environmental matters and legal matters and proceedings, including class action settlements relating to certain of our products, have in the past caused and in the future may cause us to incur substantial costs |
| We have established contingency reserves in our consolidated financial statements with respect to the estimated costs of existing environmental matters and legal proceedings to the extent that our management has determined that such costs are both probable and reasonably estimable as to amount |
| However, such reserves are based upon various estimates and assumptions relating to future events and circumstances, all of which are the subject of inherent uncertainties |
| We regularly monitor our estimated exposure to environmental and litigation loss contingencies and, as additional information becomes known, may change our estimates significantly |
| We may incur costs in respect of existing and future environmental matters and legal proceedings as to which no contingency reserves have been established |
| We cannot assure you that we will have sufficient resources available to satisfy the related costs and expenses associated with these matters and proceedings |
| Settlements of tax exposures may exceed the amounts we have established for known estimated tax exposures |
| We maintain reserves for known estimated tax exposures in federal, state and international jurisdictions |
| Significant income tax exposures may include potential challenges to intercompany pricing, the treatment of financing, acquisition and disposition transactions, the use of hybrid entities, the use of the installment sale method of accounting for tax purposes and other matters |
| These exposures are settled primarily through the closure of audits with the taxing jurisdictions and, on occasion, through the judicial process, either of which may produce a result inconsistent with past estimates |
| We believe that we have appropriate liabilities established for known estimated exposures, however, if actual results differ materially from our estimates we could experience a material adverse affect on our financial condition, results of operations and cash flows |
| Fluctuations in foreign currency exchange rates could result in currency exchange losses |
| A significant portion of our operations are conducted through foreign subsidiaries |
| The functional currency for our Canadian subsidiary is the US dollar |
| The financial statements of this foreign subsidiary are remeasured into US dollars using the historical exchange rate for property, plant and equipment, timber and timberlands, goodwill, equity and certain other non-monetary assets and liabilities and related depreciation and amortization on these assets and liabilities |
| These transaction gains or losses are recorded in foreign exchange gains (losses) in the income statement |
| The functional currency of our Chilean subsidiary is the Chilean Peso |
| Translation adjustments, which are based upon the exchange rate at the balance sheet date for assets and liabilities and the weighted average rate for the income statement, are recorded in the Accumulated Comprehensive Income (Loss) section of Stockholders’ Equity |
| Therefore, a strengthening of the Canadian dollar or the Chilean Peso relative to the US dollar may have a material adverse affect on our financial condition and results of operations |