Rogers Corporation — Q1 2018 Form 10-Q Summary
Business context and reporting period
Rogers Corporation designs and manufactures engineered materials and components for mission-critical applications. Its principal segments are Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), and Power Electronics Solutions (PES), with additional businesses reported in Other. The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $214.6 million | $203.8 million | 5.3% increase |
| Gross margin | 35.7% | 39.4% | 373 basis-point decrease |
| Operating income | $31.0 million | $39.0 million | 20.5% decrease |
| Operating margin | 14.5% | 19.2% | 469 basis-point decrease |
| Net income | $26.1 million | $27.0 million | 3.3% decrease |
| Diluted EPS | $1.40 | $1.47 | 4.8% decrease |
| Operating cash flow | $8.8 million | $23.2 million | Decrease of $14.5 million |
- Revenue benefited from favorable foreign currency movements of approximately $9.4 million and $3.9 million from adoption of ASC 606 revenue recognition. Organic growth in EMS and PES was partly offset by lower ACS demand.
- Gross margin declined because of higher commodity and product-launch costs, lower capacity utilization, process issues, machine downtime, and unfavorable fixed-cost absorption.
- SG&A increased 17.4% to $40.6 million, or 18.9% of sales, reflecting strategic growth investments, higher severance, incentive compensation, and intangible amortization. R&D increased 16.9% to $8.1 million, or 3.8% of sales.
- The effective tax rate decreased to 15.4% from 32.3%, primarily due to U.S. tax reform, jurisdictional income mix, stock-compensation tax deductions, R&D credits, and a release of uncertain-tax-position reserves.
- Cash and equivalents were $173.0 million at March 31, 2018, compared with $181.2 million at year-end 2017. Approximately $137.4 million was held by non-U.S. subsidiaries.
- Cash uses included $9.1 million of capital expenditures, $6.4 million of tax payments related to equity-award net share settlement, and $3.0 million of share repurchases.
- Borrowings under the revolving credit facility were $131.0 million. The facility provides $450.0 million of borrowing capacity, a $175.0 million accordion feature, and matures February 17, 2022. No quarterly principal payments are required.
- The company had $22.0 million of contract assets and no contract liabilities at March 31, 2018, following adoption of ASC 606.
Segment and other material changes
- ACS: Sales declined 6.5% to $73.5 million and operating income declined 59.5% to $7.9 million. Weakness in wireless infrastructure, aerospace and defense, and portable electronics was partly offset by automotive radar demand.
- EMS: Sales increased 1.6% to $78.1 million and operating income increased 10.7% to $14.2 million. Results included a $3.6 million antitrust litigation settlement gain.
- PES: Sales increased 35.3% to $57.7 million and operating income increased 44.9% to $7.0 million, driven by electric and hybrid vehicles, renewable energy, laser diode coolers, and variable-frequency motor drives. ASC 606 increased PES sales by approximately $4.3 million.
- ASC 606 was adopted using the modified retrospective method. The adoption increased January 1, 2018 retained earnings by approximately $4.2 million and increased Q1 2018 reported sales by $3.9 million and net income by $0.9 million versus the prior revenue model.
- Other operating income included a non-recurring $3.6 million antitrust settlement gain, compared with a $0.9 million gain on a property sale in Q1 2017.
- The company repurchased 23,138 shares for $3.0 million; approximately $49.0 million remained available under the $100.0 million authorization.
Outlook, risks, contingencies, and unusual items
- Management expects existing cash, operating cash flow, and available credit facilities to fund operations, planned capital expenditures, R&D, and debt service. The filing does not provide specific full-year revenue or earnings guidance.
- On April 24, 2018, the company decided to relocate Santa Fe Springs, California operations to Carol Stream, Illinois and Bear, Delaware. Estimated restructuring costs are approximately $2.0 million, with approximately $1.5 million expected in 2018 and $0.5 million in 2019; related capital expenditures are estimated at $1.2 million to $1.4 million.
- The company intends to terminate the Rogers defined-benefit pension plan, subject to management and IRS approval. Settlement is expected in late 2018 or early 2019, but the financial impact could not yet be determined.
- Asbestos-related liabilities were $75.9 million at March 31, 2018, with related insurance receivables of $69.2 million as of December 31, 2017. The company warns that future claims, coverage exhaustion, insurer solvency, and litigation outcomes could cause actual costs and recoveries to differ materially from recorded amounts.
- Environmental matters include a $1.7 million remediation accrual for the Connecticut VCAP site and a $0.2 million reserve for pond remediation at the Woodstock, Connecticut facility.
- Key operating risks include commodity prices, foreign exchange, global competition, demand volatility in wireless and automotive markets, manufacturing execution and capacity utilization, supply-chain constraints, acquisitions, tax changes, debt covenants, litigation, environmental obligations, and information-technology disruptions.
- The filing states that disclosure controls and procedures were effective as of March 31, 2018, with no material changes to internal control over financial reporting during the quarter.
Investor verification checklist
- Determine whether the Q1 gross-margin deterioration from commodity costs, product launches, capacity utilization, and process issues is temporary or structural.
- Separate underlying revenue growth from the $9.4 million currency benefit and the $3.9 million ASC 606 adoption benefit.
- Assess the sustainability of PES growth and the severity and duration of ACS weakness.
- Reconcile operating cash flow with net income, particularly the $22.0 million contract-asset build and working-capital movements.
- Monitor leverage and interest-coverage compliance under the secured credit facility, including the impact of future restructuring and capital spending.
- Track the Santa Fe Springs consolidation costs, production-transfer execution, and estimated capital expenditures.
- Review developments in asbestos claims, insurance coverage exhaustion, environmental remediation, and the proposed pension-plan termination.
- Evaluate the effect of provisional U.S. tax-reform accounting and $11.8 million of unrecognized tax benefits on future tax expense.