Rogers Corporation 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Rogers Corporation designs and manufactures engineered materials and components for mission-critical applications. Its strategic segments are Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), and Power Electronics Solutions (PES), with remaining businesses reported as Other. The filing covers the three and nine months ended September 30, 2019; financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $221.8 million | $226.9 million | $704.5 million | $656.1 million |
| Gross margin | 35.6% | 34.9% | 35.5% | 35.4% |
| Operating income | $29.9 million | $29.6 million | $95.9 million | $85.9 million |
| Operating margin | 13.5% | 13.1% | 13.6% | 13.1% |
| Net income | $23.4 million | $19.7 million | $76.1 million | $63.2 million |
| Diluted EPS | $1.25 | $1.06 | $4.07 | $3.39 |
| Effective tax rate | 18.6% | 31.0% | 18.5% | 25.8% |
- Cash provided by operating activities was $115.7 million for the first nine months, compared with $33.4 million in the prior-year period.
- Capital expenditures were $38.8 million. Investing cash use was $36.2 million, versus $157.5 million in 2018, which included the Griswold acquisition and Isola asset acquisition.
- Cash and cash equivalents were $140.7 million at September 30, 2019, down from $167.7 million at December 31, 2018. Approximately $103.9 million was held by non-U.S. subsidiaries.
- Revolving-credit borrowings were $130.5 million, down from $228.5 million at year-end after $98.0 million of discretionary principal repayments. The facility has $450 million of borrowing capacity, plus a $175 million accordion feature, and matures February 17, 2022.
- Total assets were $1.25 billion and shareholders’ equity was $914.6 million at September 30, 2019.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales decreased 2.2%, primarily because PES sales declined 21.9% and EMS sales declined 0.9%; ACS sales increased 9.9%.
- Year-to-date sales increased 7.4%, driven by ACS growth, EMS growth, 5G wireless infrastructure demand, and $15.0 million of first-half sales from Griswold. PES sales declined 7.2%.
- PES reported an operating loss of $3.4 million in the quarter and $1.0 million year to date, compared with operating income of $4.1 million and $15.3 million, respectively, in the comparable 2018 periods.
- ACS operating income increased 63.0% in the quarter and 68.1% year to date, while EMS operating income increased 13.0% and 21.4%, respectively.
- Gross and operating margins improved despite lower quarterly sales, reflecting favorable mix, productivity improvements, and better ACS and EMS performance. Freight, tariffs, duties, lower PES utilization, and higher PES fixed costs offset some benefits.
- Net income and EPS benefited from lower tax rates, reflecting U.S. tax reform-related international tax provisions, valuation allowance changes, jurisdictional mix, and lower taxes on unremitted foreign earnings.
- Other operating income in the first nine months of 2018 included a $3.6 million antitrust litigation settlement gain that did not recur in 2019.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide specific revenue or earnings guidance. Management stated that existing cash, expected operating cash flow, and available credit facilities should fund operations, planned capital expenditures, research and development, and debt service for at least the next 12 months.
- Management identified advanced mobility, vehicle electrification, advanced driver assistance systems, and advanced connectivity, including next-generation wireless infrastructure, as key growth drivers.
- On October 17, 2019, after the reporting date, the CEO approved termination of the Merged Plan. Rogers purchased a group annuity contract for approximately $124 million and paid approximately $39 million in lump-sum distributions. The company expects a non-cash pretax settlement charge of approximately $52 million to $56 million in the fourth quarter of 2019.
- The company expects approximately $7 million to $11 million of plan assets to remain after settlement and anticipates approximately $1 million of monthly pension payments during a transition period ending December 31, 2019.
- Asbestos-related liabilities were $70.7 million and related insurance receivables were $64.4 million at September 30, 2019. There were 826 outstanding asbestos claims, and management noted uncertainty regarding future claims, settlements, insurance coverage, and insurer solvency.
- Environmental remediation accruals for the Connecticut site were $1.6 million. Management stated that known litigation and environmental matters were not expected to have a material adverse impact, but actual outcomes may differ.
- Principal risks include U.S.-China trade policy and tariffs, restrictions involving Huawei, foreign currency movements, demand volatility in China and other international markets, supply-chain and commodity risks, competition, technology adoption, acquisition integration, covenant compliance, litigation, environmental matters, pension settlement costs, and cybersecurity disruptions.
- The company uses foreign-currency, copper, and interest-rate derivatives to manage exposures and does not use derivatives for trading or speculation. Its $75 million interest-rate swap hedges part of the revolving facility.
- The company adopted the new lease standard using the optional transition method in 2019, recognizing operating lease right-of-use assets and obligations; the impact on retained earnings was immaterial.
Most Important Facts for Investors to Verify
- Whether PES demand weakness in EV/HEV, industrial, and renewable-energy applications persists and whether the segment returns to profitability.
- The size and earnings impact of the expected $52 million to $56 million fourth-quarter pension settlement charge.
- Quarterly cash generation, capital expenditures, working-capital requirements, and the pace of further debt repayment.
- Exposure to tariffs, trade restrictions, foreign currency, copper prices, and international manufacturing conditions.
- Progress in 5G, automotive radar, electrification, and other stated growth markets, including customer adoption and product qualification timelines.
- Future asbestos claim activity, insurance recoverability, and potential changes in projected liabilities.
- Compliance with the revolving-credit facility’s maximum leverage ratio of 3.25 to 1.00 and minimum interest-coverage ratio of 3.00 to 1.00.