Rogers Corporation — 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). The report covers the quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
2017 results include contributions from the November 2016 DeWAL acquisition and the January 2017 acquisition of Diversified Silicone Products (DSP), both integrated into EMS. The company is headquartered in Chandler, Arizona following its relocation from Connecticut.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $206.8 million | $165.3 million | $612.0 million | $483.3 million |
| Gross margin | 39.7% | 37.5% | 39.7% | 37.8% |
| Operating income | $39.6 million | $23.1 million | $111.8 million | $66.0 million |
| Operating margin | 19.1% | 14.0% | 18.3% | 13.7% |
| Net income | $25.5 million | $16.1 million | $73.5 million | $36.4 million |
| Diluted EPS | $1.37 | $0.88 | $3.97 | $2.00 |
- Q3 sales increased 25.1%; nine-month sales increased 26.6%.
- Gross margin expanded 220 basis points in Q3 and 190 basis points year to date, reflecting higher volume, capacity utilization, automation, cost initiatives, low-cost-country manufacturing, and acquisition synergies.
- SG&A increased 22.6% in Q3 and 17.4% year to date, but declined as a percentage of sales to 18.7% and 18.4%, respectively.
- Research and development expense was $7.4 million in Q3 and $21.5 million year to date, representing 3.6% and 3.5% of sales.
- Effective tax rates were 37.6% in Q3 and 34.6% for the first nine months, compared with 32.8% and 44.5% in the prior-year periods.
Segment performance
| Segment | Q3 sales change | Q3 operating income | 9M sales change |
|---|---|---|---|
| ACS | +11.0% | $14.5 million | +9.5% |
| EMS | +51.2% | $17.8 million | +61.6% |
| PES | +16.7% | $5.4 million | +17.3% |
| Other | -2.7% | $1.8 million | -3.1% |
ACS benefited from automotive radar, aerospace and defense, wireless infrastructure, and portable electronics demand, partly offset by weaker satellite dish demand. EMS growth reflected both acquisitions and organic demand in portable electronics, general industrial, and mass transit. PES benefited from renewable energy, electric and hybrid vehicles, motor drives, mass transit, and laser diode cooler applications.
Cash flow, liquidity, debt, and financial position
- Cash provided by operating activities was $99.9 million for the first nine months, compared with $94.2 million in 2016.
- Cash used in investing activities was $68.7 million, including $60.2 million for DSP and $17.7 million of capital expenditures.
- Cash used in financing activities was $113.8 million, principally reflecting $110.3 million of debt and lease repayments.
- Cash and cash equivalents declined to $151.0 million from $227.8 million at December 31, 2016.
- Credit-facility borrowings were $131.2 million at September 30, 2017, compared with $241.2 million at year-end 2016. The revolving facility has capacity of up to $450.0 million, plus a $175.0 million accordion feature, and matures in February 2022.
- The company made discretionary debt repayments of $50.0 million in the second quarter and $60.0 million in the third quarter.
- Accounts receivable increased to $138.5 million and inventories to $114.1 million, partly reflecting higher sales, anticipated fourth-quarter demand, and DSP.
- Goodwill increased to $234.6 million and other intangible assets to $164.1 million, primarily due to acquisitions.
- Management stated that operating cash flow, available credit, and existing liquidity are expected to fund operations, planned capital expenditures, research and development, and debt service.
Material changes and unusual items
- The DSP acquisition cost approximately $60.2 million and was funded with $30.0 million of credit-facility borrowings and cash on hand. DSP contributed $16.8 million of sales during the first nine months.
- Q3 operating income included a $4.4 million gain on the sale of a Belgian facility. The first nine months also included an approximately $0.9 million gain on the sale of Belgian land.
- Restructuring and impairment charges were $0.96 million in Q3 and $2.77 million year to date, including headquarters-relocation costs and a $0.3 million impairment of the BrightVolt investment.
- Year-to-date EMS operating income included $1.6 million of acquisition-related inventory fair-value adjustments and $2.6 million of acquisition and integration costs.
- Amortization expense increased to $11.0 million year to date from $8.0 million, primarily due to acquired intangible assets.
- The company adopted ASU 2016-09, recognizing a $12.7 million cumulative-effect increase to retained earnings for previously unrecognized excess share-based compensation tax benefits.
- No shares were repurchased during the first nine months; $52.0 million remained available under the existing $100.0 million repurchase authorization.
Outlook, risks, and contingencies
The filing does not provide specific quantitative revenue or earnings guidance. Management expects continued investment in innovation and states that research and development as a percentage of sales may move closer to historical levels as the acquired businesses are integrated.
- Key risks include end-market volatility, global competition, foreign currency movements, dependence on certain suppliers, acquisition integration, technology protection, tax-rate changes, covenant compliance, cybersecurity, restructuring and impairment charges, and changing accounting standards.
- The company has asbestos-related liabilities and insurance receivables of $52.0 million and $48.4 million, respectively, based on the unchanged ten-year projection at December 31, 2016. Management warns that actual claims, defense costs, settlements, insurance recoveries, and insurer solvency could differ materially from recorded amounts.
- There were 663 asbestos claims outstanding at September 30, 2017; settlements totaled approximately $2.4 million during the first nine months.
- Environmental reserves included $1.8 million for Connecticut remediation and $0.2 million for pond remediation related to PCB contamination. Management states that the Chatham Superfund matter is substantially covered by insurance and is not expected to have a material adverse effect based on current facts.
- In October 2017, the company merged two pension plans and intends to terminate the merged plan, subject to management and IRS approval. The financial impact could not be determined as of September 30, 2017.
- The company’s disclosure controls were effective as of September 30, 2017. DSP’s internal-control evaluation was deferred until 2018.
Investor verification points
- Verify whether the strong sales and margin gains persist after separating organic growth from DeWAL and DSP acquisition contributions.
- Assess the sustainability of operational improvements and the impact of increasing amortization, integration costs, and acquisition-related expenses.
- Monitor cash conversion, elevated inventories and receivables, capital expenditures, and future discretionary debt repayments.
- Review compliance with the credit agreement’s leverage and interest-coverage covenants and the effect of variable interest rates.
- Evaluate the final purchase-price allocations for DSP and DeWAL, including goodwill and intangible-asset impairment exposure.
- Track asbestos claims, insurance recoveries, environmental remediation, and the potential cost of the proposed pension-plan termination.
- Verify the quantified impact of the January 2018 adoption of the new revenue-recognition standard, which may shift certain revenue recognition from point-in-time to over-time.