Business Context and Reporting Period
Rogers Corporation designs and manufactures engineered materials and components for connectivity, clean energy, safety and protection applications. The report covers the unaudited quarter ended March 31, 2017, compared with the quarter ended March 31, 2016. Operations are reported through Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), Power Electronics Solutions (PES) and Other.
Rogers acquired Diversified Silicone Products (DSP) on January 6, 2017, for approximately $60.2 million. The acquisition follows the November 2016 acquisition of DeWAL Industries and expands the EMS portfolio. The company was also relocating its global headquarters from Connecticut to Chandler, Arizona during 2017.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $203.8 million | $160.6 million | 26.9% increase |
| Gross margin | 39.4% | 37.7% | 170 basis-point increase |
| Operating income | $39.4 million | $24.1 million | 63.7% increase |
| Operating margin | 19.4% | 15.0% | 440 basis-point increase |
| Net income | $27.0 million | $14.9 million | 81.1% increase |
| Diluted EPS | $1.47 | $0.82 | 79.3% increase |
| Operating cash flow | $23.2 million | $26.2 million | Decrease |
Gross profit was $80.4 million versus $60.5 million. Income before tax was $39.9 million, and the effective tax rate declined to 32.3% from 35.2%, primarily due to excess tax deductions related to stock compensation, earnings mix and lower uncertain-tax-position accruals.
Cash and cash equivalents were $186.1 million at March 31, 2017, down from $227.8 million at December 31, 2016. Cash used in investing activities was $63.4 million, principally reflecting the $60.2 million DSP acquisition and $5.3 million of capital expenditures.
Borrowings under the credit facility were $241.2 million at March 31, 2017. The February 2017 amended credit agreement provides a $450.0 million revolving facility, an additional $175.0 million accordion feature and maturity in February 2022. The company reported compliance with its leverage-related dividend threshold and stated that available liquidity and expected operating cash flow should fund operations, planned capital expenditures, research and development and debt service.
Material Changes Versus the Prior Comparable Period
- EMS sales increased 65.9% to $76.8 million, reflecting 49.1% contribution from the DeWAL and DSP acquisitions and 16.8% organic growth. EMS operating income increased 143.4% to $12.9 million.
- ACS sales increased 7.0% to $78.5 million, supported by aerospace and defense and automotive radar demand, partly offset by weaker wireless 4G LTE demand.
- PES sales increased 21.0% to $42.7 million, supported by renewable energy, hybrid-electric vehicle, motor-drive and laser-diode-cooler applications.
- Margins benefited from higher volumes, capacity utilization, operational improvements, automation, lower-cost-country manufacturing and acquisition synergies.
- Q1 2017 included $1.6 million of nonrecurring purchase-accounting inventory fair-value expense, $1.2 million of acquisition and integration costs, higher amortization and depreciation, and $0.7 million of headquarters-relocation restructuring charges.
- A gain of approximately $0.9 million was recognized on the sale of a Belgian land parcel. A Belgian facility with a $1.7 million carrying value was classified as held for sale.
- Interest expense increased 11.3% because acquisition financing increased borrowings. The company entered into an interest-rate swap covering $75.0 million of the revolving facility.
- Adoption of ASU 2016-09 produced a $12.7 million cumulative-effect increase to retained earnings and deferred tax assets, and a $1.1 million income-tax benefit during the quarter.
Outlook, Commentary, Risks and Unusual Items
Management emphasized growth drivers in connectivity, clean energy and safety and protection, continued innovation and synergistic acquisitions. The filing does not provide specific quarterly or full-year revenue, earnings or margin guidance.
Management stated that liquidity is expected to be sufficient for current operating needs, planned capital expenditures, research and development and debt service. The company continues to integrate DeWAL and DSP; purchase accounting remains subject to refinement, including goodwill and acquired-asset valuations.
Principal risks include demand volatility in end markets, global competition, foreign currency fluctuations, raw-material availability and copper prices, reliance on selected suppliers, acquisition integration and realization of synergies, product and technology risks, covenant compliance, tax changes, information-technology disruptions, environmental matters and litigation.
Asbestos-related liabilities and insurance receivables were projected at $52.0 million and $48.4 million, respectively, for the 10-year projection period as of December 31, 2016, with no change reported through March 31, 2017. The company had 592 asbestos claims outstanding at quarter-end and paid approximately $1.0 million in settlements during the quarter. Management cautioned that future costs and insurance recoveries could differ materially from recorded amounts.
Environmental accruals included approximately $1.9 million for remediation at the Connecticut headquarters, $0.2 million for pond remediation at the Woodstock facility and approximately $0.4 million related to the Chatham Superfund site, with related insurance coverage expected to mitigate the latter exposure.
Important Facts for Investors to Verify
- Verify the sustainability of the substantial sales and margin increases after removing acquisition effects and nonrecurring purchase-accounting benefits and costs.
- Track integration progress, organic growth and profitability of DeWAL and DSP, including final purchase-price allocations and goodwill.
- Monitor cash conversion, working-capital growth, acquisition spending and the decline in cash balances.
- Assess leverage, variable-rate exposure, covenant headroom and available capacity under the amended credit facility.
- Review demand trends in wireless, automotive, aerospace and defense, renewable energy, hybrid vehicles and industrial markets, together with currency and copper-price impacts.
- Evaluate asbestos claims, insurance recoverability and environmental remediation costs, including exposures beyond the current 10-year asbestos forecast.
- Confirm the effect of the headquarters relocation on restructuring costs, employee retention and operating efficiency.
- Follow implementation of the new revenue-recognition standard, which was expected to become effective for Rogers in the first quarter of 2018; the filing states that the financial impact had not yet been determined.