Rogers Corporation — Q1 2012 Form 10-Q Summary
Business Context and Reporting Period
Rogers Corporation designs, manufactures, and distributes specialty material-based products serving portable communications, communications infrastructure, consumer electronics, mass transit, automotive, defense, and clean-technology markets. Its reportable businesses include High Performance Foams, Printed Circuit Materials, Curamik Electronics Solutions, Power Distribution Systems, and Other.
The filing covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. The interim financial statements are unaudited. Management stated that results were affected by economic uncertainty in Europe, slower growth and infrastructure spending in China, and lower customer demand in several markets.
Financial Performance and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $121.4 million | $135.9 million | Down 10.7% |
| Gross margin | $36.4 million; 30.0% | $42.5 million; 31.3% | Margin down 130 basis points |
| Operating income (loss) | $(0.7) million | $13.2 million | Declined to an operating loss |
| Income (loss) from continuing operations | $(1.7) million | $11.1 million | Declined materially |
| Net income (loss) | $(1.8) million | $9.4 million | Declined materially |
| Diluted EPS | $(0.11) | $0.57 | Declined |
| Cash flow from operating activities | $(2.0) million | $(20.0) million | Improved, but remained negative |
| Cash and cash equivalents at quarter-end | $93.5 million | $66.1 million | Up from $79.7 million at December 31, 2011 |
SG&A expense increased 1.2% to $24.4 million, while R&D expense increased 1.9% to $5.3 million. Restructuring and impairment charges were $7.4 million, compared with none in the prior-year quarter. The effective tax rate was 63.0%, compared with 23.3% in Q1 2011; the 2012 rate benefited from discrete tax items, including a valuation allowance recovery related to the auction rate securities liquidation.
Total debt under the credit agreement was $121.3 million at March 31, 2012, consisting of $96.3 million of term debt and $25.0 million drawn on the revolving facility. The company also had a $9.2 million capital lease obligation. The $265 million secured credit agreement matures July 13, 2016. Rogers reported compliance with all financial and other covenants.
Cash flow was supported by $25.4 million of proceeds from liquidating auction rate securities. This was partly offset by a $10.0 million voluntary pension contribution, capital expenditures of $4.2 million, and a $3.1 million deferred acquisition payment. Inventory increased to $81.3 million from $78.3 million at year-end 2011.
Material Changes Versus the Prior Comparable Period
- Sales declined 10.7%, primarily because of lower volumes in Curamik Electronics Solutions, Printed Circuit Materials, and Power Distribution Systems. High Performance Foams sales increased 3.3%.
- Operating performance weakened across most segments. High Performance Foams operating income fell to $1.4 million from $4.6 million; Printed Circuit Materials moved to a $0.3 million loss from $4.8 million of income; Curamik moved to a $1.8 million loss from $0.3 million of income; and Power Distribution Systems moved to a $0.6 million loss from $2.3 million of income.
- Curamik sales declined 26.2%, reflecting lower demand in wind energy and industrial motor drives and inventory corrections. Printed Circuit Materials sales declined 8.1%, and Power Distribution Systems sales declined 15.4%.
- Q1 2011 included approximately $1.8 million of noncash Curamik inventory fair-value step-up amortization and $1.3 million of acquisition and integration costs. Q1 2012 included restructuring-related charges and auction rate securities losses.
- Net realized investment loss was $3.2 million in Q1 2012 because the company liquidated its remaining auction rate securities. Q1 2011 included an approximately $1.9 million gain on the sale of a building.
- Discontinued operations, related to the shutdown of the TMS business, produced a $0.1 million after-tax loss in Q1 2012 versus a $1.6 million loss in Q1 2011.
- Operating cash use improved from $18.3 million in Q1 2011 to $2.0 million in Q1 2012, but remained negative.
Guidance, Outlook, Commentary, and Risks
Management stated that first-quarter results were consistent with expectations and projected market softness through the first half of 2012. The company expects gross margins to remain near first-quarter levels unless sales volumes improve. R&D spending is expected to remain approximately 3% to 5% of sales in the near term.
Rogers initiated streamlining actions that included an early retirement program, organizational restructuring, exiting the TMS business, a planned shutdown of the North American PDS start-up operation, and liquidation of auction rate securities. Management expects these initiatives to generate approximately $13.0 million of annualized cost savings by the fourth quarter of 2012, although the initiatives are expected to continue for several quarters.
Management believes existing cash, expected operating cash flow, and available credit capacity will fund operations, capital expenditures, research and development, debt service, and other needs for at least the next twelve months. The credit agreement limits certain activities, including dividends, additional debt, asset sales, and capital expenditures, and requires a leverage ratio no greater than 3.0 to 1.0. The March 30, 2012 amendment established minimum fixed-charge coverage ratios beginning at 1.25 to 1.00 for the period through December 31, 2012.
Key risks include economic and political conditions, particularly in Europe and China; end-market demand and customer inventory corrections; competition; raw material availability and pricing, including copper; foreign currency fluctuations; integration and performance of acquired businesses; execution of streamlining initiatives; and asbestos, environmental, product-liability, and other litigation.
Asbestos claims increased to 260 pending claims from 242 at December 31, 2011. Management estimated asbestos liabilities and related insurance receivables through 2016 at $27.9 million and $27.7 million, respectively, but stated that actual costs and recoveries could differ materially. The company also disclosed unresolved environmental matters, including the Killingly, Connecticut site, for which no reserve had been established because the potential cost could not be estimated.
The Richmond, Virginia facility sale closed April 4, 2012 for approximately $1.5 million. The filing states that disclosure controls were effective as of March 31, 2012 and that there were no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether expected streamlining savings of approximately $13.0 million are achieved and whether additional restructuring charges arise.
- Whether demand recovers in wind energy, industrial motor drives, wireless infrastructure, railway, and other weakened end markets.
- Compliance with the amended credit agreement’s fixed-charge coverage and leverage covenants, including scheduled term-loan repayments.
- The sustainability of liquidity given negative operating cash flow, pension obligations, capital expenditures, and debt service.
- Inventory levels and potential further inventory corrections, particularly in Curamik and High Performance Foams.
- The ultimate cost of asbestos claims and environmental matters and the collectability of related insurance recoveries.
- The impact of foreign exchange, copper prices, customer concentration, and market volatility on margins and earnings.