Rogers Corporation: Q1 2013 Form 10-Q Summary
Business context and reporting period
Rogers Corporation is a global specialty materials manufacturer serving communications, consumer electronics, automotive, defense, mass transit, clean technology and related markets. Its reportable businesses include High Performance Foams, Printed Circuit Materials, Curamik Electronics Solutions, Power Distribution Systems and Other. The filing covers the unaudited three months ended March 31, 2013, compared primarily with the three months ended March 31, 2012.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $126.0 million | $120.2 million | +4.8% |
| Gross margin | $41.3 million; 32.8% | $36.4 million; 30.3% | +250 basis points |
| Operating income (loss) | $10.8 million; 8.6% | $(0.5) million; (0.4)% | Improved |
| Income from continuing operations | $7.0 million | $(1.6) million | Improved |
| Net income (loss) | $7.1 million | $(1.8) million | Improved |
| Diluted EPS | $0.40 | $(0.11) | Improved |
| Cash flow from operating activities | $20.0 million total; $19.2 million continuing operations | $(2.0) million total; $(1.8) million continuing operations | Improved |
| Capital expenditures | $7.7 million | $4.2 million | Higher |
Cash and cash equivalents were $126.4 million at March 31, 2013, compared with $114.9 million at December 31, 2012. Inventory declined to $69.5 million from $73.2 million. Total debt outstanding was $95.5 million, consisting of $87.5 million of term debt and $8.0 million of revolver borrowings, versus $98.0 million at year-end 2012. Shareholders’ equity was $436.4 million, and total assets were $754.4 million.
The effective tax rate was 29.2% in Q1 2013, compared with a 64.2% tax benefit rate in Q1 2012. The prior-year rate benefited from discrete tax items, including a $1.5 million benefit related to the liquidation of auction rate securities. No dividend was paid.
Material changes versus the prior comparable period
- Sales growth was driven by Printed Circuit Materials, up 10.6%; High Performance Foams, up 5.0%; and Power Distribution Systems, up 4.5%. Curamik Electronics Solutions declined 4.1%.
- Gross margin benefited from higher volumes and approximately $3.0 million of streamlining savings. Excluding approximately $0.2 million of Curamik transfer costs, management indicated margin improvement of approximately 270 basis points.
- Operating results benefited from the absence of the $7.3 million of restructuring and impairment charges recorded in Q1 2012, including auction rate security-related losses and restructuring charges.
- Q1 2013 included approximately $1.2 million of special charges, primarily related to relocating Curamik final inspection operations from Germany to Hungary and other severance costs.
- Joint-venture equity income decreased 19.5% to $0.5 million, primarily reflecting yen depreciation and weakness in Japanese markets.
- Foreign currency translation reduced other comprehensive income by $9.4 million, contributing to a total comprehensive loss of $1.3 million despite net income of $7.1 million.
- Discontinued operations contributed $0.1 million after tax in Q1 2013 versus a $0.2 million loss in Q1 2012. The non-woven composite materials business had ceased production by year-end 2012, with final inventory sales in Q1 2013.
Liquidity, debt and financial condition
- Management stated that cash from operations, existing cash and available credit facilities should fund operations, capital expenditures, research and development, debt service and other needs for at least the next twelve months.
- The secured credit agreement provides total capacity of $265.0 million and matures in July 2016. Mandatory term-loan principal payments for 2013 total $12.5 million; the company also expected $8.0 million of discretionary revolver payments within the next twelve months.
- At March 31, 2013, the company reported a leverage ratio of approximately 1.30 versus a maximum of 3.00 and a fixed-charge coverage ratio of 2.27 versus a 1.50 minimum covenant for the period.
- The credit agreement restricts dividends, additional debt, asset sales and capital expenditures, subject to specified exceptions. A July 2012 interest-rate swap hedges 65% of term-loan debt beginning in July 2013.
- The company contributed $6.5 million to defined-benefit pension plans during the quarter, reducing its pension liability to $59.4 million from $65.9 million.
Guidance, outlook, commentary and risks
Management did not provide a specific numerical revenue or earnings forecast in the filing. Results were below internal expectations, particularly because of weaker-than-expected mobile internet device and tablet demand and possible customer inventory corrections. Management expected conditions to improve during the balance of 2013, supported by anticipated telecommunications spending associated with 4G infrastructure deployment.
Management expected approximately $20.0 million of annualized cost savings from 2012 streamlining initiatives during 2013, although savings would be partly offset by investments in sales, marketing, research and development, information technology and process improvements. Curamik’s Germany-to-Hungary finishing-operation relocation was on schedule and expected to have a positive financial impact by Q4 2013. Near-term R&D spending was expected to remain approximately 4.0% to 4.5% of sales.
- Demand remains dependent on short-cycle end markets, OEM and contract-manufacturer purchasing, product mix and global economic conditions, particularly in Europe and China.
- Curamik remained loss-making, with a Q1 operating loss of $3.1 million, and remained exposed to capital-spending weakness and execution risk from its relocation program.
- Asbestos claims increased to 337 from 319 at year-end 2012. The company recorded approximately $51.4 million of projected asbestos liabilities and $48.3 million of related insurance recoveries through 2022 as of December 31, 2012; no change was recorded in Q1 2013. Actual costs and insurance recoveries could differ materially.
- Environmental matters include the Chatham Superfund site, PCB remediation in Connecticut and investigations at sites in Killingly and the company’s headquarters. Some potential exposures cannot currently be estimated and have not been reserved.
- The company identified foreign exchange, raw-material costs, copper prices, interest rates, taxes, pension costs, litigation, environmental obligations, customer credit, debt covenants and potential goodwill or intangible impairments as material risks.
Important facts for investors to verify
- Whether telecom and 4G-related demand materialized and whether tablet and mobile-device inventory corrections continued after Q1.
- Progress, cost and savings realization from the Curamik relocation and other restructuring initiatives.
- Actual debt repayments, covenant headroom and the effect of scheduled 2013 term-loan amortization.
- The sustainability of Q1 gross-margin improvement after excluding special charges and favorable volume or inventory-absorption effects.
- Changes in asbestos claims, insurance coverage, settlement costs and reserve assumptions.
- Future pension contributions, foreign-exchange effects and the ability to convert reported earnings into operating cash flow.