Rogers Corporation 2019 Q1 Form 10-Q Summary
Business Context and Reporting Period
Rogers Corporation designs and manufactures engineered materials and components for mission-critical applications. Its primary segments are Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), and Power Electronics Solutions (PES), with remaining activities reported as Other. Key markets include wireless infrastructure, automotive electrification, portable electronics, aerospace and defense, renewable energy, and industrial applications.
The filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The financial statements are unaudited and prepared under U.S. GAAP. The company had 18.5 million shares outstanding as of April 26, 2019.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $239.8 million | $214.6 million | Up 11.7% |
| Gross profit | $85.4 million | $76.6 million | Up 11.5% |
| Gross margin | 35.6% | 35.7% | Down 10 bps |
| Operating income | $32.8 million | $31.0 million | Up 5.7% |
| Operating margin | 13.7% | 14.5% | Down 80 bps |
| Net income | $28.4 million | $26.1 million | Up 8.7% |
| Diluted EPS | $1.52 | $1.40 | Up 8.6% |
| Cash flow from operations | $17.1 million | $8.8 million | Up $8.3 million |
| Capital expenditures | $12.6 million | $9.1 million | Up $3.5 million |
The effective tax rate declined to 14.2% from 15.4%. Interest expense increased to $1.9 million from $1.2 million, primarily because of higher average borrowings following the Griswold acquisition and pension-related financing.
Liquidity, Debt, and Financial Position
- Cash and cash equivalents were $162.1 million at March 31, 2019, down from $167.7 million at December 31, 2018. Approximately $127.0 million was held by non-U.S. subsidiaries.
- Accounts receivable increased to $160.7 million from $144.6 million, and contract assets increased to $27.3 million from $22.7 million, primarily reflecting higher sales and demand in PES.
- Borrowings under the secured revolving credit facility were $223.5 million, down from $228.5 million after a discretionary $5.0 million principal payment.
- The revolving facility has $450.0 million of borrowing capacity, a $175.0 million accordion feature, and matures February 17, 2022. The company reported compliance with its financial covenants.
- Net cash used in investing activities was $10.0 million, including capital expenditures and a $2.6 million return of capital from unconsolidated joint ventures. Net cash used in financing activities was $11.4 million, including debt repayment and $7.1 million of taxes related to equity award settlements.
- Management stated that available cash, expected operating cash flow, and credit facilities should fund operations, planned capital expenditures, research and development, and debt service for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- ACS sales increased 9.6% and operating income increased 65.3%; margin improved to 16.2% from 10.8%, supported by higher 5G and 4G infrastructure sales, favorable mix, utilization, and resolution of prior process issues.
- EMS sales increased 18.8%, including $7.8 million from the Griswold acquisition. Operating income declined 5.1%, primarily because Q1 2018 included a $3.6 million antitrust settlement gain and Q1 2019 included facility consolidation costs.
- PES sales increased 3.6%, but operating income declined 39.2% and margin fell to 7.1% from 12.2%, due to productivity challenges, higher fixed overhead, and increased freight costs.
- Reported sales benefited from the Griswold acquisition and higher demand in wireless infrastructure, aerospace and defense, portable electronics, automotive, EV/HEV, and mass transit. Currency depreciation reduced sales by approximately $6.1 million, or 2.9%.
- Operating results included $0.8 million of restructuring charges in Q1 2019, compared with $0.4 million in Q1 2018. Q1 2018 also included a nonrecurring $3.6 million antitrust litigation gain.
- Other operating expense was $0.9 million in Q1 2019, compared with $3.6 million of other operating income in Q1 2018. Q1 2019 included lease income and related depreciation associated with a transitional leaseback arrangement.
- The company adopted the new lease standard using the optional transition method, recognizing operating lease right-of-use assets and obligations of approximately $6.2 million at January 1, 2019. The adoption had an immaterial impact on retained earnings.
Guidance, Outlook, Commentary, and Risks
The filing does not provide specific quarterly or annual revenue, earnings, or margin guidance. Management continues to emphasize growth opportunities in advanced mobility, including ADAS and EV/HEV applications, and advanced connectivity, including next-generation wireless infrastructure.
Management expects approximately $0.4 million of additional capital spending related to the Santa Fe Springs facility consolidation during the remainder of 2019. The company currently expects, subject to final management approval, to terminate the Merged Plan during the fourth quarter of 2019. The termination may require additional funding, and a pension settlement charge is expected; the amount was not yet estimated. The pre-tax accumulated other comprehensive loss associated with the Merged Plan was approximately $47 million at December 31, 2018, and the settlement charge would be non-cash.
- Major risks include trade and tariff changes, particularly involving the United States and China; foreign currency volatility; uncertain economic and political conditions; supply constraints and commodity prices; competitive pressures; technology adoption and customer demand; acquisition integration; and cybersecurity or information technology disruptions.
- Asbestos-related claims outstanding increased to 789 from 745 at December 31, 2018. Recorded projected asbestos-related claims were $70.2 million and related insurance receivables were $63.8 million. Insurance coverage may become exhausted, and actual claims and recoveries could differ materially from estimates.
- The company had 23 copper derivative contracts and foreign currency forward contracts to manage commodity and currency exposure. Derivatives are not used for trading or speculative purposes.
- The company reported no material off-balance-sheet arrangements and no material changes in market-risk exposure during the quarter.
Important Facts for Investors to Verify
- Whether PES productivity, overhead, and freight issues improve and whether segment margins recover.
- The contribution, integration, and profitability of the Griswold acquisition and other acquired assets.
- Future cash requirements and the potential non-cash settlement charge related to termination of the Merged Plan.
- Revolving-facility leverage, interest costs, covenant compliance, and refinancing requirements before the February 2022 maturity.
- Trends in asbestos claims, insurance coverage exhaustion, settlement costs, and the adequacy of recorded receivables.
- Effects of U.S.-China trade policy, tariffs, foreign exchange movements, and copper prices on sales and margins.
- Whether the increase in receivables, contract assets, and inventories converts into operating cash flow.