Rogers Corporation 2011 Q3 Form 10-Q Summary
Business Context and Reporting Period
Rogers Corporation is a global manufacturer of specialty material-based products serving communications, consumer electronics, automotive, defense, mass transit, and clean-technology markets. The filing covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Results include the January 4, 2011 acquisition of Curamik Electronics GmbH.
Management reorganized segment reporting in 2011. Curamik Electronic Solutions was added to the Power Electronic Solutions group, the former Development Stage category was eliminated, and prior periods were recast where applicable.
Financial Performance and Key Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $147.6 million | $101.3 million | $427.4 million | $281.9 million |
| Gross margin | $49.9 million | $36.8 million | $140.2 million | $104.4 million |
| Operating income | $16.6 million | $11.3 million | $43.4 million | $24.7 million |
| Net income | $14.4 million | $8.9 million | $35.9 million | $24.0 million |
| Diluted EPS | $0.85 | $0.55 | $2.15 | $1.50 |
| Operating margin | 11.3% | 11.1% | 10.2% | 8.8% |
| Net margin | 9.7% | 8.7% | 8.4% | 8.5% |
| Manufacturing margin | 33.8% | 36.4% | 32.8% | 37.0% |
- Third-quarter sales increased 45.7%; nine-month sales increased 51.6%. Management reported approximately 9.4% third-quarter organic growth excluding Curamik and approximately 14.6% nine-month organic growth.
- Curamik contributed $36.8 million of third-quarter sales and $4.1 million of operating income. For the nine months, Curamik contributed $104.3 million of sales and $7.3 million of operating income.
- Cash used in operating activities was $2.7 million in the first nine months of 2011, compared with $21.1 million provided in the prior-year period. Working-capital investment included $17.8 million of accounts receivable growth and $23.6 million of inventory growth.
- Cash used in investing activities was $138.3 million, including $139.8 million for acquisitions and $12.5 million of capital expenditures. Cash provided by financing activities was $131.5 million.
- Cash and cash equivalents were $71.1 million at September 30, 2011, versus $80.1 million at December 31, 2010. Total current assets were $278.5 million and shareholders’ equity was $383.2 million.
- Outstanding credit-facility borrowings were $128.8 million, consisting of $6.3 million current debt and $122.5 million long-term debt. The company also had a $10.8 million capital lease obligation related to Curamik.
Material Changes Versus Prior Comparable Period
- High Performance Foams sales increased 22.7% in the quarter and operating income increased 42.7%, driven by mobile-device, sports, mass-transit, clean-technology, and hybrid-vehicle demand.
- Printed Circuit Materials sales increased 15.0%, but quarterly operating income declined to $2.8 million from $3.2 million because of start-up costs at the Suzhou, China facility and other manufacturing costs.
- Power Distribution Systems sales increased 8.7%, while quarterly operating income declined to $0.3 million from $1.3 million. Nine-month operating income improved to $4.3 million from $1.5 million.
- Curamik generated its third consecutive quarter of sequential sales growth after acquisition, although management noted late-quarter softening in Europe and Japan.
- Manufacturing margins declined because of raw-material inflation, unfavorable product mix, start-up and qualification costs at new facilities, and Curamik’s historically lower gross margins. Management expected start-up costs to decline as production matured.
- Selling and administrative expenses increased in absolute dollars but declined to 18.9% of sales from 20.5% in the quarter and to 18.5% from 23.2% for the nine months, reflecting operating leverage.
- Equity income from joint ventures declined to $1.3 million from $2.4 million in the quarter and to $4.0 million from $6.3 million for the nine months, partly due to the sale of the RCCT joint venture and weaker Japanese markets.
- Interest expense increased materially because of acquisition-related debt. The company reported $0.8 million of quarterly and $2.9 million of nine-month interest expense on borrowings.
- The effective tax rate declined to 15.2% from 30.7% in the quarter and to 20.7% from 25.0% for the nine months, aided by foreign tax rates and discrete tax benefits.
Guidance, Outlook, Risks, and Unusual Items
- Management did not provide specific quantitative revenue or earnings guidance in the filing. It described the outlook as cautiously optimistic but noted uncertainty regarding the global economy, customer demand, and conditions in Europe and Asia.
- Management expects demand opportunities from internet infrastructure, mass transit, and clean technology, with additional growth from Curamik, the Suzhou facility, and the North American Power Distribution Systems facility.
- The amended credit agreement increased total borrowing capacity to $265 million, extended maturity to July 13, 2016, and added a $100 million term loan. The agreement imposes a fixed-charge coverage ratio of at least 2.5 to 1.0 and a leverage ratio of no more than 3.0 to 1.0. The company was in compliance at September 30, 2011.
- The credit agreement restricts dividends, additional debt, asset sales, and certain capital expenditures. Term-loan repayments began September 30, 2011 and are scheduled through June 30, 2016.
- Auction-rate securities had a $26.0 million fair value and approximately $29.5 million par value at quarter-end. The securities remain illiquid Level 3 assets; the company recorded approximately $0.7 million of third-quarter fair-value decline and $0.2 million of credit loss in nine-month earnings.
- Asbestos-related liabilities and related insurance receivables were each approximately $29.7 million and $29.3 million, respectively, based on estimates through 2015. Approximately 228 asbestos claims were pending at quarter-end. Management stated that future costs could exceed reserves, although substantial insurance coverage is expected to mitigate exposure.
- The company recorded a $1.0 million liability for PCB contamination remediation at its Woodstock, Connecticut facility; projected building remediation costs were $1.0 million to $2.6 million. A separate Connecticut disposal-site matter had no established reserve because the potential cost could not be estimated.
- Thermal Management Solutions continued to incur losses, with a $1.3 million quarterly operating loss and $4.3 million nine-month operating loss. Management is evaluating whether continued investment will produce acceptable returns.
- Curamik acquisition accounting remained preliminary, including the valuation of acquired net assets. Curamik added $85.9 million of goodwill and $52.8 million of intangible assets.
- Management stated that internal disclosure controls were effective. The assessment of internal control over financial reporting excluded Curamik, as permitted for recently acquired businesses.
Important Facts for Investors to Verify
- Whether Curamik’s sales growth, margins, and integration benefits continue after the acquisition-related inventory fair-value charge and other one-time costs.
- Whether manufacturing margins recover as the Suzhou and North American facilities move beyond start-up and customer-qualification phases.
- The effect of raw-material prices, product mix, foreign-exchange movements, and slowing demand in Europe and Asia on future profitability.
- Cash conversion and working-capital requirements, particularly the substantial increases in receivables and inventories and the negative operating cash flow through nine months.
- Debt covenant compliance, scheduled term-loan repayments, interest-rate exposure, and the availability of remaining revolving capacity.
- The recoverability and timing of auction-rate securities and the potential for additional fair-value losses.
- The ultimate cost of asbestos, PCB, Superfund, and other environmental matters, together with the collectability of related insurance receivables.
- The preliminary purchase-price allocation for Curamik and potential future changes to goodwill, intangible assets, amortization, or deferred taxes.