Business Context and Reporting Period
Rogers Corporation designs and manufactures engineered materials and components for mission-critical applications. Its principal segments are Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), and Power Electronics Solutions (PES). This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared primarily with the corresponding 2017 periods.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | Change | 9M 2018 | 9M 2017 |
|---|---|---|---|---|---|
| Net sales | $226.9 million | $206.8 million | +9.7% | $656.1 million | $612.0 million |
| Gross margin | $79.1 million; 34.9% | $82.2 million; 39.7% | Down 480 bps | $232.4 million; 35.4% | $243.1 million; 39.7% |
| Operating income | $29.6 million; 13.1% | $39.2 million; 19.0% | Down 24.4% | $85.9 million; 13.1% | $110.5 million; 18.1% |
| Net income | $19.7 million | $25.5 million | Down 22.7% | $63.2 million | $73.5 million |
| Diluted EPS | $1.06 | $1.37 | Down 22.6% | $3.39 | $3.97 |
| Effective tax rate | 31.0% | 37.6% | Down 660 bps | 25.8% | 34.6% |
For the nine months, operating cash flow was $33.4 million versus $99.9 million in 2017. Investing cash flow was negative $157.5 million, including $78.6 million for the Griswold acquisition, $43.4 million for the Isola asset acquisition, and $36.6 million of capital expenditures. Financing cash flow was positive $93.8 million, primarily reflecting $102.5 million of new revolving-credit borrowings.
Cash and cash equivalents were $149.6 million at September 30, 2018, down from $181.2 million at December 31, 2017. Revolving-credit borrowings were $233.5 million, compared with $131.0 million at year-end. The facility provides up to $450.0 million of borrowing capacity, plus a $175.0 million accordion feature, and matures February 17, 2022. The company reported compliance with its leverage and interest-coverage covenants.
Material Changes Versus the Prior Comparable Period
- Sales increased, led by EMS and PES. Q3 segment sales changes were ACS down 1.2%, EMS up 16.5%, and PES up 19.0%.
- Gross and operating margins declined substantially because of capacity and infrastructure investments, higher copper and other raw-material costs, facility consolidation, new-product launches, unfavorable fixed-cost absorption, and, for EMS, acquisition-related amortization and integration costs.
- Q3 results benefited from $6.9 million of sales and approximately $1.1 million of operating income from Griswold, acquired July 6, 2018. The acquisition added $32.3 million of goodwill and $34.1 million of identifiable intangible assets; purchase accounting remained preliminary.
- Rogers acquired an Isola production facility and related equipment for $43.4 million in August 2018 to expand ACS capacity in anticipation of potential 5G demand. A transitional leaseback generated $0.2 million of lease income and $0.9 million of depreciation in Q3.
- The company adopted ASC 606 using the modified retrospective method. Opening retained earnings increased $4.2 million, and contract assets were $20.3 million at September 30. ASC 606 reduced Q3 sales by $1.7 million but increased nine-month sales by $2.2 million versus the prior revenue model.
- The effective tax rate decreased primarily because of U.S. tax reform, changes in valuation allowances, releases of uncertain-tax-position reserves, and jurisdictional mix.
- Operating income in Q3 2017 included a $4.4 million gain on the sale of a Belgium facility. In 2018, other operating income included a $3.6 million antitrust settlement gain and a $0.4 million gain on an Arizona property sale.
Outlook, Risks, Contingencies, and Unusual Items
Management expects existing cash, operating cash flow, and available credit facilities to fund operations, planned capital expenditures, research and development, debt service, and strategic initiatives. The company is investing for expected growth in advanced mobility, electric and hybrid vehicles, advanced connectivity, and next-generation wireless infrastructure; the filing does not provide formal earnings or revenue guidance.
- Restructuring related to the Santa Fe Springs facility consolidation is expected to cost approximately $2.0 million in total, with about $0.5 million expected in the remainder of 2018 and $0.5 million in 2019. Related capital expenditures are estimated at $1.2 million to $1.4 million.
- Management intends to terminate the Rogers defined-benefit pension plan, subject to management and IRS approval, with settlement expected in the first half of 2019. The company made a voluntary $25.0 million contribution in Q3; the ultimate financial impact was not determinable at September 30.
- Asbestos liabilities were $75.2 million at September 30, 2018, with related insurance receivables of $69.2 million based on the disclosed balances. There were 718 outstanding claims, 194 new claims, and $5.9 million of settlements during the first nine months. Future costs and insurance recoveries remain uncertain.
- Environmental reserves included $1.7 million for the Connecticut Voluntary Corrective Action Program and $0.2 million for remaining pond remediation related to PCB contamination.
- The company identifies risks from global economic and political conditions, tariffs and trade restrictions, foreign exchange, raw-material availability and copper prices, competition, acquisition integration, technology adoption, covenant compliance, tax changes, litigation, environmental requirements, and information-security disruptions.
- Unrecognized tax benefits totaled $11.9 million, of which $10.4 million would affect the effective tax rate if recognized; approximately $3.6 million may reverse within twelve months.
Important Facts for Investors to Verify
- Whether Griswold integration, preliminary purchase accounting, and anticipated synergies develop as expected.
- Whether margin pressure from raw materials, capacity investments, facility consolidation, and product launches moderates.
- Liquidity, interest expense, and covenant headroom following the increase in revolving-credit borrowings.
- Demand trends in 5G, electric and hybrid vehicles, renewable energy, automotive radar, and wireless 4G LTE applications.
- The approval, timing, funding requirements, and accounting consequences of the proposed Rogers pension-plan termination.
- The adequacy of asbestos reserves and insurance recoveries as claims continue through the projected exposure period.
- The final effects of ASC 606, U.S. tax reform, and the planned January 1, 2019 lease-accounting adoption.