QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-4347
_______________________________
ROGERS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
_______________________________
Massachusetts
06-0513860
(State or Other Jurisdiction of
(I. R. S. Employer Identification No.)
Incorporation or Organization)
2225 W. Chandler Blvd., Chandler, Arizona85224-6155
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (480) 917-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock,
par value $1.00 per share
ROG
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐No ý
The number of shares outstanding of the registrant’s capital stock as of October 25, 2019 was 18,572,454.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Refer to “Forward-Looking Statements” in Item 2, Management’s Discussion and Analysis of Results of Operations and Financial Position for additional information.
2
Part I – Financial Information
Item 1.
Financial Statements
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
Three Months Ended
Nine Months Ended
September 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Net sales
$
221,842
$
226,863
$
704,492
$
656,149
Cost of sales
142,975
147,733
454,403
423,741
Gross margin
78,867
79,130
250,089
232,408
Selling, general and administrative expenses
40,448
39,943
127,349
123,080
Research and development expenses
7,830
7,630
23,282
24,514
Restructuring and impairment charges
580
1,052
2,485
2,015
Other operating (income) expense, net
124
863
1,075
(3,111
)
Operating income
29,885
29,642
95,898
85,910
Equity income in unconsolidated joint ventures
1,498
1,642
4,077
4,453
Other income (expense), net
(918
)
(680
)
(915
)
(647
)
Interest expense, net
(1,747
)
(2,000
)
(5,723
)
(4,503
)
Income before income tax expense
28,718
28,604
93,337
85,213
Income tax expense
5,331
8,870
17,258
22,014
Net income
$
23,387
$
19,734
$
76,079
$
63,199
Basic earnings per share
$
1.26
$
1.07
$
4.10
$
3.44
Diluted earnings per share
$
1.25
$
1.06
$
4.07
$
3.39
Shares used in computing:
Basic earnings per share
18,581
18,403
18,569
18,360
Diluted earnings per share
18,724
18,678
18,715
18,649
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
Three Months Ended
Nine Months Ended
September 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Net income
$
23,387
$
19,734
$
76,079
$
63,199
Foreign currency translation adjustment
(10,187
)
(1,608
)
(12,262
)
(9,901
)
Derivative instrument designated as cash flow hedge:
Change in unrealized gain (loss) before reclassifications, net of tax (Note 4)
(158
)
263
(1,362
)
1,416
Unrealized (gain) reclassified into earnings, net of tax (Note 4)
(32
)
(52
)
(188
)
(108
)
Pension and other postretirement benefits:
Amortization of loss, net of tax (Note 4)
172
44
485
131
Other comprehensive income (loss)
(10,205
)
(1,353
)
(13,327
)
(8,462
)
Comprehensive income
$
13,182
$
18,381
$
62,752
$
54,737
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(Dollars and shares in thousands, except par value)
September 30, 2019
December 31, 2018
Assets
Current assets
Cash and cash equivalents
$
140,747
$
167,738
Accounts receivable, less allowance for doubtful accounts of $1,353 and $1,354
138,532
144,623
Contract assets
24,070
22,728
Inventories
137,908
132,637
Prepaid income taxes
3,761
3,093
Asbestos-related insurance receivables, current portion
4,138
4,138
Other current assets
9,336
10,829
Total current assets
458,492
485,786
Property, plant and equipment, net of accumulated depreciation of $333,882 and $317,414
Pension and other postretirement benefits liabilities
1,739
1,739
Asbestos-related liabilities, non-current portion
65,104
64,799
Non-current income tax
9,296
8,418
Deferred income taxes
8,556
10,806
Other long-term liabilities
14,718
9,596
Commitments and contingencies (Note 13)
Shareholders’ equity
Capital stock - $1 par value; 50,000 authorized shares; 18,572 and 18,395 shares issued and outstanding
18,572
18,395
Additional paid-in capital
135,761
132,360
Retained earnings
852,462
776,403
Accumulated other comprehensive loss
(92,161
)
(78,834
)
Total shareholders' equity
914,634
848,324
Total liabilities and shareholders' equity
$
1,249,718
$
1,279,344
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars and shares in thousands)
Nine Months Ended
September 30, 2019
September 30, 2018
Operating Activities:
Net income
$
76,079
$
63,199
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
37,176
35,320
Equity compensation expense
9,294
8,536
Deferred income taxes
(5,565
)
(17
)
Equity in undistributed income of unconsolidated joint ventures
(4,077
)
(4,453
)
Dividends received from unconsolidated joint ventures
5,375
4,431
Pension and other postretirement benefits
(503
)
(1,193
)
Asbestos-related charges
67
—
Loss (gain) on sale or disposal of property, plant and equipment
278
(161
)
Impairment charges
1,537
477
Provision (benefit) for doubtful accounts
16
(264
)
Changes in assets and liabilities:
Accounts receivable
3,668
(14,012
)
Contract assets
(1,342
)
(20,260
)
Inventories
(7,788
)
(11,840
)
Pension and postretirement benefit contributions
(16
)
(25,347
)
Other current assets
641
146
Accounts payable and other accrued expenses
(2,552
)
(4,354
)
Other, net
3,384
3,216
Net cash provided by operating activities
115,672
33,424
Investing Activities:
Acquisition of business, net of cash received
—
(78,571
)
Isola asset acquisition
—
(43,434
)
Capital expenditures
(38,827
)
(36,557
)
Proceeds from the sale of property, plant and equipment, net
9
1,027
Return of capital from unconsolidated joint ventures
2,625
—
Net cash used in investing activities
(36,193
)
(157,535
)
Financing Activities:
Proceeds from borrowings under revolving credit facility
—
102,500
Repayment of debt principal and finance lease obligations
(98,294
)
(1,046
)
Payments of taxes related to net share settlement of equity awards
(7,309
)
(6,492
)
Proceeds from the exercise of stock options, net
344
734
Proceeds from issuance of shares to employee stock purchase plan
1,249
1,082
Share repurchases
—
(2,999
)
Net cash (used in) provided by financing activities
(104,010
)
93,779
Effect of exchange rate fluctuations on cash
(2,460
)
(1,271
)
Net decrease in cash and cash equivalents
(26,991
)
(31,603
)
Cash and cash equivalents at beginning of period
167,738
181,159
Cash and cash equivalents at end of period
$
140,747
$
149,556
Supplemental Disclosures:
Accrued capital additions
$
1,999
$
2,099
Cash paid during the year for:
Interest, net of amounts capitalized
$
6,449
$
4,662
Income taxes
$
16,018
$
23,357
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
ROGERS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands)
Three Months Ended
Nine Months Ended
September 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Capital Stock
Balance, beginning of period
$
18,559
$
18,380
$
18,395
$
18,255
Shares issued for vested restricted stock units, net of cancellations for tax withholding
2
2
139
115
Stock options exercised
1
1
11
19
Shares issued for employee stock purchase plan
8
6
15
12
Shares issued to directors
2
1
12
12
Shares repurchased
—
—
—
(23
)
Balance, end of period
18,572
18,390
18,572
18,390
Additional Paid-In Capital
Balance, beginning of period
131,836
126,452
132,360
128,933
Shares issued for vested restricted stock units, net of cancellations for tax withholding
113
(67
)
(7,448
)
(6,607
)
Stock options exercised
16
35
333
715
Shares issued for employee stock purchase plan
647
518
1,234
1,070
Shares issued to directors
(2
)
(1
)
(12
)
(12
)
Equity compensation expense
3,151
2,722
9,294
8,536
Shares repurchased
—
—
—
(2,976
)
Balance, end of period
135,761
129,659
135,761
129,659
Retained Earnings
Balance, beginning of period
829,075
732,217
776,403
684,540
Net income
23,387
19,734
76,079
63,199
Cumulative-effect adjustment for lease accounting
—
—
(20
)
—
Cumulative-effect adjustment of revenue recognition
—
—
—
4,212
Balance, end of period
852,462
751,951
852,462
751,951
Accumulated Other Comprehensive Loss
Balance, beginning of period
(81,956
)
(72,264
)
(78,834
)
(65,155
)
Other comprehensive income (loss)
(10,205
)
(1,353
)
(13,327
)
(8,462
)
Balance, end of period
(92,161
)
(73,617
)
(92,161
)
(73,617
)
Total Shareholders’ Equity
$
914,634
$
826,383
$
914,634
$
826,383
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
ROGERS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
As used herein, the terms “Company,” “Rogers,” “we,” “us,” “our” and similar terms mean Rogers Corporation and its subsidiaries, unless the context indicates otherwise.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements include all normal recurring adjustments necessary for their fair presentation in accordance with GAAP. All significant intercompany transactions have been eliminated.
Interim results are not necessarily indicative of results for a full year. For further information regarding our accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Note 2 – Fair Value Measurements
The accounting guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
•
Level 1 – Quoted prices in active markets for identical assets or liabilities.
•
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
From time to time we enter into various instruments that require fair value measurement, including foreign currency contracts, copper derivative contracts and interest rate swaps. Derivative instruments measured at fair value on a recurring basis, categorized by the level of inputs used in the valuation, include:
Derivative Instruments at Fair Value as of September 30, 2019
(Dollars in thousands)
Level 1
Level 2
Level 3
Total
Foreign currency contracts
$
—
$
189
$
—
$
189
Copper derivative contracts
$
—
$
518
$
—
$
518
Interest rate swap
$
—
$
(1,524
)
$
—
$
(1,524
)
Derivative Instruments at Fair Value as of December 31, 2018
(Dollars in thousands)
Level 1
Level 2
Level 3
Total
Foreign currency contracts
$
—
$
522
$
—
$
522
Copper derivative contracts
$
—
$
583
$
—
$
583
Interest rate swap
$
—
$
461
$
—
$
461
For further discussion on our derivative contracts, refer to “Note 3 – Hedging Transactions and Derivative Financial Instruments.”
Note 3 – Hedging Transactions and Derivative Financial Instruments
We are exposed to certain risks related to our ongoing business operations. The primary risks being managed through our use of derivative instruments are foreign currency exchange rate risk and commodity pricing risk (primarily related to copper). During 2017, we entered into an interest rate swap to hedge interest rate risk. We do not use derivative financial instruments for trading or speculative purposes. The valuation of derivative contracts used to manage each of these risks is described below:
•
Foreign Currency - The fair value of any foreign currency option derivative is based upon valuation models applied to current market information such as strike price, spot rate, maturity date and volatility, and by reference to market values resulting from an over-the-counter market or obtaining market data for similar instruments with similar characteristics.
8
•
Commodity - The fair value of copper derivatives is computed using a combination of intrinsic and time value valuation models, which are collectively a function of five primary variables: price of the underlying instrument, time to expiration, strike price, interest rate and volatility. The intrinsic valuation model reflects the difference between the strike price of the underlying copper derivative instrument and the current prevailing copper prices in an over-the-counter market at period end. The time value valuation model incorporates changes in the price of the underlying copper derivative instrument, the time value of money, the underlying copper derivative instrument’s strike price and the remaining time to the underlying copper derivative instrument’s expiration date from the period end date.
•
Interest Rates- The fair value of interest rate swap instruments is derived by comparing the present value of the interest rate forward curve against the present value of the swap rate, relative to the notional amount of the swap. The net value represents the estimated amount we would receive or pay to terminate the agreements. Settlement amounts for an “in the money” swap would be adjusted down to compensate the counterparty for cost of funds, and the adjustment is directly related to the counterparties’ credit ratings.
The guidance for the accounting and disclosure of derivatives and hedging transactions requires companies to recognize all of their derivative instruments as either assets or liabilities at fair value in the statements of financial position. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies for hedge accounting treatment as defined under the applicable accounting guidance. For derivative instruments that are designated and qualify for hedge accounting treatment as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss). This gain or loss is reclassified into earnings in the same line item of the condensed consolidated statements of operations associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. As of September 30, 2019 and 2018, only our interest rate swap qualified for hedge accounting treatment as a cash flow hedge, and the hedge was highly effective.
Foreign Currency
During the three months ended September 30, 2019, we entered into Chinese Renminbi, Euro, Korean Won, and Japanese Yuan forward contracts. We entered into these foreign currency forward contracts to mitigate certain global transactional exposures. These contracts do not qualify for hedge accounting treatment. As a result, any fair value adjustments required on these contracts are recorded in “Other income (expense), net” in our condensed consolidated statements of operations in the period in which the adjustment occurred.
As of September 30, 2019, the notional values of the remaining foreign currency forward contracts were:
Notional Values of Foreign Currency Derivatives
USD/CNY
$
6,506,000
KRW/USD
₩
5,979,000,000
Commodity
As of September 30, 2019, we had 27 outstanding contracts to hedge exposure related to the purchase of copper in our Power Electronics Solutions (PES) and Advanced Connectivity Solutions (ACS) operating segments. These contracts are held with financial institutions and are intended to offset rising copper prices and do not qualify for hedge accounting treatment. As a result, any fair value adjustments required on these contracts are recorded in “Other income (expense), net” in our condensed consolidated statements of operations in the period in which the adjustment occurred. As of September 30, 2019, the volume of our copper contracts outstanding was as follows:
Volume of Copper Derivatives
October 2019 - December 2019
195 metric tons per month
January 2020 - March 2020
202 metric tons per month
April 2020 - June 2020
202 metric tons per month
July 2020 - September 2020
201 metric tons per month
October 2020 - December 2020
201 metric tons per month
Interest Rates
In March 2017, we entered into an interest rate swap to hedge the variable interest rate on $75.0 million of our $450.0 million revolving credit facility. This transaction has been designated as a cash flow hedge and qualifies for hedge accounting treatment. For additional information regarding our revolving credit facility, refer to “Note 10 – Debt.”
9
Effects on Financial Statements
(Dollars in thousands)
The Effect of Current Derivative Instruments on the Financial Statements for the Period Ended September 30, 2019
Fair Values of Derivative Instruments as of September 30, 2019
Gain (Loss)
Other Assets/
(Other Liabilities)(1)
Location
Three Months Ended
Nine Months Ended
Foreign Currency Contracts
Contracts not designated as hedging instruments
Other income (expense), net
$
181
$
(406
)
$
189
Copper Derivative Contracts
Contracts not designated as hedging instruments
Other income (expense), net
$
(543
)
$
(1,008
)
$
518
Interest Rate Swap
Contract designated as hedging instrument
Other comprehensive income (loss)
$
(240
)
$
(1,985
)
$
(1,524
)
(Dollars in thousands)
The Effect of Current Derivative Instruments on the Financial Statements for the Period Ended September 30, 2018
Fair Values of Derivative Instruments as of September 30, 2018
Gain (Loss)
Other Assets/(Other Liabilities)(1)
Location
Three Months Ended
Nine Months Ended
Foreign Currency Contracts
Contracts not designated as hedging instruments
Other income (expense), net
$
29
$
(95
)
$
342
Copper Derivative Contracts
Contracts not designated as hedging instruments
Other income (expense), net
$
(453
)
$
(1,637
)
$
631
Interest Rate Swap
Contract designated as hedging instrument
Other comprehensive income (loss)
$
270
$
1,669
$
1,710
(1) All balances were recorded in the “Other current assets” or “Other accrued liabilities” line items in the consolidated statements of financial position, except the 2019 interest rate swap balance, which was recorded in the “Other long-term liabilities” line item in the condensed consolidated statements of financial position.
10
Note 4 – Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2019 and 2018 were as follows:
(Dollars and accompanying footnotes in thousands)
Foreign Currency Translation Adjustments
Pension and Other Postretirement Benefits(1)
Derivative Instrument Designated as Cash Flow Hedge(2)
Total
Balance as of December 31, 2018
$
(30,488
)
$
(48,700
)
$
354
$
(78,834
)
Other comprehensive income (loss) before reclassifications
(12,262
)
—
(1,362
)
(13,624
)
Amounts reclassified from accumulated other comprehensive loss
—
485
(188
)
297
Net current-period other comprehensive income (loss)
(12,262
)
485
(1,550
)
(13,327
)
Balance as of September 30, 2019
$
(42,750
)
$
(48,215
)
$
(1,196
)
$
(92,161
)
Balance as of December 31, 2017
$
(17,983
)
$
(47,198
)
$
26
$
(65,155
)
Other comprehensive income (loss) before reclassifications
(9,901
)
—
1,416
(8,485
)
Amounts reclassified from accumulated other comprehensive loss
—
131
(108
)
23
Net current-period other comprehensive income (loss)
(9,901
)
131
1,308
(8,462
)
Balance as of September 30, 2018
$
(27,884
)
$
(47,067
)
$
1,334
$
(73,617
)
(1) Net of tax benefits of $9,851 and $9,984 as of September 30, 2019 and December 31, 2018, respectively. Net of tax benefits of $9,523 and $9,563 as of September 30, 2018 and December 31, 2017, respectively.
(2) Net of tax benefits (expenses) of $329 and ($106) as of September 30, 2019 and December 31, 2018, respectively. Net of tax expenses of ($375) and ($15) as of September 30, 2018 and December 31, 2017, respectively.
Note 5 – Acquisitions
Griswold LLC
On July 6, 2018, we acquired 100% of the membership interests in Griswold LLC (Griswold) for an aggregate purchase price of $78.0 million, net of cash acquired.
Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of operations of Rogers and Griswold as if the Griswold acquisition had occurred on January 1, 2017. The unaudited pro forma financial information is not intended to represent or be indicative of our consolidated results of operations that would have been reported had the Griswold acquisition been completed as of January 1, 2017, and should not be taken as indicative of our future consolidated results of operations.