Rogers (ROG) - 2022 Q1 - Quarterly Report

Part I – Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) Unaudited condensed consolidated financial statements for Q1 2022 show net sales increased to $248.3 million from $229.3 million YoY, but net income decreased to $16.6 million from $31.2 million, with operating cash flow turning negative Condensed Consolidated Statements of Operations Highlights | Metric (in thousands, except per share amounts) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net sales | $248,266 | $229,265 | | Gross margin | $85,394 | $89,499 | | Operating income | $19,891 | $37,193 | | Net income | $16,600 | $31,218 | | Diluted earnings per share | $0.87 | $1.66 | Condensed Consolidated Statements of Financial Position Highlights | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $182,144 | $232,296 | | Inventories | $152,150 | $133,384 | | Total assets | $1,593,262 | $1,598,566 | | Borrowings under revolving credit facility | $190,000 | $190,000 | | Total liabilities | $475,784 | $479,671 | | Total shareholders' equity | $1,117,478 | $1,118,895 | Condensed Consolidated Statements of Cash Flows Highlights | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(13,723) | $36,521 | | Net cash used in investing activities | $(25,987) | $(3,602) | | Net cash used in financing activities | $(9,694) | $(23,181) | | Net (decrease) increase in cash and cash equivalents | $(50,152) | $7,324 | Notes to Condensed Consolidated Financial Statements Notes detail key accounting policies and events, including derivative contracts, asbestos liabilities, the acquisition of Silicone Engineering Ltd., the DuPont merger agreement, and a decreased effective tax rate - The company uses foreign currency forward contracts and copper derivative contracts to mitigate transactional and commodity price risks. These contracts do not qualify for hedge accounting, and fair value adjustments are recorded in 'Other income (expense), net'[25][27][30] - As of March 31, 2022, the company had an asbestos-related liability of $68.1 million and a corresponding insurance receivable of $62.6 million. The company has never manufactured asbestos but used it in some products until the late 1980s[72][74][78] - The effective income tax rate for Q1 2022 was 18.5%, a decrease from 25.2% in Q1 2021, primarily due to a decrease in accruals for uncertain tax positions and increased windfall tax benefits from stock compensation[80] - On October 8, 2021, the company acquired Silicone Engineering Ltd. for $172.3 million to expand its advanced silicones platform in Europe, funded by borrowings under the existing credit facility[97] - On November 1, 2021, Rogers entered into a definitive merger agreement to be acquired by DuPont for $277.00 per share in an all-cash transaction, expected to close in late Q2 or early Q3 2022 pending regulatory approvals[100][112] Management's Discussion and Analysis of Results of Operations and Financial Position Management discusses an 8.3% increase in Q1 2022 net sales to $248.3 million, but a significant gross margin decline to 34.4% and a sharp drop in operating income due to merger expenses and supply chain issues - The company's growth strategy is centered on being a market-driven organization focused on advanced mobility (EV/HEV, ADAS) and advanced connectivity (5G smartphones)[107] - The company sees an opportunity to double annual revenues over the next five years, supported by strong growth in markets like EV/HEV (projected >25% CAGR) and ADAS (projected >15% CAGR)[110] - In Q1 2022, the company incurred $11.5 million in expenses related to the DuPont merger, primarily for a discretionary RESIP contribution, professional services, and retention awards[116] - Recent COVID-19 lockdowns in Shanghai and Suzhou, China, have not disrupted manufacturing but are causing logistics challenges[114] Results of Operations Q1 2022 net sales rose 8.3% to $248.3 million, driven by EMS, but gross margin fell 460 basis points to 34.4% and operating income dropped significantly due to higher costs and merger-related expenses Net Sales and Gross Margin Comparison | Metric (in thousands) | Q1 2022 | Q1 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $248,266 | $229,265 | +8.3% | | Gross Margin | $85,394 | $89,499 | -4.6% | | Gross Margin % | 34.4% | 39.0% | -460 bps | - Gross margin was unfavorably impacted by poor yield performance, higher fixed overhead, and increased freight/duties/tariffs, partially offset by favorable commercial actions and higher volume[119] - SG&A expenses increased 36.1% YoY, primarily due to a $9.1 million increase in compensation and benefits (including a $6.5 million discretionary RESIP contribution for the DuPont merger) and a $4.4 million increase in professional services ($2.8 million related to the merger)[122][123] Operating Segment Performance (Q1 2022 vs Q1 2021) | Segment | Q1 2022 Net Sales (in millions) | Q1 2021 Net Sales (in millions) | % Change | Q1 2022 Operating Income (in millions) | Q1 2021 Operating Income (in millions) | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | AES | $133.2 | $131.9 | +1.0% | $1.3 | $14.8 | -91.2% | | EMS | $110.2 | $91.8 | +20.0% | $17.0 | $20.1 | -15.3% | | Other | $4.9 | $5.5 | -11.8% | $1.6 | $2.3 | -29.9% | Liquidity, Capital Resources and Financial Position The company ended Q1 2022 with $182.1 million in cash, a $50.2 million decrease driven by negative operating cash flow and capital expenditures, with projected 2022 capital spending of $155.0 million to $165.0 million - Cash and cash equivalents decreased by $50.2 million during the quarter to $182.1 million as of March 31, 2022[144] - Approximately $122.6 million (67%) of cash and cash equivalents were held by non-U.S. subsidiaries as of March 31, 2022[142] - Expected capital spending for 2022 is in the range of $155.0 million to $165.0 million[145] - The merger agreement with DuPont restricts the company from paying dividends to shareholders without DuPont's prior approval[147] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes occurred in the company's market risk exposure during the first quarter of 2022 - There were no material changes in the company's market risk exposure during the first quarter of 2022[151] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[152] - No changes occurred in the company's internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls[153] Part II – Other Information Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents and CEO/CFO certifications - The report includes CEO and CFO certifications as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[156]