Rogers Corporation Form 10-Q Summary
Business Context and Reporting Period
Rogers Corporation designs and manufactures engineered materials and components for advanced mobility, advanced connectivity, automotive, telecommunications, aerospace and defense, clean energy, industrial, and other markets. The filing reports unaudited results for the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Operating segments are Advanced Electronics Solutions (AES), Elastomeric Material Solutions (EMS), and Other.
Financial Performance and Position
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net sales | $234.9 million | $191.2 million | $464.2 million | $390.0 million |
| Gross margin | $89.8 million; 38.2% | $70.0 million; 36.6% | $179.3 million; 38.6% | $135.6 million; 34.8% |
| Operating income | $35.7 million; 15.2% | $21.1 million; 11.0% | $72.9 million; 15.7% | $38.6 million; 9.9% |
| Net income | $28.7 million | $14.5 million | $59.9 million | $27.8 million |
| Diluted EPS | $1.52 | $0.78 | $3.18 | $1.49 |
| Cash flow from operations | Not separately provided | Not separately provided | $66.2 million | $55.0 million |
Q2 sales increased 22.9%, while first-half sales increased 19.0%. Net income approximately doubled in both periods. Gross margin expanded 160 basis points in Q2 and 380 basis points for the first half, benefiting from higher volume, fixed-cost absorption, product mix, productivity improvements, and lower inventory reserves, partly offset by higher commodity, raw-material, freight, duty and tariff costs.
AES generated Q2 sales of $140.4 million and operating income of $18.3 million, compared with $116.2 million and $17.1 million, respectively, in the prior-year quarter. EMS generated Q2 sales of $89.3 million and operating income of $15.6 million, compared with $71.6 million and $3.0 million. EMS operating income benefited materially from volume, mix, absorption, lower inventory reserves, and substantially lower amortization following accelerated amortization of certain DSP-related intangible assets in 2020.
Cash and cash equivalents were $203.9 million at June 30, 2021, compared with $191.8 million at December 31, 2020. Operating cash flow was $66.2 million; capital expenditures were $21.4 million. Cash used in financing was $31.6 million, including $25.0 million of discretionary debt repayments. Approximately $164.6 million of cash was held by non-U.S. subsidiaries.
Rogers had no borrowings under its revolving credit facility at June 30, 2021, versus $25.0 million at year-end 2020. The facility provides up to $450.0 million of capacity plus a $175.0 million accordion feature and matures March 31, 2024. The company stated that it remained in compliance with applicable covenants and believed available liquidity and expected operating cash flow were sufficient for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by ADAS, EV/HEV, aerospace and defense, clean energy, general industrial, consumer and automotive markets. Wireless infrastructure and mass transit remained weaker.
- Foreign currency translation favorably affected sales by $8.1 million in Q2 and $16.3 million in the first half.
- Interest expense declined to $0.4 million in Q2 and $1.0 million in the first half, compared with $1.8 million and $3.0 million, respectively, due primarily to lower revolving-credit borrowings.
- The effective tax rate declined to 25.6% in Q2 from 30.6%, and to 25.4% for the first half from 26.1%, primarily due to lower unrecognized-tax-benefit reserves and jurisdictional mix.
- Restructuring charges were $0.7 million in Q2 and $2.3 million year to date, related mainly to manufacturing-footprint optimization in Europe and Asia.
Outlook, Risks, Contingencies and Unusual Items
Management expects 2021 capital expenditures of approximately $70 million to $80 million, including spending to restore UTIS operations, with a significant portion expected to be reimbursed by insurance. Management expects supply constraints and raw-material cost pressures to continue in the third quarter, but at a lesser extent, supported by commercial actions and anticipated easing of constraints. UTIS sales disruption is expected to have a similar impact in the third quarter as in the second quarter.
A fire at the UTIS facility in Ansan, South Korea, disrupted operations into at least the first quarter of 2022. The company recognized net fire-related expense of $1.5 million in Q2 and $2.8 million in the first half, including asset and inventory write-offs, professional services, lease-related costs and employee compensation, partly offset by anticipated insurance recoveries. Additional liabilities related to nearby property or other fire-related costs could not be estimated and were not reserved.
Key risks include COVID-19 effects, supply-chain and raw-material availability, commodity prices, tariffs and U.S.-China trade restrictions, foreign currency movements, global competition, technology adoption, customer demand, cybersecurity, regulatory and tax changes, covenant compliance, litigation, environmental matters and the outcome of asbestos claims.
Asbestos-related liabilities were $73.1 million and related insurance receivables were $66.8 million at June 30, 2021. There were 548 outstanding asbestos claims, including 64 new claims and 77 concluded claims during the first half. Management stated that insurance has substantially covered historical costs, but future coverage, claim volumes, settlements and insurer solvency remain uncertain. Environmental remediation accruals for the Connecticut site were $0.9 million.
The company had $15.5 million of unrecognized tax benefits, including $14.9 million that would affect the effective tax rate if recognized. Management reported effective disclosure controls as of June 30, 2021 and no material changes in internal control over financial reporting.
Investor Verification Items
- Verify whether sales momentum in AES and EMS is sustained after adjusting for favorable foreign currency effects and market-specific demand.
- Assess the sustainability of margin expansion, particularly the effect of commodity, freight, tariff and raw-material costs and the unusually favorable 2020 comparison.
- Track UTIS restoration timing, third-quarter sales disruption, insurance recoveries and any additional fire-related liabilities.
- Reconcile planned 2021 capital expenditures with operating cash generation and expected insurance reimbursements.
- Monitor liquidity, leverage and compliance with the revolving-credit agreement, including restrictions on dividends and other payments.
- Evaluate asbestos claims, insurance coverage exhaustion and potential changes in projected liabilities or recoveries.
- Consider the effect of lower amortization expense and other non-recurring items when evaluating EMS and consolidated earnings quality.