Rogers Corporation — Q2 2018 Form 10-Q Summary
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), with remaining businesses reported as Other. The filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Key end-market drivers included advanced mobility, electric and hybrid vehicles, renewable energy, mass transit, variable-frequency motor drives, wireless infrastructure, aerospace and defense, and automotive radar.
Financial Performance and Liquidity
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Net sales | $214.7 million | $201.4 million | $429.3 million | $405.3 million |
| Gross margin | 35.7% | 40.0% | 35.7% | 39.7% |
| Operating income | $25.2 million | $32.3 million | $56.3 million | $71.4 million |
| Operating margin | 11.7% | 16.0% | 13.1% | 17.6% |
| Net income | $17.3 million | $20.9 million | $43.5 million | $47.9 million |
| Diluted EPS | $0.93 | $1.13 | $2.33 | $2.60 |
| Effective tax rate | 32.6% | 33.9% | 23.2% | 33.0% |
Six-month cash provided by operating activities was $22.8 million, compared with $64.5 million in the prior-year period. Capital expenditures were $20.2 million versus $9.7 million, and cash used in investing activities was $19.2 million versus $67.3 million, primarily because the 2017 period included the $60.2 million Diversified Silicone Products acquisition.
Cash and cash equivalents were $174.7 million at June 30, 2018, compared with $181.2 million at December 31, 2017. Approximately $140.7 million was held by non-U.S. subsidiaries. Borrowings under the revolving credit facility were $131.0 million at quarter-end; the facility has $450.0 million of borrowing capacity, a $175.0 million accordion feature, and matures in February 2022. No quarterly principal payments are required.
Accounts receivable increased to $148.7 million, inventories increased to $117.7 million, and contract assets were $21.9 million at June 30, 2018. The company repurchased 23,138 shares for $3.0 million during the first half, with approximately $49.0 million remaining under its repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Q2 net sales increased 6.6%; six-month sales increased 5.9%. Currency translation contributed approximately $8.4 million to Q2 sales and $17.8 million to first-half sales.
- PES was the principal growth contributor: Q2 sales increased 22.2% and first-half sales increased 28.7%, driven by demand from electric and hybrid vehicles, renewable energy, mass transit, and motor-drive applications.
- Q2 ACS sales increased 2.7%, but first-half sales declined 2.0%, reflecting weaker portable-electronics and wireless 4G LTE demand. EMS sales increased 2.1% in Q2 and 1.9% year to date.
- Gross margin declined 430 basis points in Q2 and 400 basis points for the first half. Management cited unfavorable fixed-cost absorption, higher copper and other raw-material costs, facility consolidation, machine downtime, product qualification costs, and freight.
- Operating income declined 22.0% in Q2 and 21.1% for the first half. SG&A increased 6.3% in Q2 and 11.5% year to date, while R&D increased 22.5% and 19.7%, respectively, reflecting investments in growth initiatives and R&D realignment.
- The lower tax rate benefited earnings, primarily from U.S. tax reform, jurisdictional mix, equity-compensation tax deductions, R&D credits, and releases of uncertain-tax-position reserves.
- Revenue adoption of ASC 606 increased first-half net sales by $3.8 million and net income by $0.9 million; the standard was adopted using the modified retrospective method and increased opening retained earnings by $4.2 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management stated that existing cash, expected operating cash flow, and available credit facilities should fund operations, planned capital expenditures, R&D, debt service, and strategic initiatives.
- On July 6, 2018, Rogers acquired Griswold LLC for a cash-free, debt-free purchase price of $77.9 million plus a potential earn-out capped at $3.0 million. The company borrowed $82.5 million under its revolver to fund the transaction; resulting borrowings and interest expense were expected to increase in Q3 2018. Purchase-price allocation disclosures were incomplete at the filing date.
- Rogers planned to terminate its defined-benefit Rogers Plan, subject to management and IRS approval, with settlement expected in early 2019. It anticipated a $25.0 million payment during Q3 2018, but had not determined the full financial impact.
- The company expects approximately $2.0 million of costs related to relocating Santa Fe Springs operations, including approximately $1.5 million in 2018 and $0.5 million in 2019, plus $1.2 million to $1.4 million of capital expenditures.
- Asbestos-related liabilities were $75.7 million and related insurance receivables were $69.2 million at the latest disclosed balances. The company had 686 outstanding asbestos claims at June 30, 2018 and warned that actual liabilities and insurance recoveries could differ materially from estimates.
- Environmental reserves included $1.7 million for future remediation at the Connecticut VCAP site and $0.2 million for pond remediation related to PCB contamination.
- The first half included a $3.6 million gain from an antitrust litigation settlement and a $0.4 million gain on the sale of Arizona property. These gains were unusual and benefited operating results.
- Principal risks include commodity prices, foreign exchange, tariffs and trade restrictions, global economic conditions, supplier concentration, competition, execution of acquisitions and facility relocations, technology and product adoption, tax changes, credit-covenant compliance, asbestos and environmental litigation, and information-technology disruptions.
- Management reported effective disclosure controls as of June 30, 2018, with no material changes in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether PES growth remains strong and whether ACS and EMS demand weakness persists in portable electronics, wireless infrastructure, and general industrial markets.
- Whether copper, raw-material, freight, facility-consolidation, and product-qualification costs continue to pressure gross margins.
- The effect of the Griswold acquisition on Q3 revenue, integration costs, leverage, interest expense, and covenant headroom.
- The timing and cash impact of the planned $25.0 million pension contribution and potential Rogers Plan termination.
- The adequacy of asbestos reserves and insurance recoveries, including the risk of coverage exhaustion or higher-than-expected claims.
- The final accounting for 2018 tax reform estimates and the impact of ASC 606 on future revenue timing and contract assets.