Rogers Corporation 2019 Q2 Form 10-Q Summary
Business context and reporting period
Rogers Corporation designs and manufactures engineered materials and components for mission-critical applications. Its operating segments are Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), Power Electronics Solutions (PES), and Other. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Key growth markets include advanced connectivity, 5G infrastructure, automotive radar, electric and hybrid vehicles, renewable energy, aerospace and defense, and portable electronics.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Net sales | $242.9 million | $214.7 million | 13.1% increase |
| Gross margin | 35.3% | 35.7% | 40 basis-point decrease |
| Operating income | $33.2 million | $25.2 million | 31.7% increase |
| Operating margin | 13.7% | 11.7% | 200 basis-point increase |
| Net income | $24.3 million | $17.3 million | 40.2% increase |
| Diluted EPS | $1.30 | $0.93 | Increase |
| Metric | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|
| Net sales | $482.7 million | $429.3 million |
| Gross margin | 35.5% | 35.7% |
| Operating income | $66.0 million | $56.3 million |
| Operating margin | 13.7% | 13.1% |
| Net income | $52.7 million | $43.5 million |
| Diluted EPS | $2.82 | $2.33 |
- Six-month operating cash flow was $67.5 million, compared with $22.8 million in the prior-year period.
- Capital expenditures were $24.0 million; investing cash outflow was $21.4 million.
- Financing cash outflow was $39.7 million, including $33.2 million of debt principal repayments and $7.4 million of taxes related to net share settlements.
- Cash and cash equivalents were $173.1 million at June 30, 2019, up from $167.7 million at December 31, 2018. Approximately $133.8 million was held by non-U.S. subsidiaries.
- Revolving-credit borrowings were $195.5 million, down from $228.5 million at year-end. The facility has $450.0 million of borrowing capacity, a $175.0 million accordion feature, and matures February 17, 2022.
- The effective tax rate declined to 22.9% from 32.6% in Q2 and to 18.5% from 23.2% for the first six months, primarily reflecting U.S. tax-reform-related international tax benefits and other tax adjustments.
Material changes versus the prior comparable period
- ACS revenue increased 21.1% in Q2 and 15.5% year to date, driven by 5G and 4G wireless infrastructure, automotive radar, aerospace and defense, and portable electronics. ACS operating margin increased to 19.9% from 13.9% in Q2.
- EMS revenue increased 18.5% in Q2 and 18.7% year to date, including $7.3 million in Q2 and $15.0 million year to date from the Griswold acquisition. EMS operating margin increased to 16.3% from 10.6% in Q2.
- PES revenue decreased 3.7% in Q2 and was essentially flat year to date. Q2 operating income declined to a $1.9 million loss from $4.2 million of income, reflecting productivity challenges, unfavorable fixed-cost absorption, and lower industrial demand.
- Gross margin declined modestly because of PES productivity and absorption issues and increased freight, tariffs, and duties, partly offset by favorable mix and productivity improvements in ACS and EMS.
- Research and development expense decreased 10.4% in Q2 and 8.5% year to date, while SG&A increased 2.6% and 4.5%, respectively.
- Q2 other operating expense was $0.04 million versus $0.38 million of income in the prior year. The first half of 2018 included a $3.6 million antitrust litigation settlement gain that did not recur.
- Interest expense increased 57.7% in Q2 and 58.8% year to date because of higher average debt balances associated with the Griswold acquisition and pension funding, partly offset by debt repayments.
Outlook, commentary, risks, contingencies, and unusual items
Management stated that cash generated from operations, existing cash, and available credit facilities should be sufficient to fund operations, planned capital expenditures, research and development, and debt service for at least the next 12 months. The filing does not provide quantitative earnings or revenue guidance.
- Management continues to focus on advanced mobility and advanced connectivity, including 5G, automotive electrification, and advanced driver-assistance systems.
- The company expects to potentially terminate its fully funded Merged Plan during the second half of 2019, subject to approval by the Chief Executive Officer. The company may need additional contributions, and expects a pension settlement charge. The pre-tax accumulated other comprehensive loss associated with the plan was approximately $47 million at June 30, 2019; the ultimate charge was not estimated.
- Asbestos-related liabilities were $70.8 million and related insurance receivables were $64.4 million. There were 804 outstanding asbestos claims at June 30, 2019. Management noted uncertainty regarding future claims, settlement costs, insurance coverage, and insurer solvency.
- The company had 26 copper derivative contracts and foreign-currency forwards to manage commodity and currency exposures. Q2 other income was negatively affected by copper derivative and foreign-currency results.
- Key stated risks include U.S.-China trade restrictions and tariffs, including restrictions involving Huawei; foreign currency volatility; dependence on key suppliers; global competition; technology adoption; acquisition integration; covenant compliance; litigation and asbestos claims; environmental matters; pension termination costs; tax changes; and information-technology disruptions.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $7.0 million of operating lease right-of-use assets and obligations by June 30, 2019. Management reported no material off-balance-sheet arrangements.
- Restructuring and impairment charges were $1.1 million in Q2 and $1.9 million year to date, including impairments related to the Isola asset acquisition and facility consolidation costs.
Important facts for investors to verify
- Whether PES productivity, fixed-cost absorption, and demand issues improve and whether segment profitability returns to prior levels.
- The effect of tariffs, freight costs, China-related trade restrictions, and currency movements on revenue and gross margin.
- The timing, funding requirements, and final settlement charge associated with the Merged Plan termination.
- The adequacy and continued availability of asbestos insurance coverage relative to projected claims and liabilities.
- Debt reduction progress, interest-rate exposure, and compliance with the 3.25-to-1.00 leverage and 3.00-to-1.00 interest-coverage covenants.
- The sustainability of revenue growth from 5G, automotive radar, electrification, Griswold, and other acquired or expanding businesses.