Rogers Corporation — Form 10-Q Summary
Business Context and Reporting Period
Rogers Corporation is a global specialty materials manufacturer serving communications, automotive, consumer electronics, defense, clean technology, safety and protection markets. Its operating segments are Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), Power Electronics Solutions (PES) and Other. This report covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Rogers completed the approximately $157 million acquisition of Arlon on January 22, 2015. Arlon contributed $25.4 million of second-quarter revenue and $45.6 million for the first six months. The company renamed two segments during the quarter, without changing their composition.
Financial Results and Key Metrics
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Net sales | $163.1 million | $153.5 million | $328.1 million | $300.1 million |
| Gross margin | $60.6 million; 37.1% | $57.1 million; 37.2% | $122.9 million; 37.5% | $111.1 million; 37.0% |
| Operating income | $20.5 million; 12.6% | $16.2 million; 10.6% | $40.6 million; 12.4% | $37.7 million; 12.5% |
| Net income | $13.5 million | $10.9 million | $27.2 million | $25.5 million |
| Diluted EPS | $0.71 | $0.58 | $1.43 | $1.37 |
| Operating cash flow | Not separately provided | Not separately provided | $22.4 million | $29.7 million |
Second-quarter sales increased 6.3%, while net income increased 24.2%. Management attributed the sales increase to 16.5% acquisition growth, offset by a 4.9% organic sales decline and a 5.4% negative currency impact. For the first half, sales increased 9.3%, consisting of 15.2% acquisition growth, a 0.9% organic decline and a 4.9% currency headwind.
Second-quarter selling and administrative expense declined 4.3% to $33.0 million, primarily because of lower incentive compensation, lower operating spending and prior-year CFO transition and severance costs. Research and development expense increased 9.9% to $7.1 million. The second-quarter effective tax rate was 29.0%, compared with 33.9% in 2014, helped by a $1.6 million state tax benefit partly offset by a $0.4 million discrete tax expense.
Segment Performance
- ACS: Second-quarter sales increased 8.0% to $66.4 million and operating income increased 16.5% to $12.0 million. Growth was supported by automotive radar, satellite TV, aerospace and defense applications, partly offset by lower wireless telecommunications demand.
- EMS: Sales increased 9.9% to $47.0 million and operating income increased 19.6% to $5.5 million. General industrial and mass transit demand improved, while portable electronics, EV/HEV and consumer applications declined.
- PES: Sales declined 10.2% to $38.5 million because of currency effects, despite 5.3% organic growth. Operating income improved to $0.9 million from a $0.7 million loss, reflecting manufacturing efficiency and product mix improvements.
- Other: Sales increased 77.5% to $11.1 million, primarily from Arlon, while operating income remained $2.1 million. Arlon-related sales carried lower margins.
Liquidity, Debt and Financial Position
- Cash and cash equivalents were $209.8 million at June 30, 2015, down from $237.4 million at December 31, 2014.
- Operating cash flow was $22.4 million, compared with $29.7 million in the prior-year period. Investing cash flow was negative $170.1 million, including $155.8 million for the Arlon acquisition and $14.3 million of capital expenditures.
- Financing cash flow was $124.4 million, including $125.0 million of new borrowings and $5.1 million of debt and lease repayments.
- Total outstanding credit-facility debt was $180.0 million at quarter-end, comprising a $55.0 million term loan and $125.0 million revolving borrowing. The debt was primarily used to fund Arlon.
- The amended secured credit agreement increased total borrowing capacity to $350.0 million, with a $50.0 million expansion option. The facility matures in June 2020, subject to scheduled term-loan amortization and customary covenants.
- Rogers reported compliance with all debt covenants, including a leverage ratio of approximately 1.34x versus a maximum of 3.25x and interest coverage of approximately 30.68x versus a minimum of 3.00x.
- Inventory increased 26.8% to $87.0 million, partly due to Arlon inventory and higher ACS inventory levels. Goodwill increased to $178.6 million and other intangible assets to $80.6 million, primarily from the acquisition.
Management stated that existing cash, expected operating cash flow and available credit facilities should be sufficient for operations, capital expenditures, research and development, debt service and other needs for at least the next twelve months.
Material Changes, Outlook and Unusual Items
- The Arlon acquisition materially increased revenue, assets and debt, but also added integration costs, purchase-accounting expenses and amortization. First-half results included approximately $1.7 million of Arlon purchase-accounting expenses and $4.9 million of integration expenses in selling and administrative costs.
- Management expects growth opportunities in wireless telecommunications, automotive safety systems, rail traction, hybrid and electric vehicles, energy-efficient motor controls, automotive electrification and safety and protective cushioning. No quantified earnings or revenue guidance was provided in the filing.
- Management continues to pursue strategic acquisitions and technology investments, while noting that organic sales declined in both the quarter and first half.
- Joint-venture income declined to $0.4 million in the quarter and $1.3 million for the first half, reflecting lower demand, product mix and unfavorable currency effects.
- Asbestos-related liabilities and insurance receivables were recorded at approximately $56.5 million and $53.0 million, respectively, based on a ten-year projection through 2024. Management stated that actual costs and insurance recoveries could differ materially and that additional charges are reasonably possible but not estimable.
- There were 444 pending asbestos claims at June 30, 2015, compared with 438 at December 31, 2014. The company reported 45 dismissals and one settlement during the first six months.
- Environmental matters include ongoing PCB remediation, a Superfund site with estimated company exposure largely covered by insurance, and other sites for which potential exposure is currently not estimable. The company also settled a European distributor claim for $0.5 million.
- Key operating risks include currency fluctuations, raw-material and copper prices, acquisition integration, demand volatility, inventory levels, technology changes, debt service and covenants, litigation and asbestos insurance recoveries, environmental costs, cybersecurity, labor matters and tax exposures.
Important Facts for Investors to Verify
- Whether Arlon delivers the expected synergies and margin improvement after integration costs and purchase-accounting effects subside.
- Whether organic demand recovers, particularly in wireless telecommunications, portable electronics, EV/HEV, motor drives and renewable energy applications.
- The sustainability of improved operating income despite flat quarterly gross margin and higher debt-related interest expense.
- Inventory growth, working-capital conversion and the decline in year-to-date operating cash flow.
- Debt maturity and amortization requirements, covenant compliance and the effect of variable LIBOR-based interest rates.
- The accuracy of projected asbestos liabilities and insurance recoveries, including the status of the cost-sharing agreement and insurer coverage.
- Potential impairment risk relating to the substantially higher goodwill and intangible-asset balances following the Arlon acquisition.