ROGERS CORP quarterly report, Q2 FY2013

Rogers Corporation 2013 Q2 Form 10-Q Summary

Business Context and Reporting Period

Rogers Corporation is a global specialty materials manufacturer serving portable communications, communications infrastructure, consumer electronics, transportation, automotive, defense, and clean-technology markets. Its reportable segments are High Performance Foams, Printed Circuit Materials, Curamik Electronics Solutions, Power Distribution Systems, and Other.

This unaudited Form 10-Q covers the three and six months ended June 30, 2013, compared primarily with the corresponding 2012 periods. The company ceased production of certain non-woven composite products and presents those results as discontinued operations.

Financial Performance and Position

Metric	Q2 2013	Q2 2012	Six Months 2013	Six Months 2012
Net sales	$132.5 million	$125.3 million	$258.4 million	$245.5 million
Gross margin	$44.4 million; 33.5%	$36.7 million; 29.3%	$85.7 million; 33.2%	$73.1 million; 29.8%
Operating income	$8.1 million; 6.1%	$9.0 million; 7.2%	$18.9 million; 7.2%	$8.5 million; 3.5%
Income from continuing operations	$5.6 million	$6.4 million	$12.6 million	$4.8 million
Net income	$5.6 million	$6.5 million	$12.7 million	$4.6 million
Diluted earnings per share	$0.32	$0.38	$0.72	$0.27

Quarterly sales increased 5.7%; first-half sales increased 5.3%.
Reported Q2 net income declined 13.8%, primarily because 2013 included approximately $6.2 million of special charges versus approximately $2.0 million in Q2 2012.
Management reported adjusted Q2 income from continuing operations increased 18.2% year over year after excluding special charges.
Cash provided by operating activities was $30.6 million for the first half, including $29.7 million from continuing operations, compared with $4.3 million and $4.6 million, respectively, in 2012.
Capital expenditures were $10.5 million. The company contributed $6.5 million to defined benefit pension plans and made $5.0 million of debt principal payments.
Cash and cash equivalents increased to $137.0 million from $114.9 million at December 31, 2012. Accounts receivable were $88.8 million and inventories were $66.7 million.
Total credit-facility borrowings were $93.0 million at June 30, 2013, consisting of $85.0 million of term debt and $8.0 million of revolver borrowings. Including the capital lease obligation, reported debt and lease obligations were higher.
The company was in compliance with its debt covenants, reporting leverage of approximately 1.27x versus a maximum of 3.0x and fixed-charge coverage of 2.06x versus a 1.50x minimum.

Material Changes Versus the Prior Comparable Period

Printed Circuit Materials sales increased 12.5% in Q2 and operating income increased to $4.0 million from $3.1 million, supported by telecom infrastructure and automotive safety-sensor demand.
Curamik Electronics Solutions sales increased 19.2% to $28.5 million, but the segment remained loss-making, with a Q2 operating loss of $2.5 million, partly due to severance and Hungary start-up costs.
Power Distribution Systems sales increased 6.1% and operating income rose to $1.1 million from $0.1 million, aided by electric-vehicle and renewable-energy demand.
High Performance Foams sales declined 7.8% to $39.9 million, primarily because of weaker tablet-device demand and lower transportation-market demand. Operating income declined to $3.5 million.
Gross margin increased 420 basis points in Q2 and 340 basis points for the first half, driven primarily by higher volume and streamlining savings.
Selling and administrative expense increased 15.8% in Q2, and research and development expense increased 39.6%, reflecting higher incentive and equity compensation, strategic spending, and increased technology investment.
Equity income from joint ventures declined 41.6% in Q2 and 34.2% year to date, primarily because of Japanese yen depreciation and weakness in LCD television and domestic mobile-phone markets.
The effective tax rate increased to 29.1% for the first half from 5.0% in 2012, when the rate benefited from one-time discrete tax items related to the liquidation of auction-rate securities.
The company froze defined-benefit pension accruals for U.S. salaried and non-union hourly employees effective June 30, 2013, and for union employees effective December 31, 2013. The action reduced the recorded pension liability but generated a $1.5 million curtailment charge in Q2.

Guidance, Outlook, Commentary, Risks, and Unusual Items

Management expects approximately $20.0 million of annualized savings from 2012 streamlining initiatives during 2013 and approximately $12.0 million of additional annualized savings from 2013 initiatives by the first quarter of 2014.
Management expects approximately $6.8 million of net annual benefits from the pension-plan changes, with material impact beginning in Q3 2013. The filing does not provide formal revenue or earnings guidance.
Curamik’s transfer of final inspection operations from Germany to Hungary was on schedule for completion by Q4 2013. The company expects further demand recovery in several Curamik markets.
High Performance Foams management expected demand to improve in the second half because of seasonal mobile-device and tablet demand and improving North American economic conditions, but noted raw-material and yield issues.
Key risks include end-market cyclicality, short customer lead times, global economic conditions, competition, raw-material availability and cost, foreign-exchange volatility, execution of restructuring and facility transfers, acquisition integration, product development, debt covenants, tax exposures, environmental matters, and asbestos litigation.
Asbestos-related claims increased to 358 from 319 at December 31, 2012. The company recorded approximately $51.4 million of projected asbestos liabilities and $48.3 million of related insurance recoveries through 2022; no changes to those projections occurred in the first half of 2013. Actual costs and recoveries could differ materially.
The company had 2013 restructuring and impairment charges of $4.5 million in Q2 and the first half, including severance, pension curtailment, union ratification costs, and Curamik relocation costs. A total of $3.8 million remained in severance accruals at June 30, 2013.
Environmental matters include a Superfund claim, PCB remediation at the Woodstock facility, and early-stage inquiries concerning a Killingly, Connecticut disposal site and the Rogers headquarters. Potential exposure for the latter two matters was not estimable and no reserve was recorded.
Management stated that cash, expected operating cash flow, and available credit facilities should fund operations, capital expenditures, research and development, debt service, and other needs for at least the next twelve months.

Important Facts for Investors to Verify

Whether the projected $20.0 million and $12.0 million annualized cost savings are realized without impairing growth, quality, or customer service.
Whether Curamik achieves sustained profitability after the Germany-to-Hungary transition and absorbs increased amortization and overhead costs.
Whether the recovery in power-electronics markets offsets continued weakness in High Performance Foams and joint-venture markets.
The sustainability of the 33.5% quarterly gross margin after restructuring benefits and other special items normalize.
Future pension funding requirements and the effect of the pension freeze on earnings and cash flow.
Compliance with the 3.0x leverage and 1.50x fixed-charge coverage covenants as debt repayments, capital spending, and market conditions change.
The adequacy of asbestos insurance coverage and reserves, particularly after the January 2015 expiration of the cost-sharing agreement.
Potential additional environmental, litigation, tax, impairment, or restructuring charges that are not currently estimable.