Rogers Corporation — Q2 2016 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 in Other. The filing covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods.
The company remains focused on the Internet Connectivity, Clean Energy, and Safety & Protection megatrends. The December 2015 divestiture of the Arlon polyimide and thermoset laminate business materially affected year-over-year comparisons.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $157.5 million | $163.1 million | $318.1 million | $328.1 million |
| Gross margin | 38.2% | 37.2% | 38.0% | 37.5% |
| Operating income | $18.8 million | $20.6 million | $42.9 million | $40.8 million |
| Operating margin | 11.9% | 12.6% | 13.5% | 12.4% |
| Net income | $5.4 million | $13.6 million | $20.3 million | $27.2 million |
| Diluted EPS | $0.29 | $0.71 | $1.11 | $1.43 |
| Cash flow from operations | Not separately provided | Not separately provided | $51.3 million | $22.4 million |
Gross profit was $60.2 million in the quarter and $120.7 million year to date. Net income margins were 3.4% in Q2 and 6.4% year to date. The Q2 effective tax rate was 71.0%, compared with 29.2% in the prior-year quarter; the year-to-date rates were 51.2% and 30.5%, respectively.
Cash and cash equivalents were $247.4 million at June 30, 2016, up from $204.6 million at December 31, 2015. Capital expenditures were $10.0 million year to date. Cash used in investing activities was $10.0 million, compared with $170.1 million in the prior-year period, which included the Arlon acquisition.
Total outstanding borrowings were $177.3 million, consisting of a $52.3 million term loan and $125.0 million drawn on the revolving facility. The reported debt rate was one-month LIBOR of 0.50% plus a 1.50% spread. The company was in compliance with its debt covenants, and approximately $56.0 million remained available under the share repurchase authorization.
Material Changes Versus Prior Comparable Period
- Q2 sales declined 3.4% and first-half sales declined 3.1%, principally because the divested Arlon business contributed to the 2015 comparison period.
- Sales in the strategic segments were comparatively stable in Q2: ACS increased 1.2%, EMS declined 2.7%, and PES declined 0.5%. First-half ACS sales increased 2.1%, EMS increased 0.6%, and PES declined 4.5%.
- Gross margin improved by 100 basis points in Q2 and 50 basis points year to date, reflecting purchasing savings, operational efficiencies, and the divestiture of the lower-margin Arlon business.
- Q2 operating income fell 8.9% because higher SG&A, including approximately $2.0 million of strategic project costs, more than offset gross-margin gains. First-half operating income increased 5.2%, partly because 2015 included Arlon integration costs.
- Q2 net income fell 60.3% and diluted EPS fell from $0.71 to $0.29, primarily because of substantially higher income taxes.
- The company recorded $5.5 million of withholding taxes and a $3.4 million deferred tax liability related to distributions and changed reinvestment assumptions for accumulated Chinese foreign earnings.
- PES profitability weakened materially: Q2 operating income declined 45.6% and first-half operating income declined 45.7%, primarily due to unfavorable product mix and lower mass-transit demand.
- Operating cash flow more than doubled year to date, benefiting from working-capital changes and the absence of the prior-year acquisition outflow.
- The company repurchased 69,641 shares for approximately $4.0 million during the first half of 2016.
Outlook, Commentary, Risks, and Unusual Items
Management stated that existing cash, expected operating cash flow, and available credit facilities should be sufficient to fund operations, planned capital expenditures, research and development, and debt service. The filing does not provide specific revenue, earnings, or margin guidance.
Management continued to emphasize investment in innovation and growth initiatives. R&D expense was $7.1 million in Q2, or 4.5% of sales, with spending directed toward new platforms, technologies, and product extensions.
Key risks include demand volatility in the company’s targeted megatrends, global economic and political conditions, foreign exchange movements, commodity prices, supply-chain concentration, competitive pressure, product-development and customer-adoption risk, acquisition integration, tax-rate changes, debt covenants, cybersecurity, environmental matters, intellectual-property claims, and asbestos litigation.
Environmental accruals included approximately $3.0 million for remediation at the Connecticut headquarters, plus approximately $0.2 million for pond remediation at the Woodstock facility. Asbestos-related liabilities and insurance receivables were projected at $56.6 million and $53.4 million, respectively, for the ten-year projection period; management noted that actual costs and recoveries could differ materially and that losses beyond 2025 were not estimable.
The company adopted FIFO inventory costing retrospectively and adopted new balance-sheet presentation guidance for debt issuance costs and deferred taxes. It was evaluating the future effects of the new revenue, lease, derivative, and share-based-payment accounting standards.
Important Facts for Investors to Verify
- Whether the elevated tax rate and the $8.9 million of Q2 tax costs are largely nonrecurring or could recur through future foreign cash distributions.
- Whether PES demand, particularly in mass transit, recovers and whether product mix improves.
- Progress and returns from strategic SG&A and R&D investments.
- Segment-level organic growth excluding the Arlon divestiture and currency effects.
- Debt repayment requirements, covenant headroom, variable-rate exposure, and the expiration of the interest-rate swap on June 30, 2016.
- Realization of asbestos-related insurance receivables and the potential for claims, defense costs, or coverage exhaustion to exceed recorded amounts.
- Required debt repayments, including approximately $160.8 million scheduled for 2020, and continued availability under the revolving credit facility.
- Implementation impacts of the pending revenue-recognition and lease-accounting standards.