Rogers Corporation 2022 Q2 Form 10-Q Summary
Business context and reporting period
Rogers Corporation designs and manufactures engineered materials and components for advanced mobility, advanced connectivity, automotive, EV/HEV, aerospace and defense, telecommunications, industrial, clean energy and other markets. Its strategic segments are Advanced Electronics Solutions (AES) and Elastomeric Material Solutions (EMS), with remaining operations reported as Other. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Net sales | $252.0 million | $234.9 million | $500.2 million | $464.2 million |
| Gross margin | $86.5 million | $89.8 million | $171.9 million | $179.3 million |
| Gross margin percentage | 34.3% | 38.2% | 34.4% | 38.6% |
| Operating income | $23.4 million | $35.7 million | $43.3 million | $72.9 million |
| Operating margin | 9.3% | 15.2% | 8.7% | 15.7% |
| Net income | $17.9 million | $28.7 million | $34.5 million | $59.9 million |
| Diluted EPS | $0.94 | $1.52 | $1.82 | $3.18 |
| Operating cash flow | Not separately provided | Not separately provided | $(11.7) million | $66.2 million |
Q2 net sales increased 7.3%, while first-half sales increased 7.8%. EMS sales grew 17.6% in Q2 and 18.8% in the first half, including $11.1 million and $22.2 million, respectively, from the Silicone Engineering acquisition. AES sales increased 0.5% in Q2 and 0.7% year to date. Foreign currency reduced Q2 sales by $6.9 million and first-half sales by $10.9 million.
Profitability declined materially. Q2 gross margin decreased approximately 390 basis points and first-half gross margin decreased approximately 420 basis points. Operating margin declined approximately 590 basis points in Q2 and 700 basis points in the first half. Drivers included higher fixed overhead, unfavorable yields and productivity, higher freight, duties and tariffs, unfavorable product mix, labor and raw-material constraints, and costs allocated to the proposed DuPont merger.
Cash and cash equivalents were $225.3 million at June 30, 2022, compared with $232.3 million at December 31, 2021. Accounts receivable increased to $176.6 million from $163.1 million, and inventories increased 28.3% to $171.1 million from $133.4 million. Six-month capital expenditures were $53.2 million, compared with $21.4 million in the prior-year period.
Borrowings under the revolving credit facility increased to $260.0 million from $190.0 million at year-end. The facility has $450.0 million of committed capacity plus a $175.0 million accordion feature and matures March 31, 2024. Management reported compliance with applicable leverage and interest-coverage covenants. The company stated that available liquidity, operating cash flow and credit facilities should fund operations, planned capital expenditures, R&D and debt service for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue increased, primarily from EV/HEV, general industrial and other EMS demand, but sales were pressured by supply-chain disruption, semiconductor shortages, COVID-19-related customer disruptions and foreign exchange.
- Net income fell 37.6% in Q2 and 42.4% in the first half; diluted EPS fell from $1.52 to $0.94 in Q2 and from $3.18 to $1.82 for the first half.
- SG&A increased 24.9% in Q2 and 30.3% in the first half, reflecting higher professional services, compensation, software, amortization, travel and other costs. Merger-related expenses totaled approximately $3.4 million in Q2 and $14.9 million in the first half, including a discretionary retirement-plan contribution and retention awards.
- Operating cash flow changed from $66.2 million provided in the first half of 2021 to $11.7 million used in the first half of 2022, primarily reflecting higher inventories, receivables and other working-capital requirements.
- Interest expense increased to $1.5 million in Q2 and $2.6 million in the first half, driven by higher revolving-credit borrowings and interest rates.
- Other operating income of $1.7 million in Q2 and $2.3 million in the first half primarily reflected insurance recoveries related to the 2021 UTIS South Korea fire. The comparable 2021 periods included net expenses.
Guidance, outlook, risks and unusual items
Management expects 2022 capital expenditures of approximately $155 million to $165 million, funded through operating cash flow, cash on hand and the revolving credit facility if necessary. The company continues to target a long-term opportunity to double annual revenue over five years, supported by EV/HEV, ADAS, aerospace and defense, clean energy and portable electronics markets; the filing does not provide formal quarterly or full-year revenue or earnings guidance.
Management expects supply-chain disruptions, raw-material and labor constraints, semiconductor shortages, freight and tariff pressures, and COVID-19-related disruptions to continue into the second half of 2022. The war in Ukraine, sanctions, export controls, foreign exchange movements and uncertainty in China and other international markets may further affect sales, margins and production.
The proposed all-cash acquisition by DuPont remains a significant event. The transaction was approved by Rogers shareholders, with consideration of $277.00 per share, and was expected to close in the third quarter of 2022 subject to customary conditions and regulatory approvals. Failure to close could result in substantial costs and adverse effects on financial results and the share price. The merger agreement also restricts dividends and changes to dividend policy without DuPont approval.
The UTIS facility fire in Ansan, South Korea continued to disrupt operations, with disruption expected into the first half of 2023. Insurance recoveries exceeded related costs in the reported periods, but future recoveries and the ultimate timing of restoration remain uncertain.
Rogers had 541 asbestos claims outstanding at June 30, 2022, with $64.3 million of recorded asbestos liabilities and $58.9 million of related insurance receivables. Insurance has historically covered most costs, but coverage exhaustion, insurer solvency, claim levels and litigation outcomes could cause actual costs and recoveries to differ from recorded amounts. Environmental remediation at the Connecticut facility had an accrued future cost of $0.8 million.
Important facts for investors to verify
- Whether the DuPont merger closed on the expected timetable, including regulatory approvals, termination provisions and any related fees.
- The sustainability of gross margins after temporary supply-chain, freight, yield, productivity and merger-related pressures.
- Progress toward the $155 million to $165 million 2022 capital-spending plan and the effect on free cash flow and revolving-credit borrowings.
- Inventory normalization, working-capital conversion and the causes of the sharp year-over-year decline in operating cash flow.
- Operational recovery at the UTIS facility and the timing and collectability of remaining insurance recoveries.
- Compliance with the revolving-credit facility’s leverage and interest-coverage covenants as borrowings and interest rates change.
- Developments in asbestos claims, insurance coverage and Connecticut environmental remediation obligations.
- Exposure to semiconductor shortages, raw-material availability, China-related restrictions, Ukraine-related disruptions, foreign exchange and customer production declines.