Rogers Corporation — Form 10-Q Summary
Business Context and Reporting Period
Rogers Corporation is a global specialty materials manufacturer serving communications, electronics, automotive, transportation, defense, and clean-technology markets. Its reportable segments are High Performance Foams, Printed Circuit Materials, Curamik Electronics Solutions, Power Distribution Systems, and Other. The filing covers the quarter and six months ended June 30, 2012; results are unaudited and discontinued operations have been reclassified for all periods.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Net sales | $126.7 million | $143.5 million | $248.0 million | $279.4 million |
| Gross margin | $36.9 million; 29.1% | $48.6 million; 33.8% | $73.3 million; 29.6% | $91.1 million; 32.6% |
| Operating income | $9.1 million; 7.2% | $16.5 million; 11.5% | $8.4 million; 3.4% | $29.7 million; 10.6% |
| Income from continuing operations | $6.5 million | $13.4 million | $4.8 million | $24.5 million |
| Net income | $6.5 million | $12.1 million | $4.6 million | $21.6 million |
| Diluted EPS | $0.38 | $0.73 | $0.27 | $1.30 |
- Cash provided by operating activities was $4.3 million for the first six months, compared with cash used of $3.4 million in the prior-year period. Capital expenditures were $10.8 million.
- Cash and cash equivalents were $95.8 million at June 30, 2012, versus $79.7 million at December 31, 2011. The increase primarily reflected $25.4 million of proceeds from liquidating auction rate securities.
- Outstanding credit-facility borrowings were $120.0 million, consisting of $95.0 million of term debt and $25.0 million drawn on the revolver. The company also had an $8.5 million capital lease obligation.
- Total assets were $661.2 million and shareholders’ equity was $345.3 million at June 30, 2012. Inventories declined to $74.7 million from $78.3 million at year-end 2011.
- The effective tax rate was 32.5% in the second quarter and 4.3% for the first six months. The year-to-date rate benefited from discrete tax items, including a $1.5 million benefit related to the auction rate securities liquidation.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined 11.7%, and first-half sales declined 11.2%, primarily due to lower volumes in Curamik Electronics Solutions, Printed Circuit Materials, and Power Distribution Systems, weakness in European and Chinese markets, and unfavorable foreign exchange.
- Gross margin fell 470 basis points in the quarter and 300 basis points year to date. Lower volumes, inventory reductions, and approximately $1.1 million of shutdown-related accelerated depreciation and inventory charges affected 2012 margins.
- Operating income declined 45.0% in the quarter and 71.8% for the first half. Selling and administrative expenses decreased, but the savings were more than offset by lower sales, weaker operating leverage, restructuring charges, and higher pension-related costs.
- Curamik Electronics Solutions sales declined 30.9% in the quarter and 28.6% year to date; the segment reported operating losses of $1.2 million and $3.0 million, respectively. Power Distribution Systems sales declined 17.1% in the quarter and 16.4% year to date, with a first-half operating loss of $0.5 million.
- High Performance Foams sales were broadly stable, while Printed Circuit Materials sales declined 6.7% in the quarter and 7.3% year to date. Automotive radar applications were a relative area of strength.
- The company liquidated its remaining auction rate securities for $25.4 million of proceeds against $29.5 million of stated par value and recognized a $3.2 million first-half loss.
- Pension and postretirement liabilities declined following $16.0 million of pension contributions during the first half. Current debt classification increased because management anticipated additional voluntary principal payments.
Outlook, Management Commentary, Risks, and Unusual Items
- Management expects streamlining initiatives to produce approximately $13.0 million of annualized cost savings by the fourth quarter of 2012 and expects margins to improve gradually as savings are realized and volumes recover.
- The Bremen, Germany, High Performance Foams facility is scheduled to close by year-end 2012. Total related charges are estimated at approximately $3.1 million, of which approximately $1.5 million was recognized in the second quarter.
- The North American Power Distribution Systems startup operation and non-woven composite materials production are scheduled to be shut down by year-end 2012. The non-woven shutdown is not expected to result in material charges.
- Management projected a 26% effective tax rate for the balance of 2012, subject to quarterly volatility.
- After quarter-end, Rogers committed to moving Curamik final inspection operations from Germany to Hungary, expected to be substantially complete by year-end 2012 or early 2013. Related charges, including severance and startup costs, could not be reasonably estimated.
- Management stated that liquidity, expected operating cash flow, and available borrowing capacity should fund operations, capital expenditures, research and development, debt service, and other needs for at least the next twelve months. The company was in compliance with all debt covenants, including leverage of approximately 1.6 times and fixed-charge coverage of 2.09 times versus a 1.25-times covenant.
- Key risks include weak European and Chinese infrastructure spending, wind and solar market weakness, foreign exchange exposure, raw-material costs, competition, execution of restructuring and facility moves, debt-service and covenant requirements, pension obligations, tax uncertainties, environmental matters, and asbestos litigation.
- There were 298 pending asbestos claims at June 30, 2012, compared with 242 at December 31, 2011. Management believes insurance will substantially mitigate projected costs, but stated that future liabilities and insurance recoveries remain uncertain and could exceed recorded reserves.
- The filing reports an interest-rate swap entered into in July 2012 covering 65% of term debt. The filing contains inconsistent descriptions of the fixed variable-rate component, stating both 0.75% and 0.075%; the precise rate should be verified.
Important Facts for Investors to Verify
- Whether the planned facility closures and Curamik relocation achieve the stated savings and remain within estimated costs.
- The sustainability of demand and margins in Curamik, Power Distribution Systems, wireless infrastructure, wind, and solar markets.
- Available revolver capacity, mandatory and anticipated voluntary debt repayments, interest-rate exposure, and compliance with financial covenants.
- The adequacy of asbestos reserves and insurance recoveries, including the effect of rising claim counts and the January 2015 expiration of the cost-sharing agreement.
- The realization of deferred tax assets, the projected 26% tax rate, and exposure from unrecognized tax benefits of approximately $18.6 million.
- The financial impact of pension obligations, future contributions, and the approximately $6.0 million payment to the former CEO expected to generate a $2.1 million settlement charge in the third quarter.