ROGERS CORP quarterly report, Q2 FY2011

Rogers Corporation — Form 10-Q Summary

Business context and reporting period

Rogers Corporation filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company develops, manufactures, and sells specialty material-based products for communications, electronics, automotive, mass transit, defense, and clean-technology markets. Its reportable businesses were reorganized in 2011 to include High Performance Foams, Printed Circuit Materials, Power Electronic Solutions, and Other. Prior periods were recast for the new segment presentation.

The January 4, 2011 acquisition of Curamik Electronics GmbH, a manufacturer of power electronic substrates, materially affected the year-over-year comparisons.

Financial performance and position

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Net sales	$143.7 million	$96.6 million	$279.7 million	$180.5 million
Gross margin	$48.2 million	$37.3 million	$90.3 million	$67.6 million
Gross margin percentage	33.5%	38.6%	32.3%	37.4%
Operating income	$15.2 million	$7.7 million	$26.8 million	$13.5 million
Operating margin	10.6%	8.0%	9.6%	7.5%
Net income	$12.1 million	$8.3 million	$21.6 million	$15.2 million
Diluted EPS	$0.73	$0.52	$1.30	$0.95

Quarterly sales increased 48.7%; six-month sales increased 54.9%. Curamik contributed $34.6 million of Q2 sales and $67.5 million of first-half sales. Excluding Curamik, organic growth was approximately 12.9% in Q2 and 17.6% for the first half.
Operating income increased approximately 94% in Q2 and 98% for the first half. Selling and administrative expense declined as a percentage of sales, while operating leverage more than offset lower manufacturing margins.
Manufacturing margins declined because of new-facility start-up and qualification costs, higher raw-material prices, unfavorable product mix, and Curamik’s historically lower manufacturing margins. Management expected start-up costs to decline as facilities entered production.
Effective tax rates were 22.0% in Q2 and 23.9% for the first half, compared with 20.3% and 21.2%, respectively, in the comparable periods. Foreign operating tax rates continued to benefit the consolidated rate.

Segment developments

High Performance Foams: Q2 sales increased 13.1% to $44.0 million and operating income increased 21.8% to $6.7 million. Demand was strong in aircraft, communications infrastructure, solar power, hybrid vehicles, mobile internet devices, and industrial applications.
Printed Circuit Materials: Q2 sales increased 29.2% to $43.4 million and operating income more than doubled to $4.4 million. Growth was driven by wireless infrastructure, 3G/4G systems, radar, and automotive applications, partially offset by copper and PTFE cost inflation and China facility start-up costs.
Curamik Electronic Solutions: Q2 sales were $34.6 million and operating income was $2.9 million. Sales represented a record quarter and increased 5.2% sequentially. The business was being integrated and capacity was being expanded.
Power Distribution Systems: Q2 sales increased 38.6% to $14.0 million and operating income rose to $1.6 million from $0.1 million. Demand was strong in mass transit and wind and solar power applications.
Thermal Management Solutions: Q2 sales were $0.2 million and the operating loss widened to $1.3 million. Management stated that progress was slower than anticipated and that future investment would be evaluated.
Other: Q2 sales declined to $7.5 million from $13.8 million, primarily because the prior-year period included the former Polyimide Laminate Systems business. Operating income was $0.9 million.

Cash flow, liquidity, debt, and balance sheet

Six-month operating cash flow was negative $6.4 million versus positive $15.1 million in 2010. Working-capital usage included increases of $12.1 million in accounts receivable and $12.2 million in inventory, along with lower accounts payable and accrued liabilities.
Investing cash flow was negative $137.9 million, including $139.8 million for business acquisitions and $8.0 million of capital expenditures, partially offset by $5.9 million of proceeds from property sales.
Financing cash flow was positive $133.4 million, primarily reflecting $145.0 million of borrowings, $10.0 million of principal repayments, and $5.5 million of proceeds from stock-option exercises.
Cash and cash equivalents were $71.6 million at June 30, 2011, compared with $80.1 million at December 31, 2010. Cash, cash equivalents, and short-term investments totaled $75.4 million.
Total assets increased to $709.5 million from $484.9 million, primarily due to the Curamik acquisition. Goodwill and other intangibles increased to $185.1 million from $36.0 million.
Debt included $135.0 million of long-term borrowings and $10.8 million of lease obligations at June 30, 2011. The company had drawn $145.0 million under its secured revolving facility and repaid $10.0 million during Q2.
Rogers was in compliance with its debt covenants at June 30, 2011. Management stated that existing liquidity, expected operating cash flow, and available financing were sufficient for at least the next twelve months.
On July 13, 2011, the company entered into an amended and restated $265 million secured credit agreement, including a new $100 million term loan, extending maturity to July 13, 2016 and reducing the borrowing spread by 25 basis points.

Guidance, outlook, risks, contingencies, and unusual items

Management was cautiously optimistic but noted uncertainty in global economic conditions, customer demand, raw-material prices, product mix, foreign exchange, and competition. No specific revenue or earnings guidance was provided.
Near-term R&D spending was expected to remain approximately 4% to 5% of sales. Management expected production sales from the new China PCM facility and Arizona PDS facility later in 2011.
Curamik purchase accounting generated a $1.8 million inventory fair-value amortization charge in Q1 that did not recur in Q2. Curamik was expected to incur approximately $1.0 million of intangible-asset amortization per quarter for the remainder of 2011.
Auction-rate securities had a par value of approximately $33.6 million and a fair value of $30.5 million at June 30, 2011. The portfolio had approximately $3.1 million of cumulative impairment and remained classified primarily as long-term because of market illiquidity. Approximately $3.7 million was redeemed after quarter-end.
Asbestos-related liabilities and related insurance receivables were recorded at approximately $29.7 million and $29.3 million, respectively, for projected costs and recoveries through 2015. Approximately 213 asbestos claims were pending at June 30, 2011, compared with 194 at year-end 2010. Actual costs and insurance recoveries could differ materially from estimates.
The company recorded an $0.8 million liability for PCB contamination in its Woodstock, Connecticut facility. Estimated building-remediation costs ranged from $0.8 million to $2.4 million.
The company had $18.7 million of unrecognized tax benefits, including approximately $1.3 million of accrued interest. A significant valuation allowance remained against U.S. deferred tax assets.
Management stated that there were no material changes to previously disclosed risk factors and no off-balance-sheet arrangements expected to have a material effect.

Important facts for investors to verify

Whether Curamik integration, capacity expansion, and expected cross-selling produce sustainable growth and margins after acquisition-related charges.
Whether raw-material inflation, product mix, and start-up costs continue to pressure manufacturing margins.
The pace of cash conversion, particularly the elevated accounts receivable and inventory balances and negative first-half operating cash flow.
Compliance with the amended credit agreement, debt-service requirements, leverage limits, and restrictions on acquisitions, capital expenditures, and dividends.
The recoverability and timing of auction-rate securities and the impact of future fair-value changes.
The ultimate cost of asbestos litigation, PCB remediation, environmental matters, and the availability and collectability of related insurance coverage.
Whether Thermal Management Solutions achieves commercial traction or requires additional investment, restructuring, or discontinuation.