NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
As used herein, the terms “Company,” “Rogers,” “we,” “us,” “our” and similar terms mean Rogers Corporation and its subsidiaries, unless the context indicates otherwise.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements include all normal recurring adjustments necessary for their fair presentation in accordance with GAAP. All significant intercompany transactions have been eliminated.
Interim results are not necessarily indicative of results for a full year. For further information regarding our accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2018
.
Note 2 – Fair Value Measurements
The accounting guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
|
|
|
|
•
|
Level 1 – Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
•
|
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
From time to time we enter into various instruments that require fair value measurement, including foreign currency contracts, copper derivative contracts and interest rate swaps. Derivative instruments measured at fair value on a recurring basis, categorized by the level of inputs used in the valuation, include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments at Fair Value as of June 30, 2019
|
|
(Dollars in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Foreign currency contracts
|
$
|
—
|
|
|
$
|
(184
|
)
|
|
$
|
—
|
|
|
$
|
(184
|
)
|
|
Copper derivative contracts
|
$
|
—
|
|
|
$
|
762
|
|
|
$
|
—
|
|
|
$
|
762
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
(1,284
|
)
|
|
$
|
—
|
|
|
$
|
(1,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments at Fair Value as of December 31, 2018
|
|
(Dollars in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Foreign currency contracts
|
$
|
—
|
|
|
$
|
522
|
|
|
$
|
—
|
|
|
$
|
522
|
|
|
Copper derivative contracts
|
$
|
—
|
|
|
$
|
583
|
|
|
$
|
—
|
|
|
$
|
583
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
461
|
|
|
$
|
—
|
|
|
$
|
461
|
|
For further discussion on our derivative contracts, refer to “
Note 3 – Hedging Transactions and Derivative Financial Instruments
.”
Note 3 – Hedging Transactions and Derivative Financial Instruments
We are exposed to certain risks related to our ongoing business operations. The primary risks being managed through our use of derivative instruments are foreign currency exchange rate risk and commodity pricing risk (primarily related to copper). During 2017, we entered into an interest rate swap to hedge interest rate risk. We do not use derivative financial instruments for trading or speculative purposes. The valuation of derivative contracts used to manage each of these risks is described below:
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|
|
•
|
Foreign Currency
- The fair value of any foreign currency option derivative is based upon valuation models applied to current market information such as strike price, spot rate, maturity date and volatility, and by reference to market values resulting from an over-the-counter market or obtaining market data for similar instruments with similar characteristics.
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|
|
|
|
•
|
Commodity -
The fair value of copper derivatives is computed using a combination of intrinsic and time value valuation models, which are collectively a function of five primary variables: price of the underlying instrument, time to expiration, strike price, interest rate and volatility. The intrinsic valuation model reflects the difference between the strike price of the underlying copper derivative instrument and the current prevailing copper prices in an over-the-counter market at period end. The time value valuation model incorporates changes in the price of the underlying copper derivative instrument, the time value of money, the underlying copper derivative instrument’s strike price and the remaining time to the underlying copper derivative instrument’s expiration date from the period end date.
|
|
|
|
|
•
|
Interest Rates
- The fair value of interest rate swap instruments is derived by comparing the present value of the interest rate forward curve against the present value of the swap rate, relative to the notional amount of the swap. The net value represents the estimated amount we would receive or pay to terminate the agreements. Settlement amounts for an “in the money” swap would be adjusted down to compensate the counterparty for cost of funds, and the adjustment is directly related to the counterparties’ credit ratings.
|
The guidance for the accounting and disclosure of derivatives and hedging transactions requires companies to recognize all of their derivative instruments as either assets or liabilities at fair value in the statements of financial position. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies for hedge accounting treatment as defined under the applicable accounting guidance. For derivative instruments that are designated and qualify for hedge accounting treatment as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss). This gain or loss is reclassified into earnings in the same line item of the condensed consolidated statements of operations associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. As of
June 30, 2019
and
2018
, only our interest rate swap qualified for hedge accounting treatment as a cash flow hedge, and the hedge was highly effective.
Foreign Currency
During the
three months ended June 30, 2019
, we entered into Chinese Renminbi, Korean Won and Euro forward contracts. We entered into these foreign currency forward contracts to mitigate certain global transactional exposures. These contracts do not qualify for hedge accounting treatment. As a result, any fair value adjustments required on these contracts are recorded in “Other income (expense), net” in our condensed consolidated statements of operations in the period in which the adjustment occurred.
As of
June 30, 2019
, the notional values of the remaining foreign currency forward contracts were:
|
|
|
|
|
|
|
|
Notional Values of Foreign Currency Derivatives
|
|
USD/CNY
|
$
|
33,351,869
|
|
|
KRW/USD
|
₩
|
4,620,000,000
|
|
|
EUR/USD
|
€
|
8,750,874
|
|
Commodity
As of
June 30, 2019
, we had
26
outstanding contracts to hedge exposure related to the purchase of copper in our Power Electronics Solutions (PES) and Advanced Connectivity Solutions (ACS) operating segments. These contracts are held with financial institutions and are intended to offset rising copper prices and do not qualify for hedge accounting treatment. As a result, any fair value adjustments required on these contracts are recorded in “Other income (expense), net” in our condensed consolidated statements of operations in the period in which the adjustment occurred. As of
June 30, 2019
, the volume of our copper contracts outstanding was as follows:
|
|
|
|
|
|
Volume of Copper Derivatives
|
|
July 2019 - September 2019
|
191 metric tons per month
|
|
October 2019 - December 2019
|
195 metric tons per month
|
|
January 2020 - March 2020
|
202 metric tons per month
|
|
April 2020 - June 2020
|
202 metric tons per month
|
|
July 2020 - September 2020
|
201 metric tons per month
|
Interest Rates
In March 2017, we entered into an interest rate swap to hedge the variable interest rate on
$75.0 million
of our
$450.0 million
revolving credit facility. This transaction has been designated as a cash flow hedge and qualifies for hedge accounting treatment. For additional information regarding our revolving credit facility, refer to “
Note 10 – Debt
.”
Effects on Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
The Effect of Current Derivative Instruments on the Financial Statements for the Period Ended June 30, 2019
|
|
Fair Values of Derivative Instruments as of June 30, 2019
|
|
|
|
|
|
Gain (Loss)
|
|
Other Assets/
(Other Liabilities)
(1)
|
|
|
|
Location
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
Foreign Currency Contracts
|
|
|
|
|
|
|
|
|
|
Contracts not designated as hedging instruments
|
|
Other income (expense), net
|
|
$
|
125
|
|
|
$
|
(586
|
)
|
|
$
|
(184
|
)
|
|
Copper Derivative Contracts
|
|
|
|
|
|
|
|
|
|
Contracts not designated as hedging instruments
|
|
Other income (expense), net
|
|
$
|
(775
|
)
|
|
$
|
(465
|
)
|
|
$
|
762
|
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
Contract designated as hedging instrument
|
|
Other comprehensive income (loss)
|
|
$
|
(1,113
|
)
|
|
$
|
(1,745
|
)
|
|
$
|
(1,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
The Effect of Current Derivative Instruments on the Financial Statements for the Period Ended June 30, 2018
|
|
Fair Values of Derivative Instruments as of June 30, 2018
|
|
|
|
|
|
Gain (Loss)
|
|
Other Assets/(Other Liabilities)
(1)
|
|
|
|
Location
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
Foreign Currency Contracts
|
|
|
|
|
|
|
|
|
|
Contracts not designated as hedging instruments
|
|
Other income (expense), net
|
|
$
|
(60
|
)
|
|
$
|
(124
|
)
|
|
$
|
118
|
|
|
Copper Derivative Contracts
|
|
|
|
|
|
|
|
|
|
Contracts not designated as hedging instruments
|
|
Other income (expense), net
|
|
$
|
(363
|
)
|
|
$
|
(1,185
|
)
|
|
$
|
827
|
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
Contract designated as hedging instrument
|
|
Other comprehensive income (loss)
|
|
$
|
410
|
|
|
$
|
1,399
|
|
|
$
|
1,439
|
|
(1)
All balances were recorded in the “Other current assets” or “Other accrued liabilities” line items in the consolidated statements of financial position, except the 2019 interest rate swap balance, which was recorded in the “Other long-term liabilities” line item in the condensed consolidated statements of financial position.
Note 4 – Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component for the
six months ended June 30, 2019
and
2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars and accompanying footnotes in thousands)
|
Foreign Currency Translation Adjustments
|
|
Pension and Other Postretirement Benefits
(1)
|
|
Derivative Instrument Designated as Cash Flow Hedge
(2)
|
|
Total
|
|
Balance as of December 31, 2018
|
$
|
(30,488
|
)
|
|
$
|
(48,700
|
)
|
|
$
|
354
|
|
|
$
|
(78,834
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(2,075
|
)
|
|
—
|
|
|
(1,204
|
)
|
|
(3,279
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
313
|
|
|
(156
|
)
|
|
157
|
|
|
Net current-period other comprehensive income (loss)
|
(2,075
|
)
|
|
313
|
|
|
(1,360
|
)
|
|
(3,122
|
)
|
|
Balance as of June 30, 2019
|
$
|
(32,563
|
)
|
|
$
|
(48,387
|
)
|
|
$
|
(1,006
|
)
|
|
$
|
(81,956
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
$
|
(17,983
|
)
|
|
$
|
(47,198
|
)
|
|
$
|
26
|
|
|
$
|
(65,155
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(8,293
|
)
|
|
—
|
|
|
1,153
|
|
|
(7,140
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
87
|
|
|
(56
|
)
|
|
31
|
|
|
Net current-period other comprehensive income (loss)
|
(8,293
|
)
|
|
87
|
|
|
1,097
|
|
|
(7,109
|
)
|
|
Balance as of June 30, 2018
|
$
|
(26,276
|
)
|
|
$
|
(47,111
|
)
|
|
$
|
1,123
|
|
|
$
|
(72,264
|
)
|
(1)
Net of tax benefits of
$9,893
and
$9,984
as of
June 30, 2019
and
December 31, 2018
, respectively. Net of tax benefits of
$9,536
and
$9,563
as of
June 30, 2018
and
December 31, 2017
, respectively.
(2)
Net of tax benefits (expenses) of
$278
and
($106)
as of
June 30, 2019
and
December 31, 2018
, respectively. Net of tax benefits (expenses) of
($316)
and
($15)
as of
June 30, 2018
and
December 31, 2017
, respectively.
Note 5 – Acquisitions
Griswold LLC
On July 6, 2018, we acquired
100%
of the membership interests in Griswold LLC (Griswold) for an aggregate purchase price of
$78.0 million
, net of cash acquired.
Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of operations of Rogers and Griswold as if the Griswold acquisition had occurred on January 1, 2017. The unaudited pro forma financial information is not intended to represent or be indicative of our consolidated results of operations that would have been reported had the Griswold acquisition been completed as of January 1, 2017, and should not be taken as indicative of our future consolidated results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
June 30, 2018
|
|
June 30, 2018
|
|
Net sales
|
$
|
222,350
|
|
|
$
|
444,073
|
|
|
Net income
|
16,554
|
|
|
42,436
|
|
Note 6 – Inventories
Inventories are valued at the lower of cost or net realizable value. Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Raw materials
|
$
|
63,931
|
|
|
$
|
59,321
|
|
|
Work-in-process
|
31,646
|
|
|
30,086
|
|
|
Finished goods
|
39,490
|
|
|
43,230
|
|
|
Total inventories
|
$
|
135,067
|
|
|
$
|
132,637
|
|
Note 7 – Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill from
December 31, 2018
to
June 30, 2019
by operating segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Advanced Connectivity Solutions
|
|
Elastomeric Material Solutions
|
|
Power Electronics Solutions
|
|
Other
|
|
Total
|
|
December 31, 2018
|
$
|
51,693
|
|
|
$
|
142,589
|
|
|
$
|
68,379
|
|
|
$
|
2,224
|
|
|
$
|
264,885
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
(538
|
)
|
|
(543
|
)
|
|
—
|
|
|
(1,081
|
)
|
|
June 30, 2019
|
$
|
51,693
|
|
|
$
|
142,051
|
|
|
$
|
67,836
|
|
|
$
|
2,224
|
|
|
$
|
263,804
|
|
Other Intangible Assets
The gross carrying amount, accumulated amortization and net carrying amount of other intangible assets as of
June 30, 2019
and
December 31, 2018
by classification type, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(Dollars in thousands)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Customer relationships
|
$
|
149,496
|
|
|
$
|
34,508
|
|
|
$
|
114,988
|
|
|
$
|
149,753
|
|
|
$
|
30,078
|
|
|
$
|
119,675
|
|
|
Technology
|
81,273
|
|
|
41,943
|
|
|
39,330
|
|
|
81,535
|
|
|
38,624
|
|
|
42,911
|
|
|
Trademarks and trade names
|
11,995
|
|
|
3,779
|
|
|
8,216
|
|
|
12,019
|
|
|
3,213
|
|
|
8,806
|
|
|
Covenants not to compete
|
1,340
|
|
|
377
|
|
|
963
|
|
|
1,340
|
|
|
249
|
|
|
1,091
|
|
|
Total definite-lived other intangible assets
|
244,104
|
|
|
80,607
|
|
|
163,497
|
|
|
244,647
|
|
|
72,164
|
|
|
172,483
|
|
|
Indefinite-lived other intangible asset
|
4,488
|
|
|
—
|
|
|
4,488
|
|
|
4,525
|
|
|
—
|
|
|
4,525
|
|
|
Total other intangible assets
|
$
|
248,592
|
|
|
$
|
80,607
|
|
|
$
|
167,985
|
|
|
$
|
249,172
|
|
|
$
|
72,164
|
|
|
$
|
177,008
|
|
In the table above, gross carrying amounts and accumulated amortization may differ from prior periods due to foreign exchange rate fluctuations.
Amortization expense for the three and
six months ended June 30, 2019
was approximately
$4.4 million
and
$8.9 million
, respectively. Amortization expense for the three and
six months ended June 30, 2018
was approximately
$3.8 million
and
$7.7 million
, respectively. The estimated future amortization expense is
$8.9 million
for the remainder of
2019
and
$14.6 million
,
$13.8 million
,
$13.3 million
and
$12.7 million
for 2020, 2021, 2022 and 2023, respectively.
The weighted average amortization period as of
June 30, 2019
, by definite-lived other intangible asset class, is presented in the table below:
|
|
|
|
|
|
|
Definite-Lived Other Intangible Asset Class
|
|
Weighted Average Remaining Amortization Period
|
|
Customer relationships
|
|
7.4 years
|
|
Technology
|
|
4.2 years
|
|
Trademarks and trade names
|
|
4.9 years
|
|
Covenants not to compete
|
|
1.8 years
|
|
Total definite-lived other intangible assets
|
|
6.5 years
|
Note 8 – Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
24,293
|
|
|
$
|
17,329
|
|
|
$
|
52,692
|
|
|
$
|
43,465
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
18,568
|
|
|
18,389
|
|
|
18,562
|
|
|
18,338
|
|
|
Effect of dilutive shares
|
162
|
|
|
271
|
|
|
149
|
|
|
297
|
|
|
Weighted-average shares outstanding - diluted
|
18,730
|
|
|
18,660
|
|
|
18,711
|
|
|
18,635
|
|
|
Basic earnings per share
|
$
|
1.31
|
|
|
$
|
0.94
|
|
|
$
|
2.84
|
|
|
$
|
2.37
|
|
|
Diluted earnings per share
|
$
|
1.30
|
|
|
$
|
0.93
|
|
|
$
|
2.82
|
|
|
$
|
2.33
|
|
Dilutive shares are calculated using the treasury stock method and primarily include unvested restricted stock units. Anti-dilutive shares are excluded from the calculation of diluted shares and diluted earnings per share. For the
three months ended June 30, 2019
and
2018
,
6,256
shares and
27,145
shares were excluded, respectively.
Note 9 – Capital Stock and Equity Compensation
Equity Compensation
Performance-Based Restricted Stock Units
As of
June 30, 2019
, we had performance-based restricted stock units from 2019, 2018 and 2017 outstanding. These awards generally cliff vest at the end of a
three
year measurement period. However, employees whose employment terminates during the measurement period due to death, disability, or, in certain cases, retirement may receive a pro-rata payout based on the number of days they were employed during the measurement period. Participants are eligible to be awarded shares ranging from
0%
to
200%
of the original award amount, based on certain defined performance measures.
The outstanding awards have one measurement criterion: the three year total shareholder return (TSR) on our capital stock as compared to that of a specified group of peer companies. The TSR measurement criterion of the awards is considered a market condition. As such, the fair value of this measurement criterion was determined on the grant date using a Monte Carlo simulation valuation model. We recognize compensation expense on all of these awards on a straight-line basis over the vesting period with no changes for final projected payout of the awards. We account for forfeitures as they occur.
Below are the assumptions used in the Monte Carlo calculation on the respective grant dates for awards granted in 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 3, 2019
|
|
February 7, 2019
|
|
September 17, 2018
|
|
February 8, 2018
|
|
Expected volatility
|
39.7%
|
|
36.7%
|
|
36.6%
|
|
34.8%
|
|
Expected term (in years)
|
2.6
|
|
2.9
|
|
3.0
|
|
3.0
|
|
Risk-free interest rate
|
1.78%
|
|
2.43%
|
|
2.85%
|
|
2.28%
|
Expected volatility – In determining expected volatility, we have considered a number of factors, including historical volatility.
Expected term – We use the vesting period of the award to determine the expected term assumption for the Monte Carlo simulation valuation model.
Risk-free interest rate – We use an implied “spot rate” yield on U.S. Treasury Constant Maturity rates as of the grant date for our assumption of the risk-free interest rate.
Expected dividend yield – We do not currently pay dividends on our capital stock; therefore, a dividend yield of
0%
was used in the Monte Carlo simulation valuation model.
The following table summarizes the change in number of performance-based restricted stock units outstanding for the
six months ended June 30, 2019
:
|
|
|
|
|
|
|
|
Performance-Based
Restricted Stock Units
|
|
Awards outstanding as of December 31, 2018
|
142,434
|
|
|
Awards granted
|
111,087
|
|
|
Stock issued
|
(131,650
|
)
|
|
Awards forfeited
|
(11,549
|
)
|
|
Awards outstanding as of June 30, 2019
|
110,322
|
|
We recognized
$1.1 million
and
$2.0 million
of compensation expense for performance-based restricted stock units during the three and
six months ended June 30, 2019
, respectively. We recognized
$0.8 million
and
$1.8 million
of compensation expense for performance-based restricted stock units during the three and six months ended
June 30, 2018
, respectively.
Time-Based Restricted Stock Units
As of
June 30, 2019
, we had time-based restricted stock unit awards from 2019, 2018, 2017 and 2016 outstanding. The outstanding awards all ratably vest on the first, second and third anniversaries of the original grant date. However, employees whose employment terminates during the measurement period due to death, disability, or, in certain cases, retirement may receive a pro-rata payout based on the number of days they were employed subsequent to the last grant anniversary date. Each time-based restricted stock unit represents a right to receive one share of Rogers’ capital stock at the end of the vesting period. The fair value of the award is determined by the market value of the underlying stock price at the grant date. We recognize compensation expense on all of these awards on a straight-line basis over the vesting period. We account for forfeitures as they occur.
A summary of activity of the outstanding time-based restricted stock units for the
six months ended June 30, 2019
is presented below:
|
|
|
|
|
|
|
|
Time-Based
Restricted Stock Units
|
|
Awards outstanding as of December 31, 2018
|
117,476
|
|
|
Awards granted
|
59,561
|
|
|
Stock issued
|
(64,536
|
)
|
|
Awards forfeited
|
(7,596
|
)
|
|
Awards outstanding as of June 30, 2019
|
104,905
|
|
We recognized
$1.4 million
and
$2.9 million
of compensation expense for time-based restricted stock units during the three and
six months ended June 30, 2019
, respectively. We recognized
$1.3 million
and
$2.9 million
of compensation expense for time-based restricted stock units during the three and six months ended
June 30, 2018
, respectively.
Deferred Stock Units
We grant deferred stock units to non-management directors. These awards are fully vested on the date of grant and the related shares are generally issued on the 13-month anniversary of the grant date unless the individual elects to defer the receipt of those shares. Each deferred stock unit results in the issuance of
one
share of Rogers’ capital stock. The grant of deferred stock units is typically done annually during the second quarter of each year. The fair value of the award is determined by the market value of the underlying stock price at the grant date.
The following table summarizes the change in number of deferred stock units outstanding during the
six months ended June 30, 2019
:
|
|
|
|
|
|
|
|
Deferred Stock Units
|
|
Awards outstanding as of December 31, 2018
|
8,400
|
|
|
Awards granted
|
5,950
|
|
|
Stock issued
|
(7,200
|
)
|
|
Awards outstanding as of June 30, 2019
|
7,150
|
|
We recognized
$1.1 million
of compensation expense related to deferred stock units for the three and six months ended
June 30, 2019
, and
$0.9 million
of compensation expense for the three and six months ended
June 30, 2018
.
Stock Options
Stock options have been granted under various equity compensation plans. The maximum contractual term for all options is normally
10 years
. All outstanding options are fully vested and exercisable. We have
no
t granted any stock options since the first quarter of 2012.
During the
six months ended June 30, 2019
, the total intrinsic value of options exercised (i.e., the difference between the market price at time of exercise and the price paid by the individual to exercise the options) was
$1.1 million
, and the total amount of cash received from the exercise of these options was
$0.3 million
.
A summary of the activity under our stock option plans for the
six months ended June 30, 2019
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted- Average Exercise Price Per Share
|
|
Weighted-Average Remaining Contractual Life in Years
|
|
Aggregate Intrinsic Value
|
|
Options outstanding, vested and exercisable as of December 31, 2018
|
10,950
|
|
|
$
|
31.99
|
|
|
2.0
|
|
$
|
734,469
|
|
|
Options exercised
|
(10,000
|
)
|
|
$
|
32.74
|
|
|
|
|
|
|
Options expired
|
(300
|
)
|
|
$
|
23.86
|
|
|
|
|
|
|
Options outstanding, vested and exercisable as of June 30, 2019
|
650
|
|
|
$
|
24.20
|
|
|
0.6
|
|
$
|
96,447
|
|
Employee Stock Purchase Plan
We have an employee stock purchase plan (ESPP) that allows eligible employees to purchase, through payroll deductions, shares of our capital stock at a discount to fair market value. The ESPP has
two
six
-month offering periods each year, the first beginning in January and ending in June and the second beginning in July and ending in December. The ESPP contains a look-back feature that allows the employee to acquire shares of our capital stock at a
15%
discount from the underlying market price at the beginning or end of the applicable period, whichever is lower. We recognize compensation expense on this plan ratably over the offering period based on the fair value of the anticipated number of shares that will be issued at the end of each offering period. Compensation expense is adjusted at the end of each offering period for the actual number of shares issued. Fair value is determined based on two factors: (i) the
15%
discount on the underlying stock’s market value on the first day of the applicable offering period, and (ii) the fair value of the look-back feature determined by using the Black-Scholes model. We recognized an immaterial amount of equity compensation expense associated with the ESPP for each of the three- and six-month periods ended
June 30, 2019
and
2018
.
Note 10 – Debt
In 2017, we entered into a secured
five
year credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (the Third Amended Credit Agreement), which increased the principal amount of our revolving credit facility to up to
$450.0 million
borrowing capacity, with sublimits for multicurrency borrowings, letters of credit and swing-line notes, and provided an additional
$175.0 million
accordion feature. Borrowings may be used to finance working capital needs, for letters of credit and for general corporate purposes in the ordinary course of business, including the financing of permitted acquisitions (as defined in the Third Amended Credit Agreement).
In 2018, we borrowed
$82.5 million
under our revolving credit facility to fund the acquisition of Griswold and an additional
$20.0 million
to fund the Rogers Corporation Defined Benefit Pension Plan (Merged Plan) as part of the proposed plan termination process.
Borrowings under the Third Amended Credit Agreement can be made as alternate base rate loans or euro-currency loans. Alternate base rate loans bear interest at a base reference rate plus a spread of
37.5
to
75.0
basis points, depending on our leverage ratio.
The base reference rate is the greater of the prime rate; federal funds effective rate (or the overnight bank funding rate, if greater) plus 50 basis points.
Euro-currency loans bear interest based on adjusted LIBOR plus a spread of
137.5
to
175.0
basis points, depending on our leverage ratio. Based on our leverage ratio as of
June 30, 2019
, the spread was 150.0 basis points.
We incurred interest expense on our outstanding debt of
$2.1 million
, and
$1.1 million
during the three months ended
June 30, 2019
and
2018
, respectively, and
$4.2 million
and
$2.0 million
during the
six months ended June 30, 2019
and
2018
, respectively.
In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Third Amended Credit Agreement, we are required to pay a quarterly fee of
20
to
30
basis points (based upon our leverage ratio) of the unused amount of the lenders’ commitments under the Third Amended Credit Agreement. We incurred immaterial unused commitment fees in each of the three- and six-month periods ended
June 30, 2019
and
2018
.
The Third Amended Credit Agreement contains customary representations, warranties, covenants, mandatory prepayments and events of default under which our payment obligations may be accelerated. If an event of default occurs, the lenders may, among other things, terminate their commitments and declare all outstanding borrowings to be immediately due and payable together with accrued interest and fees. The financial covenants include requirements to maintain (1) a leverage ratio of no more than
3.25
to 1.00, subject to an election to increase the maximum leverage ratio to
3.50
to 1.00 for one fiscal year in connection with a permitted acquisition, and (2) an interest coverage ratio of no less than
3.00
to 1.00.
All obligations under the Third Amended Credit Agreement are guaranteed by each of our existing and future material domestic subsidiaries, as defined in the Third Amended Credit Agreement (the Guarantors). The obligations are also secured by a Third Amended and Restated Pledge and Security Agreement, dated as of February 17, 2017, entered into by us and the Guarantors which grants to the administrative agent, for the benefit of the lenders, a security interest, subject to certain exceptions, in substantially all of the non-real estate assets of the Guarantors. These assets include, but are not limited to, receivables, equipment, intellectual property, inventory, and stock in certain subsidiaries.
All revolving loans are due on the maturity date, February 17, 2022. We are not required to make any quarterly principal payments under the Third Amended Credit Agreement, and as of
June 30, 2019
we had
$195.5 million
in outstanding borrowings under our revolving credit facility. However, we made discretionary principal payments totaling
$33.0 million
on our revolving credit facility during the six months ended
June 30, 2019
.
As of
June 30, 2019
, we had
$1.4 million
of outstanding line of credit issuance costs that will be amortized over the life of the Third Amended Credit Agreement. We recognized an immaterial amount of amortization expense for each of the three- and six-month periods ended
June 30, 2019
and
2018
, related to these deferred costs.
In March 2017, we entered into an interest rate swap to hedge the variable interest rate on
$75.0 million
of our
$450.0 million
revolving credit facility. For further information regarding the interest rate swap, refer to “
Note 3 – Hedging Transactions and Derivative Financial Instruments
.”
Restriction on Payment of Dividends
Our Third Amended Credit Agreement generally permits us to pay cash dividends to our shareholders, provided that (i) no default or event of default has occurred and is continuing or would result from the dividend payment and (ii) our leverage ratio does not exceed
2.75
to
1.00
. If our leverage ratio exceeds
2.75
to
1.00
, we may nonetheless make up to
$20.0 million
in restricted payments, including cash dividends, during the fiscal year, provided that no default or event of default has occurred and is continuing or would result from the payments. Our leverage ratio did not exceed
2.75
to
1.00
as of
June 30, 2019
.
Note 11 - Leases
We have a finance lease obligation related to our manufacturing facility in Eschenbach, Germany. Under the terms of the lease agreement, we have an option to purchase the property upon the expiration of the lease in 2021 at a price which is the greater of (i) the then-current market value or (ii) the residual book value of the land including the buildings and installations thereon. Our finance lease obligation related to this facility was
$4.8 million
and
$5.0 million
as of
June 30, 2019
and
December 31, 2018
, respectively. The finance lease right-of-use asset balance for this facility was
$6.5 million
and
$6.7 million
as of
June 30, 2019
and
December 31, 2018
, respectively. All other finance lease obligations and finance lease right-of-use assets were cumulatively immaterial as of
June 30, 2019
and
December 31, 2018
. Accumulated amortization related to our finance lease right-of-use assets was
$3.7 million
and
$3.5 million
as of
June 30, 2019
and
December 31, 2018
, respectively.
Amortization expense related to our finance lease right-of-use assets, which is primarily included in the “Cost of sales” line item of the condensed consolidated statements of operations, was immaterial for each of the three- and six-month periods ended
June 30, 2019
and
2018
. Interest expense related to our finance lease obligations, which is included in the “Interest expense, net” line item of the condensed consolidated statements of operations, was immaterial for each of the three- and six-month periods ended
June 30, 2019
and
2018
. Payments made on the principal portion of our finance lease obligations were immaterial for each of the three-and six-month periods ended
June 30, 2019
and
2018
.
We have operating leases primarily related to building space and vehicles. Renewal options are included in the lease term to the extent we are reasonably certain to exercise the option. The exercise of lease renewal options is at our sole discretion. We account for lease components separately from non-lease components. The incremental borrowing rate represents our ability to borrow on a collateralized basis over a similar lease term.
The following table includes our expenses and payments for operating leases for the three and six months ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2019
|
|
Operating leases expense
|
775
|
|
|
1,493
|
|
|
Short-term leases expense
|
43
|
|
|
82
|
|
|
Payments on operating lease obligations
|
760
|
|
|
1,524
|
|
As of
June 30, 2019
and
December 31, 2018
, our assets and liabilities balances related to finance and operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Location in Statements of Financial Position
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Finance lease right-of-use assets
|
Property, plant and equipment, net
|
|
$
|
6,529
|
|
|
$
|
6,750
|
|
|
Operating lease right-of-use assets
|
Other long-term assets
|
|
$
|
6,285
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Finance lease obligations, current portion
|
Other accrued liabilities
|
|
$
|
420
|
|
|
$
|
420
|
|
|
Finance lease obligations, non-current portion
|
Other long-term liabilities
|
|
$
|
4,394
|
|
|
$
|
4,629
|
|
|
Total finance lease obligations
|
|
|
$
|
4,814
|
|
|
$
|
5,049
|
|
|
|
|
|
|
|
|
|
Operating lease obligations, current portion
|
Other accrued liabilities
|
|
$
|
2,594
|
|
|
$
|
—
|
|
|
Operating lease obligations, non-current portion
|
Other long-term liabilities
|
|
$
|
3,710
|
|
|
$
|
—
|
|
|
Total operating lease obligations
|
|
|
$
|
6,304
|
|
|
$
|
—
|
|
Net Future Minimum Lease Payments
The following table includes future minimum lease payments under finance and operating leases together with the present value of the net future minimum lease payments as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Finance
|
|
Operating
|
|
|
Leases
|
|
Leases Signed
|
|
Less: Leases Not Yet Commenced
|
|
Leases
|
|
2019
|
$
|
278
|
|
|
$
|
1,478
|
|
|
$
|
—
|
|
|
$
|
1,478
|
|
|
2020
|
521
|
|
|
2,713
|
|
|
—
|
|
|
2,713
|
|
|
2021
|
4,238
|
|
|
1,589
|
|
|
—
|
|
|
1,589
|
|
|
2022
|
—
|
|
|
822
|
|
|
—
|
|
|
822
|
|
|
2023
|
—
|
|
|
229
|
|
|
—
|
|
|
229
|
|
|
Thereafter
|
—
|
|
|
30
|
|
|
—
|
|
|
30
|
|
|
Total Lease Payments
|
5,037
|
|
|
6,861
|
|
|
—
|
|
|
6,861
|
|
|
Less: Interest
|
(223
|
)
|
|
(557
|
)
|
|
—
|
|
|
(557
|
)
|
|
Present Value of Net Future Minimum Lease Payments
|
$
|
4,814
|
|
|
$
|
6,304
|
|
|
$
|
—
|
|
|
$
|
6,304
|
|
The following table includes information regarding the lease term and discount rates utilized in the calculation of the present value of net future minimum lease payments:
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
Operating Leases
|
|
Weighted Average Remaining Lease Term
|
2.0 years
|
|
2.7 years
|
|
Weighted Average Discount Rate
|
2.55%
|
|
6.09%
|
Transition
We adopted Accounting Standards Codification (ASC) 842,
Leases
, in the first quarter of 2019 using the optional transition method, which applies the new lease requirements through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restatement of comparative periods. The guidance was applied to all leases that were not completed at the date of implementation. The adoption primarily affected our condensed consolidated statements of financial position through the recognition of
$6.2 million
of operating lease right-of-use assets and
$6.2 million
of operating lease obligations, as well as an immaterial impact to retained earnings, as of January 1, 2019. We recognized an additional
$0.1 million
of operating lease right-
of-use assets and
$0.1 million
operating lease obligations during the three months ended
June 30, 2019
. We recognized an additional
$0.8 million
of operating lease right-of-use assets and
$0.8 million
operating lease obligations during the six months ended
June 30, 2019
. The total operating lease right-of use assets and operating lease obligations recognized was
$7.0 million
and
$7.0 million
, respectively.
Practical Expedients
We have elected to recognize lease payments in the condensed consolidated statements of operations on a straight-line basis over the term of the lease for short-term leases. We also elected the package of practical expedients that allows us to carry forward the historical lease classification and accounting for indirect costs for any existing leases.
Note 12 – Pension Benefits and Other Postretirement Benefit Plans
As of
June 30, 2019
, we had
two
qualified noncontributory defined benefit pension plans: 1) the Rogers Corporation Employees’ Pension Plan (the Union Plan) and 2) the Rogers Corporation Defined Benefit Pension Plan for (i) all other U.S. employees hired before December 31, 2007 who are salaried employees or non-union hourly employees and (ii) employees of the acquired Arlon business (the Merged Plan).
The Company also maintains the Rogers Corporation Amended and Restated Pension Restoration Plan effective as of January 1, 2004 and the Rogers Corporation Amended and Restated Pension Restoration Plan effective as of January 1, 2005 (collectively, the Nonqualified Plans). The Nonqualified Plans serve to restore certain retirement benefits that might otherwise be lost due to limitations imposed by federal law on qualified pension plans, as well as to provide supplemental retirement benefits, for certain senior executives of the Company. In addition, we sponsor multiple fully insured or self-funded medical plans and life insurance plans for certain retirees. The measurement date for all plans is December 31
st
for each respective plan year.
We are required, as an employer, to: (a) recognize in our consolidated statements of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and our obligations that determine our funded status as of the end of the year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur and report these changes in accumulated other comprehensive loss. In addition, actuarial gains and losses that are not immediately recognized as net periodic pension cost are recognized as a component of accumulated other comprehensive loss and amortized into net periodic pension cost in future periods.
Pension Plan Proposed Termination
The Company currently intends to terminate the Merged Plan and has received a determination letter from the Internal Revenue Service (IRS). On June 10, 2019, the Company amended the Plan to (a) terminate the Plan (subject to discretionary approval by the Company’s Chief Executive Officer) and (b) add a lump sum distribution option in connection with the termination of the Plan, if approved. The Company plans to provide participants an option to elect either a lump sum distribution or an annuity. One or more group annuity contracts with one or more insurance companies will be purchased to settle our obligations for those participants who do not receive a lump sum. The Merged Plan is fully-funded on a GAAP basis, however, in order to terminate the plan in accordance with IRS and Pension Benefit Guaranty Corporation requirements, the Company will be required to contribute additional assets, if necessary, to settle all of the Merged Plan’s obligations. The amount necessary to do so is not yet known. In addition, the Company expects to record a pension settlement charge at plan termination. This settlement charge will include, as a non-cash charge, the immediate recognition into expense of the unrecognized losses within accumulated other comprehensive loss on the statement of financial position as of the plan termination date. The Company does not have a current estimate of these future charges, however, the pre-tax accumulated other comprehensive loss related to the Merged Plan was approximately
$47 million
as of
June 30, 2019
. We currently estimate that if the plan termination is approved by the Chief Executive Officer, it will be completed during the second half of 2019, when lump sum distributions are expected to occur and one or more annuity contracts are expected to be purchased. At this time, there are no plans to terminate the Union Plan.
Components of Net Periodic (Benefit) Cost
The components of net periodic (benefit) cost for the periods indicated were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Retirement Health and Life Insurance Benefits
|
|
(Dollars in thousands)
|
Three Months Ended
|
|
Six Months Ended
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
17
|
|
|
$
|
36
|
|
|
$
|
38
|
|
|
Interest cost
|
1,785
|
|
|
1,692
|
|
|
3,569
|
|
|
3,372
|
|
|
15
|
|
|
16
|
|
|
30
|
|
|
31
|
|
|
Expected return of plan assets
|
(2,192
|
)
|
|
(2,164
|
)
|
|
(4,384
|
)
|
|
(4,333
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(253
|
)
|
|
(400
|
)
|
|
(506
|
)
|
|
(801
|
)
|
|
Amortization of net loss
|
456
|
|
|
457
|
|
|
910
|
|
|
913
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net periodic cost (benefit)
|
$
|
49
|
|
|
$
|
(15
|
)
|
|
$
|
95
|
|
|
$
|
(48
|
)
|
|
$
|
(220
|
)
|
|
$
|
(367
|
)
|
|
$
|
(440
|
)
|
|
$
|
(732
|
)
|
Employer Contributions
There were no required contributions to our qualified defined benefit pension plans for the three- or six-month periods ended
June 30, 2019
and
2018
, and we are not required to make additional contributions to these plans for the remainder of
2019
. No voluntary contributions were made to our qualified defined benefit pension plans for each of the three- and six-month periods ended
June 30, 2019
and
2018
.
As there is no funding requirement for the Nonqualified Plans or the Retiree Health and Life Insurance benefit plans, we fund the amount of benefit payments made during the year, which were immaterial for each of the three- and six-month periods ended
June 30, 2019
and
2018
.
Note 13 – Commitments and Contingencies
We are currently engaged in the following environmental and legal proceedings:
Voluntary Corrective Action Program
Our location in Rogers, Connecticut is part of the Connecticut Voluntary Corrective Action Program (VCAP). As part of this program, we partnered with the Connecticut Department of Energy and Environmental Protection (CT DEEP) to determine the corrective actions to be taken at the site related to contamination issues. We evaluated this matter and completed internal due diligence work related to the site in the fourth quarter of 2015. Remediation activities on the site are ongoing and are recorded as reductions to the accrual as they are incurred. We incurred an immaterial amount of aggregate remediation costs through
June 30, 2019
, and the accrual for future remediation efforts is
$1.6 million
.
Asbestos
Overview
We, like many other industrial companies, have been named as a defendant in a number of lawsuits filed in courts across the country by persons alleging personal injury from exposure to products containing asbestos. We have never mined, milled, manufactured or marketed asbestos; rather, we made and provided to industrial users a limited number of products that contained encapsulated asbestos, but we stopped manufacturing these products in the late 1980s. Most of the claims filed against us involve numerous defendants, sometimes as many as several hundred.
The following table summarizes the change in number of asbestos claims outstanding during the
six months ended June 30, 2019
:
|
|
|
|
|
|
|
|
Asbestos Claims
|
|
Claims outstanding as of December 31, 2018
|
745
|
|
|
New claims filed
|
165
|
|
|
Pending claims concluded
(1)
|
(106
|
)
|
|
Claims outstanding as of June 30, 2019
|
804
|
|
(1)
For the
six months ended June 30, 2019
,
98
claims were dismissed and
8
claims were settled. Settlements totaled approximately
$0.7 million
for the
six months ended June 30, 2019
.
Impact on Financial Statements
We recognize a liability for asbestos-related contingencies that are probable of occurrence and reasonably estimable. In connection with the recognition of liabilities for asbestos-related matters, we record asbestos-related insurance receivables that are deemed probable.
The liability projection period covers all current and future claims through 2058, which represents the expected end of our asbestos liability exposure with no further ongoing claims expected beyond that date. This conclusion was based on our history and experience with the claims data, the diminished volatility and consistency of observable claims data, the period of time that has elapsed since we stopped manufacturing products that contained encapsulated asbestos and an expected downward trend in claims due to the average age of our claimants, which is approaching the average life expectancy.
To date, the defense and settlement costs of our asbestos-related product liability litigation have been substantially covered by insurance. Although we have exhausted coverage under some of our insurance policies, we believe that we have applicable primary, excess and/or umbrella coverage for claims arising with respect to most of the years during which we manufactured and marketed asbestos-containing products. In addition, we have entered into a cost sharing agreement with most of our primary, excess and umbrella insurance carriers to facilitate the ongoing administration and payment of claims covered by the carriers. The cost sharing agreement may be terminated by any party, but will continue until a party elects to terminate it. As of the filing date for this report, the agreement has not been terminated, and no carrier had informed us it intended to terminate the agreement. We expect to continue to exhaust individual primary, excess and umbrella coverages over time, and there is no assurance that such exhaustion will not accelerate due to additional claims, damages and settlements or that coverage will be available as expected. We are responsible for uninsured defense, indemnity and settlement costs, and we incurred an immaterial amount of expenses for each of the three- and six-month periods ended
June 30, 2019
and
2018
, respectively, related primarily to such costs.
The amounts recorded for the asbestos-related liability and the related insurance receivables are based on facts known at the time and a number of assumptions. However, projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of such claims, the length of time it takes to dispose of such claims, coverage issues among insurers and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual liability and insurance recoveries for us to be higher or lower than those projected or recorded.
As of
June 30, 2019
and
December 31, 2018
, our projected asbestos-related claims and insurance receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
Asbestos-related claims
|
$
|
70.8
|
|
|
$
|
70.3
|
|
|
Asbestos-related insurance receivables
|
$
|
64.4
|
|
|
$
|
63.8
|
|
General
In addition to the above issues, the nature and scope of our business brings us in regular contact with the general public and a variety of businesses and government agencies. Such activities inherently subject us to the possibility of litigation, including environmental and product liability matters that are defended and handled in the ordinary course of business. We have established accruals for matters for which management considers a loss to be probable and reasonably estimable. It is the opinion of management that facts known at the present time do not indicate that such litigation will have a material adverse impact on our results of operations, financial position or cash flows.
Note 14 – Income Taxes
Our effective income tax rate was
22.9%
and
32.6%
for the
three months ended June 30, 2019
and
2018
, respectively. The decrease from the second quarter of 2018 was primarily due to the beneficial impact of the international tax provisions from U.S. tax reform as a result of administrative guidance issued during the second half of 2018, changes in valuation allowance related to R&D credits and a lower tax impact on unremitted foreign earnings and profits. Our effective income tax rate was
18.5%
and
23.2%
for the
six months ended June 30, 2019
and
2018
, respectively. The decrease from the first half of 2018 was primarily due to the beneficial impact of the international tax provisions from U.S. tax reform as a result of administrative guidance issued during the second half of 2018 and a lower tax impact on unremitted foreign earnings and profits, partially offset by a decrease in current year release of reserves for uncertain tax positions.
The total amount of unrecognized tax benefits as of
June 30, 2019
was
$9.8 million
, of which
$9.6 million
would affect our effective tax rate if recognized. It is reasonably possible that approximately
$1.4 million
of our unrecognized tax benefits as of
June 30, 2019
will reverse within the next 12 months.
We recognize interest and penalties related to unrecognized tax benefits through income tax expense. As of
June 30, 2019
, we had
$0.6 million
accrued for the payment of interest.
We are subject to taxation in the U.S. and various state and foreign jurisdictions. With few exceptions, we are no longer subject to examinations by tax authorities for years prior to 2014.
Note 15 – Segment Information
Our reporting structure is comprised of the following strategic operating segments: ACS, EMS and PES. The remaining operations, which represent our non-core businesses, are reported in the Other operating segment. We believe this structure aligns our external reporting presentation with how we currently manage and view our business internally.
On January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers
. For additional information regarding the impacts of this accounting guidance, refer to “
Note 16 – Revenue from Contracts with Customers
.” We sell products to fabricators and distributors who then sell directly into various end markets. End markets within our ACS operating segment include wireless infrastructure, aerospace and defense, automotive, connected devices, wired infrastructure and consumer electronics. End markets within our EMS operating segment include portable electronics, mass transit, automotive, consumer and general industrial. End markets within our PES operating segment include e-mobility, industrial, renewable energy, mass transit, and micro channel coolers. End markets in our Other operating segment include automotive and industrial.
The following table presents a disaggregation of revenue from contracts with customers and other pertinent financial information, for the periods indicated; inter-segment sales have been eliminated from the net sales data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Advanced Connectivity Solutions
|
|
Elastomeric Material Solutions
|
|
Power Electronics Solutions
|
|
Other
|
|
Total
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Net sales - recognized over time
|
|
$
|
—
|
|
|
$
|
2,965
|
|
|
$
|
51,319
|
|
|
$
|
4,313
|
|
|
$
|
58,597
|
|
|
Net sales - recognized at a point in time
|
|
92,529
|
|
|
90,929
|
|
|
343
|
|
|
454
|
|
|
184,255
|
|
|
Total net sales
|
|
$
|
92,529
|
|
|
$
|
93,894
|
|
|
$
|
51,662
|
|
|
$
|
4,767
|
|
|
$
|
242,852
|
|
|
Operating income
|
|
$
|
18,458
|
|
|
$
|
15,326
|
|
|
$
|
(1,884
|
)
|
|
$
|
1,313
|
|
|
$
|
33,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Net sales - recognized over time
|
|
$
|
—
|
|
|
$
|
907
|
|
|
$
|
53,052
|
|
|
$
|
4,616
|
|
|
$
|
58,575
|
|
|
Net sales - recognized at a point in time
|
|
76,376
|
|
|
78,309
|
|
|
595
|
|
|
820
|
|
|
156,100
|
|
|
Total net sales
|
|
$
|
76,376
|
|
|
$
|
79,216
|
|
|
$
|
53,647
|
|
|
$
|
5,436
|
|
|
$
|
214,675
|
|
|
Operating income
|
|
$
|
10,594
|
|
|
$
|
8,421
|
|
|
$
|
4,239
|
|
|
$
|
1,970
|
|
|
$
|
25,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Net sales - recognized over time
|
|
$
|
—
|
|
|
$
|
5,971
|
|
|
$
|
110,921
|
|
|
$
|
8,917
|
|
|
$
|
125,809
|
|
|
Net sales - recognized at a point in time
|
|
172,999
|
|
|
180,685
|
|
|
555
|
|
|
2,602
|
|
|
356,841
|
|
|
Total net sales
|
|
$
|
172,999
|
|
|
$
|
186,656
|
|
|
$
|
111,476
|
|
|
$
|
11,519
|
|
|
$
|
482,650
|
|
|
Operating income
|
|
$
|
31,522
|
|
|
$
|
28,757
|
|
|
$
|
2,383
|
|
|
$
|
3,351
|
|
|
$
|
66,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Net sales - recognized over time
|
|
$
|
—
|
|
|
$
|
1,941
|
|
|
$
|
110,451
|
|
|
$
|
9,265
|
|
|
$
|
121,657
|
|
|
Net sales - recognized at a point in time
|
|
149,831
|
|
|
155,358
|
|
|
909
|
|
|
1,531
|
|
|
307,629
|
|
|
Total net sales
|
|
$
|
149,831
|
|
|
$
|
157,299
|
|
|
$
|
111,360
|
|
|
$
|
10,796
|
|
|
$
|
429,286
|
|
|
Operating income
|
|
$
|
18,496
|
|
|
$
|
22,581
|
|
|
$
|
11,260
|
|
|
$
|
3,932
|
|
|
$
|
56,269
|
|
Information relating to our segment operations by geographic area for the
three months ended June 30, 2019
and
2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Net Sales
(1)
|
|
Region/Country
|
|
Advanced Connectivity Solutions
|
|
Elastomeric Material Solutions
|
|
Power Electronics Solutions
|
|
Other
|
|
Total
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
16,272
|
|
|
$
|
41,370
|
|
|
$
|
8,208
|
|
|
$
|
1,079
|
|
|
$
|
66,929
|
|
|
Other Americas
|
|
1,039
|
|
|
2,190
|
|
|
229
|
|
|
206
|
|
|
3,664
|
|
|
Total Americas
|
|
17,311
|
|
|
43,560
|
|
|
8,437
|
|
|
1,285
|
|
|
70,593
|
|
|
China
|
|
49,333
|
|
|
23,846
|
|
|
11,283
|
|
|
953
|
|
|
85,415
|
|
|
Other APAC
|
|
17,026
|
|
|
15,534
|
|
|
6,625
|
|
|
760
|
|
|
39,945
|
|
|
Total APAC
|
|
66,359
|
|
|
39,380
|
|
|
17,908
|
|
|
1,713
|
|
|
125,360
|
|
|
Germany
|
|
3,951
|
|
|
3,471
|
|
|
14,305
|
|
|
130
|
|
|
21,857
|
|
|
Other EMEA
|
|
4,908
|
|
|
7,483
|
|
|
11,012
|
|
|
1,639
|
|
|
25,042
|
|
|
Total EMEA
|
|
8,859
|
|
|
10,954
|
|
|
25,317
|
|
|
1,769
|
|
|
46,899
|
|
|
Total net sales
|
|
$
|
92,529
|
|
|
$
|
93,894
|
|
|
$
|
51,662
|
|
|
$
|
4,767
|
|
|
$
|
242,852
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,447
|
|
|
$
|
35,777
|
|
|
$
|
8,279
|
|
|
$
|
866
|
|
|
$
|
59,369
|
|
|
Other Americas
|
|
758
|
|
|
2,179
|
|
|
323
|
|
|
725
|
|
|
3,985
|
|
|
Total Americas
|
|
15,205
|
|
|
37,956
|
|
|
8,602
|
|
|
1,591
|
|
|
63,354
|
|
|
China
|
|
32,032
|
|
|
24,071
|
|
|
8,940
|
|
|
1,410
|
|
|
66,453
|
|
|
Other APAC
|
|
18,588
|
|
|
8,324
|
|
|
7,092
|
|
|
649
|
|
|
34,653
|
|
|
Total APAC
|
|
50,620
|
|
|
32,395
|
|
|
16,032
|
|
|
2,059
|
|
|
101,106
|
|
|
Germany
|
|
4,823
|
|
|
2,595
|
|
|
16,524
|
|
|
163
|
|
|
24,105
|
|
|
Other EMEA
|
|
5,728
|
|
|
6,270
|
|
|
12,489
|
|
|
1,623
|
|
|
26,110
|
|
|
Total EMEA
|
|
10,551
|
|
|
8,865
|
|
|
29,013
|
|
|
1,786
|
|
|
50,215
|
|
|
Total net sales
|
|
$
|
76,376
|
|
|
$
|
79,216
|
|
|
$
|
53,647
|
|
|
$
|
5,436
|
|
|
$
|
214,675
|
|
|
|
|
|
(1)
|
Net sales are allocated to countries based on the location of the customer. The table above lists individual countries with 10% or more of net sales for the periods indicated.
|
Information relating to our segment operations by geographic area for the
six months ended June 30, 2019
and
2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Net Sales
(1)
|
|
Region/Country
|
|
Advanced Connectivity Solutions
|
|
Elastomeric Material Solutions
|
|
Power Electronics Solutions
|
|
Other
|
|
Total
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
29,343
|
|
|
$
|
84,835
|
|
|
$
|
15,685
|
|
|
$
|
2,369
|
|
|
$
|
132,232
|
|
|
Other Americas
|
|
1,791
|
|
|
4,273
|
|
|
249
|
|
|
397
|
|
|
6,710
|
|
|
Total Americas
|
|
31,134
|
|
|
89,108
|
|
|
15,934
|
|
|
2,766
|
|
|
138,942
|
|
|
China
|
|
91,822
|
|
|
46,265
|
|
|
22,347
|
|
|
3,466
|
|
|
163,900
|
|
|
Other APAC
|
|
31,167
|
|
|
30,022
|
|
|
11,963
|
|
|
1,569
|
|
|
74,721
|
|
|
Total APAC
|
|
122,989
|
|
|
76,287
|
|
|
34,310
|
|
|
5,035
|
|
|
238,621
|
|
|
Germany
|
|
8,423
|
|
|
6,907
|
|
|
36,252
|
|
|
276
|
|
|
51,858
|
|
|
Other EMEA
|
|
10,453
|
|
|
14,354
|
|
|
24,980
|
|
|
3,442
|
|
|
53,229
|
|
|
Total EMEA
|
|
18,876
|
|
|
21,261
|
|
|
61,232
|
|
|
3,718
|
|
|
105,087
|
|
|
Total net sales
|
|
$
|
172,999
|
|
|
$
|
186,656
|
|
|
$
|
111,476
|
|
|
$
|
11,519
|
|
|
$
|
482,650
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
26,725
|
|
|
$
|
73,469
|
|
|
$
|
16,857
|
|
|
$
|
2,123
|
|
|
$
|
119,174
|
|
|
Other Americas
|
|
1,584
|
|
|
3,980
|
|
|
681
|
|
|
555
|
|
|
6,800
|
|
|
Total Americas
|
|
28,309
|
|
|
77,449
|
|
|
17,538
|
|
|
2,678
|
|
|
125,974
|
|
|
China
|
|
65,539
|
|
|
44,865
|
|
|
18,362
|
|
|
2,727
|
|
|
131,493
|
|
|
Other APAC
|
|
33,926
|
|
|
17,484
|
|
|
13,543
|
|
|
1,442
|
|
|
66,395
|
|
|
Total APAC
|
|
99,465
|
|
|
62,349
|
|
|
31,905
|
|
|
4,169
|
|
|
197,888
|
|
|
Germany
|
|
11,073
|
|
|
5,337
|
|
|
31,234
|
|
|
332
|
|
|
47,976
|
|
|
Other EMEA
|
|
10,984
|
|
|
12,164
|
|
|
30,683
|
|
|
3,617
|
|
|
57,448
|
|
|
Total EMEA
|
|
22,057
|
|
|
17,501
|
|
|
61,917
|
|
|
3,949
|
|
|
105,424
|
|
|
Total net sales
|
|
$
|
149,831
|
|
|
$
|
157,299
|
|
|
$
|
111,360
|
|
|
$
|
10,796
|
|
|
$
|
429,286
|
|
|
|
|
|
(1)
|
Net sales are allocated to countries based on the location of the customer. The table above lists individual countries with 10% or more of net sales for the periods indicated.
|
Note 16 – Revenue from Contracts with Customers
Contract Balances
The Company has contract assets primarily related to unbilled revenue for revenue recognized related to products that are deemed to have no alternative use whereby we have the right to payment. Revenue is recognized in advance of billing to the customer in these circumstances as billing is typically performed at the time of shipment to the customer. The unbilled revenue is included in the contract assets on the condensed consolidated statements of financial position.
The Company did not have any contract liabilities as of
June 30, 2019
or
December 31, 2018
.
The following table presents contract assets by operating segment as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
June 30, 2019
|
|
December 31, 2018
|
|
Advanced Connectivity Solutions
|
$
|
—
|
|
|
$
|
—
|
|
|
Elastomeric Material Solutions
|
955
|
|
|
943
|
|
|
Power Electronics Solutions
|
22,652
|
|
|
19,738
|
|
|
Other
|
1,966
|
|
|
2,047
|
|
|
Total contract assets
|
$
|
25,573
|
|
|
$
|
22,728
|
|
No impairment losses were recognized for each of the three- and six-month periods ended
June 30, 2019
and
2018
on any receivables or contract assets arising from our contracts with customers.
Note 17 – Restructuring and Impairment Charges
In 2018, we made the decision to consolidate our Santa Fe Springs, California operations into the Company’s facilities in Carol Stream, Illinois and Bear, Delaware. We recorded
$0.1 million
and
$0.9 million
of expense for the three and
six months ended
June 30, 2019
, respectively, related to the facility consolidation. We recorded
$0.5 million
of expense related to this project in the three and six months ended
June 30, 2018
, respectively. The fair value of the total severance benefits paid in connection with the facility consolidation was
$0.5 million
. The total severance costs were expensed ratably over the required service period for the affected employees. All severance expenses were recorded as of December 31, 2018, and the final severance payments were made in the first quarter of 2019.
The following table presents severance activity related to the facility consolidation for the
six months ended June 30, 2019
:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Severance Related to Facility Consolidation
|
|
Balance as of December 31, 2018
|
$
|
523
|
|
|
Provisions
|
—
|
|
|
Payments
|
(523
|
)
|
|
Balance as of June 30, 2019
|
$
|
—
|
|
We recognized
$0.9 million
and
$1.0 million
in impairment charges on certain assets in connection with the Isola USA Corp. (Isola) asset acquisition for the three and
six months ended June 30, 2019
, respectively.
Note 18 – Supplemental Financial Information
The components of “Other operating (income) expense, net” are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Gain from antitrust litigation settlement
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,591
|
)
|
|
Loss (gain) on sale of property, plant and equipment
|
3
|
|
|
(383
|
)
|
|
276
|
|
|
(383
|
)
|
|
Lease income
|
(329
|
)
|
|
—
|
|
|
(876
|
)
|
|
—
|
|
|
Depreciation on leased assets
|
366
|
|
|
—
|
|
|
1,551
|
|
|
—
|
|
|
Total other operating (income) expense, net
|
$
|
40
|
|
|
$
|
(383
|
)
|
|
$
|
951
|
|
|
$
|
(3,974
|
)
|
In the first quarter of 2018, we recorded a gain from the settlement of antitrust litigation in the amount of
$3.6 million
as a result of the settlement of a class action lawsuit, filed in 2005, which alleged that Dow Chemical Company and other urethane raw material suppliers unlawfully agreed to fix, raise, maintain or stabilize the prices of Polyether Polyol Products sold in the United States from January 1, 1999 through December 31, 2004 in violation of the federal antitrust laws.
We recognized lease income of approximately
$0.3 million
and
$0.9 million
for the three and
six months ended June 30, 2019
, respectively, as well as approximately
$0.4 million
and
$1.6 million
of related depreciation on leased assets for the three and
six months ended June 30, 2019
, respectively, in connection with the transitional leaseback of a portion of the facility and certain machinery and equipment acquired from Isola in August 2018.
Note 19 – Recent Accounting Standards
Recently Issued Standards
In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-14,
Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
, which modifies the disclosure requirements for employers that sponsor defined benefit plans or other postretirement plans. This ASU is effective for our fiscal year ending December 31, 2020, with early adoption permitted. ASU 2018-14 is required to be applied on a retrospective basis to all periods presented. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
. This ASU modifies the disclosure requirements for fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. This ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income (loss). This ASU is effective for our fiscal year ending December 31, 2020 and for the interim periods within that year. Early adoption is permitted. ASU 2018-13 is generally required to be applied retrospectively to all periods presented upon their effective date with the exception of certain amendments, that should be applied prospectively to the most recent interim or annual period presented in the year of adoption. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
Recently Adopted Standards Reflected in Our 2019 Financial Statements
In October 2018, the FASB issued ASU 2018-16,
Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
, which permits the use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes. The amendments in this update were effective for the Company on January 1, 2019 and the Company will apply the amendments in this update to qualifying new or redesignated hedging relationships.
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
,
which aligns the requirements for capitalizing costs incurred in the implementation of a hosting arrangement that is a service contract with the requirements for capitalizing costs incurred to develop or obtain internal use software. The Company adopted this ASU on January 1, 2019 on a prospective basis and it did not have a material impact on our condensed consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. This ASU allows for reclassification of stranded tax effects resulting from U.S. Tax Reform from accumulated other comprehensive loss to retained earnings but it does not require this reclassification. The Company adopted this ASU on January 1, 2019 and elected to not reclassify the stranded tax effects resulting from U.S. Tax Reform. As a result of that election, the adoption of ASU 2018-02 did not have an impact on the Company’s consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to classify leases as either finance or operating leases and record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. An accounting policy election may be made to account for leases with a term of 12 months or less similar to existing guidance for operating leases today. ASU 2016-02 supersedes the existing guidance on accounting for leases. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842): Targeted Improvements
, which allowed for an optional transition method for the adoption of Topic 842. The two permitted transition methods are now the modified retrospective approach, which applies the new lease requirements at the beginning of the earliest period presented, and the optional transition method, which applies the new lease requirements through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted this standard on January 1, 2019 using the optional transition method. The Company elected to use the practical expedients that allow us to carry forward the historical lease classification. For additional information regarding the impact of the adoption of this standard, refer to “
Note 11 - Leases
.”
Note 20 – Share Repurchases
In 2015, we initiated a share repurchase program (the Program) of up to
$100.0 million
of the Company’s capital stock. We initiated the Program to mitigate potentially dilutive effects of stock options and shares of restricted stock granted by the Company, in addition to enhancing shareholder value. The Program has no expiration date, and may be suspended or discontinued at any time without notice.
No
share repurchases were made during the three and six months ended
June 30, 2019
. During the three and six months ended June 30, 2018, we repurchased
23,138
shares of our capital stock for
$3.0 million
. As of
June 30, 2019
,
$49.0 million
remained of our
$100.0 million
share repurchase program.