Business Context and Reporting Period
Rogers Corporation designs and manufactures engineered materials and components for mission-critical applications. Its principal segments are Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), and Power Electronics Solutions (PES), with remaining activities reported as Other. This Form 10-K covers the fiscal year ended December 31, 2016; fourth-quarter 2016 information is included where relevant.
- Approximately 75% of 2016 sales were generated in foreign markets, including approximately 52% in Asia and 23% in Europe.
- Rogers employed approximately 3,100 people at year-end and planned to relocate its global headquarters from Connecticut to Chandler, Arizona.
- In November 2016, Rogers acquired DeWAL Industries for $135.5 million. DeWAL contributed $5.4 million of sales and $2.0 million of operating income after acquisition.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $656.3 million | $641.4 million | 2.3% increase |
| Gross margin | $249.5 million; 38.0% | $235.4 million; 36.7% | 130 basis-point increase |
| Operating income | $83.9 million; 12.8% | $76.3 million; 11.9% | 10.0% increase |
| Income before taxes | $82.3 million | $66.2 million | 24.3% increase |
| Net income | $48.3 million | $46.3 million | 4.2% increase |
| Diluted EPS | $2.65 | $2.48 | 6.9% increase |
| Cash from operations | $117.0 million | $73.9 million | Increase |
| Capital expenditures | $18.1 million | $24.8 million | Decrease |
Fourth-quarter 2016 net sales were $173.0 million, gross margin was $66.8 million, net income was $11.9 million, and diluted EPS was $0.65, compared with fourth-quarter 2015 sales of $152.9 million, gross margin of $52.6 million, net income of $6.6 million, and diluted EPS of $0.37.
- Year-end cash and cash equivalents were $227.8 million, compared with $204.6 million in 2015. Current assets were $458.4 million and current liabilities were $101.2 million, a 4.5-to-1 current ratio.
- Outstanding borrowings on credit facilities were $241.2 million at year-end, comprising a $50.2 million term loan and $191.0 million of revolving borrowings. Total long-term debt was $235.9 million, compared with $173.6 million in 2015.
- Net working capital was $357.2 million, and shareholders’ equity was $635.8 million.
- Cash used in investing activities was $151.8 million, primarily reflecting $133.9 million of net cash used for the DeWAL acquisition.
- Cash provided by financing activities was $57.9 million, including $166.0 million of borrowings, $103.8 million of debt and capital-lease repayments, and $8.0 million of share repurchases.
- Backlog increased to $106.5 million at year-end from $63.3 million, with the filing stating that the orders were expected to be filled within 12 months.
Segment Results
| Segment | 2016 Sales | 2016 Operating Income | Change in Sales |
|---|---|---|---|
| ACS | $277.8 million | $44.0 million | 3.8% increase |
| EMS | $203.2 million | $26.6 million | 12.3% increase |
| PES | $152.4 million | $6.0 million | 1.4% increase |
| Other | $23.0 million | $7.3 million | 46.1% decrease |
Material Changes Versus the Prior Comparable Period
- Sales growth occurred in all three strategic segments, partially offset by the 2015 divestiture of the lower-margin Arlon polyimide and thermoset laminate business and unfavorable currency effects of approximately 1.2% overall.
- Gross and operating margins improved due to higher sales, operational-efficiency initiatives, lower commodity costs, and the divestiture of the lower-margin Arlon business.
- EMS operating income increased 33.1%, supported by higher sales and the DeWAL contribution. PES operating income increased 59.1% due primarily to efficiency programs. ACS operating income declined 2.6% because of mix, pricing and absorption pressures and higher compensation and corporate allocations.
- SG&A increased 3.7%, including $7.7 million of higher incentive compensation, $4.5 million of strategic-project costs, and $3.8 million of acquisition costs related to DeWAL and DSP.
- Income taxes increased to $34.0 million from $19.9 million, and the effective tax rate rose to 41.3% from 30.0%. The change included $6.3 million of withholding taxes and a $6.1 million deferred foreign-tax accrual associated with Chinese subsidiary distributions and a change in permanent-reinvestment assertions.
- Goodwill increased to $208.4 million from $175.5 million and other intangible assets increased to $136.7 million from $75.0 million, primarily due to DeWAL. No goodwill or intangible-asset impairment was recorded in 2016.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash from operations, existing liquidity, and available credit facilities were expected to fund operations, capital expenditures, research and development, debt service, and other needs for at least the next 12 months.
- Rogers continued to emphasize connectivity, clean energy, safety and protection, innovation, operational excellence, and synergistic acquisitions. R&D expense was $28.6 million, or 4.4% of sales.
- On January 6, 2017, Rogers acquired the principal operating assets of Diversified Silicone Products for a stated price of $60.0 million, funded with cash and $30.0 million of additional borrowings. Purchase accounting was incomplete at the filing date.
- On February 17, 2017, Rogers entered into a new credit agreement that eliminated the term loan, increased revolving capacity to $450.0 million, added a $175.0 million accordion feature, and extended maturity to February 2022. The agreement includes leverage and interest-coverage covenants.
- Rogers recorded $0.7 million of restructuring expense related to the headquarters relocation and retained a $1.9 million environmental remediation accrual for its Connecticut headquarters site.
- Asbestos-related cases increased to 605 from 489. Estimated liabilities through 2026 were $52.0 million, with estimated insurance recoveries of $48.4 million and a recorded net accrual of $3.6 million. Management stated that future costs could exceed existing reserves but could not reasonably estimate the excess.
- Key risks include foreign currency and international operating exposure, cyclical demand, competition and pricing pressure, innovation and customer design-in risk, limited-source raw materials, acquisition integration, cybersecurity, environmental matters, pension obligations, taxes, debt covenants, and litigation.
- A 10% currency movement was estimated to affect annual sales and net income by approximately $21.8 million and $2.0 million, respectively. A 100-basis-point increase in LIBOR would increase annual interest expense by approximately $2.4 million based on year-end debt.
- The company paid no dividends in 2016 or 2015 and stated that it did not anticipate paying cash dividends in the foreseeable future. The share repurchase program had $52.0 million remaining at year-end.
Important Facts for Investors to Verify
- Reconcile reported 2016 growth and margin expansion for the effects of DeWAL, the Arlon divestiture, currency movements, acquisition costs, and other non-recurring items.
- Assess post-acquisition EMS performance and integration progress for DeWAL and DSP, including the effect of acquisition-related amortization and financing.
- Monitor leverage, interest coverage, LIBOR sensitivity, covenant compliance, and the February 2017 refinancing terms.
- Evaluate the sustainability of the 2016 cash-tax profile and the potential tax consequences of foreign earnings and future distributions.
- Review asbestos claims activity, insurance collectability, environmental accruals, and the possibility of liabilities exceeding recorded reserves.
- Confirm demand trends and margin resilience in ACS telecommunications and automotive markets, EMS portable-electronics and automotive markets, and PES electric-vehicle and renewable-energy applications.
- Note that management and the independent auditor reported effective internal control over financial reporting, but DeWAL was excluded from the 2016 internal-control assessment.