Rogers Corporation 2022 Form 10-K Summary
Business context and reporting period
Rogers Corporation designs and manufactures engineered materials and components for advanced mobility, advanced connectivity, automotive, EV/HEV, aerospace and defense, communications, clean energy, industrial, portable electronics and mass-transit markets. The company reports Advanced Electronics Solutions (AES), Elastomeric Material Solutions (EMS) and Other operating segments. This Form 10-K covers the fiscal year ended December 31, 2022, and was filed March 1, 2023.
Rogers operated globally, with approximately 69% of 2022 net sales generated in foreign markets. The company employed approximately 3,800 people at year-end, including approximately 1,100 in China.
Financial performance and position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $971.2 million | $932.9 million | +4.1% |
| Gross margin | $321.0 million | $349.1 million | -8.1% |
| Gross margin percentage | 33.1% | 37.4% | -430 bps |
| Operating income | $144.4 million | $117.2 million | +23.2% |
| Operating margin | 14.9% | 12.6% | +230 bps |
| Net income | $116.6 million | $108.1 million | +7.9% |
| Diluted EPS | $6.15 | $5.73 | +7.3% |
| Net cash from operations | $129.5 million | $124.4 million | +$5.1 million |
| Capital expenditures | $116.8 million | $71.1 million | +$45.7 million |
Reported operating income and net income benefited substantially from the $162.5 million pre-tax regulatory termination fee received from DuPont, partially offset by a $20.4 million transaction-related fee. The company reported $144.0 million of other operating income in 2022 compared with $5.3 million of other operating expense in 2021.
Cash and cash equivalents totaled $235.9 million at December 31, 2022, including approximately $115.9 million held by non-U.S. subsidiaries. Net working capital was $517.3 million, compared with $420.1 million in 2021. Accounts receivable increased to $177.4 million and inventories increased 36.7% to $182.4 million.
Borrowings under the revolving credit facility were $215.0 million at year-end, compared with $190.0 million in 2021. During 2022, Rogers borrowed $100.0 million and repaid $75.0 million. The facility has $450.0 million of borrowing capacity, subject to terms and covenants, and matures March 31, 2024. Management stated that available liquidity and expected operating cash flow should fund operations, planned capital expenditures, R&D and debt service for at least the next 12 months.
Rogers spent $25.0 million to repurchase 237,806 shares in 2022; $24.0 million remained available under the repurchase program at year-end. The company has never paid cash dividends and stated that it may not pay dividends in the foreseeable future.
Segment and operating developments
| Segment | 2022 sales | 2021 sales | 2022 operating income | 2022 operating margin |
|---|---|---|---|---|
| AES | $530.2 million | $534.4 million | $77.2 million | 14.6% |
| EMS | $420.0 million | $378.0 million | $60.4 million | 14.4% |
| Other | $21.0 million | $20.4 million | $6.9 million | 33.0% |
- AES sales declined 0.8%, reflecting weakness in wireless infrastructure, aerospace and defense, ADAS and clean energy, partly offset by EV/HEV and mass-transit growth.
- EMS sales increased 11.1%, including $32.0 million of incremental sales from Silicone Engineering and stronger general industrial, mass-transit and EV/HEV demand.
- Gross margin was pressured by lower factory utilization, unfavorable yields, higher freight, duties and tariffs, inventory reserves, raw-material costs, labor constraints and supply disruptions.
- SG&A increased 13.3% to $218.8 million, while R&D increased 17.7% to $35.2 million. Increases included merger-related retention awards, a discretionary $6.5 million RESIP contribution, professional services, laboratory expenses and software costs.
- Rogers recorded $66.6 million of restructuring and impairment charges, including $65.1 million of impairment charges. These primarily involved AES equipment-in-process and EMS assets and intangibles associated with the planned divestiture of the high-performance engineered cellular elastomer business.
Material changes versus the prior comparable period
- Revenue increased 4.1%, but gross margin declined 430 basis points because of operating and supply-chain pressures.
- Operating income increased primarily because of the DuPont termination fee, despite substantially higher restructuring and impairment charges.
- Interest expense increased to $9.5 million from $2.5 million, primarily because of higher revolving-credit borrowings and interest rates.
- Inventories increased $49.0 million, while capital expenditures increased $45.7 million, contributing to increased financing needs.
- Cash flow from operations increased modestly, but investing cash use remained substantial because of $116.8 million of capital expenditures.
- Other comprehensive loss increased to $40.0 million, primarily from foreign-currency translation losses.
Guidance, outlook, risks and unusual items
Management did not provide formal revenue or earnings guidance in the filing. Management expects to improve profitability and accelerate revenue growth over the next several years through operational improvements, organic growth and targeted acquisitions. The company highlighted EV/HEV, ADAS, aerospace and defense, clean energy and portable electronics as growth markets and cited third-party projections of more than 25% compound annual growth for EV/HEV markets.
On February 16, 2023, Rogers announced a global workforce reduction expected to be completed in the first half of 2023. The company expects approximately $10 million to $13 million of additional pre-tax restructuring charges, substantially related to severance and other termination benefits. On February 17, 2023, Rogers entered into an agreement to sell its high-performance engineered cellular elastomer business for a net purchase price of $1.8 million, with closing expected in early March 2023.
The DuPont merger terminated on November 1, 2022 because regulatory approval from China’s State Administration for Market Regulation had not been obtained. The termination generated a $162.5 million fee but also resulted in transaction expenses and other merger-related costs.
Key risks include COVID-19 and related disruptions, weaker demand or delayed adoption in EV/HEV and connectivity markets, U.S.-China trade restrictions and supply-chain decoupling, foreign-currency volatility, dependence on sole or limited-source suppliers, raw-material and labor costs, intense competition, cybersecurity and information-technology disruptions, environmental and PFAS-related liabilities, debt covenant compliance, interest-rate exposure and asbestos-related litigation.
As of December 31, 2022, Rogers was named in 537 asbestos-related cases. Projected asbestos liabilities through 2064 were $65.0 million, with estimated insurance recoveries of $59.8 million, resulting in a $5.2 million net accrual. Management noted that actual costs and recoveries could differ materially from estimates.
The independent auditor, PricewaterhouseCoopers LLP, issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The auditor identified asbestos-related liabilities and insurance receivables as a critical audit matter.
Important facts for investors to verify
- Separate recurring operating performance from the nonrecurring $162.5 million DuPont termination fee and related expenses.
- Assess whether the announced workforce reductions, manufacturing footprint changes and divestiture improve gross margin and operating expenses.
- Monitor inventory growth, factory utilization, yields, raw-material costs, freight and customer demand for evidence of margin normalization.
- Review the $215.0 million revolving-credit balance, March 2024 maturity, interest-rate exposure and compliance with leverage and interest-coverage covenants.
- Evaluate the sustainability of cash flow after capital expenditures, restructuring payments, share repurchases and working-capital investment.
- Track EV/HEV and other design wins, customer production schedules and the conversion of the company’s growth pipeline into revenue.
- Reassess asbestos insurance recoverability, claim trends and potential environmental or PFAS-related obligations.