Rogers Corporation: FY2020 Form 10-K Summary
Business Context and Reporting Period
Rogers Corporation designs and manufactures engineered materials and components for advanced connectivity, elastomeric materials, and power electronics applications. Its principal markets include automotive, electric and hybrid vehicles, 5G and wireless infrastructure, portable electronics, aerospace and defense, renewable energy, industrial, and mass transit. The filing covers the fiscal year ended December 31, 2020, with comparisons primarily to fiscal 2019. The company reported approximately 3,350 employees and sales in approximately 3,600 customer relationships worldwide.
Reporting segments were Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), Power Electronics Solutions (PES), and Other. In the first quarter of 2021, ACS and PES were combined into a new Advanced Electronics Solutions segment.
Key Financial Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $802.6 million | $898.3 million | Down 10.7% |
| Gross margin | $291.8 million; 36.4% | $314.3 million; 35.0% | Margin up 140 bps |
| Operating income | $67.3 million; 8.4% | $110.5 million; 12.3% | Margin down 390 bps |
| Income before tax | $68.5 million | $55.1 million | Up 24.3% |
| Net income | $50.0 million | $47.3 million | Up 5.6% |
| Diluted EPS | $2.67 | $2.53 | Up 5.5% |
| Net cash from operations | $165.1 million | $161.3 million | Up $3.7 million |
| Capital expenditures | $40.4 million | $51.6 million | Down $11.2 million |
| Cash and equivalents | $191.8 million | $166.8 million | Up $24.9 million |
| Revolving credit borrowings | $25.0 million | $123.0 million | Down $98.0 million |
Current assets were $474.2 million versus current liabilities of $111.5 million, a current ratio of 4.3 to 1. Shareholders’ equity increased to $1.021 billion from $933.9 million. Net working capital was $362.7 million. The company had no off-balance-sheet arrangements considered material.
Material Changes Versus the Prior Comparable Period
- Sales declined across ACS, EMS, and PES, primarily because of COVID-19 impacts, weaker wireless infrastructure demand, trade tensions, customer inventory rebalancing, and lower automotive, industrial, and mass transit demand.
- ACS sales fell 15.1% to $268.7 million and operating income fell 21.5% to $38.2 million.
- EMS sales fell 9.2% to $328.2 million and operating income fell 46.0% to $30.8 million, including $27.4 million of accelerated amortization related to DSP customer relationships and trade names.
- PES sales fell 4.3% to $190.0 million, and its operating loss increased to $6.2 million from $1.4 million, driven partly by $7.9 million of restructuring and impairment charges.
- Gross margin improved due to lower freight, duties, and tariffs; favorable EMS product mix; productivity and yield improvements; and lower fixed overhead costs. These benefits were partly offset by lower volumes and unfavorable absorption.
- Operating income declined substantially despite higher net income because of accelerated intangible amortization, restructuring and impairment charges, higher SG&A, and the prior-year pension settlement charge of $53.2 million not recurring in 2020.
- Restructuring and impairment charges increased to $13.0 million from $2.5 million, including $12.3 million for manufacturing footprint optimization in Europe and Asia.
- The effective tax rate increased to 27.1% from 14.2%, primarily because of higher uncertain tax position accruals, lower foreign tax credits, reduced excess tax deductions, and higher taxes on unremitted foreign earnings.
Cash Flow, Debt, and Liquidity
Operating cash flow was $165.1 million. Investing cash outflow was $40.4 million, consisting principally of capital expenditures. Financing cash outflow was $104.2 million. Rogers borrowed $150.0 million under its revolving credit facility in the first quarter as a COVID-19 precaution and subsequently made $248.0 million of discretionary principal repayments.
The revolving facility provides up to $450.0 million of borrowing capacity, plus a $175.0 million accordion feature, and matures March 31, 2024. Borrowings at year-end were $25.0 million, with an effective all-in interest rate of 1.77%. The company stated that available liquidity, operating cash flow, and credit facilities should fund operations, planned capital expenditures, research and development, and debt service for at least the next 12 months. Expected 2021 capital expenditures were approximately $70 million to $80 million, excluding potential fire-related spending.
Rogers has never paid cash dividends and retains earnings for operations, expansion, debt repayment, and potential repurchases. No shares were repurchased in 2020; $49.0 million remained available under the repurchase authorization at year-end.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated stronger 2021 demand in EV/HEV, automotive, ADAS, portable electronics, aerospace and defense, and renewable energy markets, while acknowledging continuing uncertainty related to COVID-19.
- Management expected higher 5G smartphone demand but noted that the February 2021 fire at the UTIS facility in Ansan, South Korea, could disrupt portable-electronics sales. UTIS represented less than 4% of 2020 annual sales; the duration, financial impact, and insurance recovery remained undetermined.
- COVID-19 generated approximately $4.9 million of incremental direct costs in 2020, including additional benefits, premium pay, sick pay, and safety supplies. Demand was most affected in general industrial and mass transit markets.
- Major risks include global economic and political conditions, COVID-19, U.S.-China trade restrictions and Huawei controls, foreign exchange, intense competition, customer design changes, reliance on sole or limited-source suppliers, cybersecurity, environmental matters, and acquisition or restructuring execution.
- Asbestos-related liabilities were estimated at $73.2 million and related insurance receivables at $66.8 million through 2064. The company was defending 561 asbestos-related cases at year-end and acknowledged that actual liabilities or insurance recoveries could differ materially from estimates.
- Goodwill was $270.2 million at year-end. No goodwill or indefinite-lived intangible impairment was recorded, but valuation depends on subjective discounted-cash-flow assumptions and market conditions.
- The company terminated a $75.0 million notional interest-rate swap in September 2020 and settled it for $2.4 million, increasing 2020 interest expense but eliminating the hedge going forward.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Critical audit matters included curamik goodwill impairment and asbestos-related liabilities and insurance receivables.
Investor Verification Checklist
- Verify the sustainability of 2021 recovery assumptions for automotive, ADAS, EV/HEV, 5G smartphones, aerospace and defense, and renewable energy.
- Assess the operational and financial effect of the Ansan facility fire, including replacement capacity, insurance proceeds, capital spending, and customer retention.
- Reconcile reported operating performance after excluding the $27.4 million accelerated amortization, $13.0 million restructuring and impairment charges, and COVID-19 costs.
- Review debt covenant compliance, the March 2024 maturity, LIBOR replacement provisions, and the company’s ability to fund planned capital expenditures.
- Evaluate exposure to Huawei restrictions, U.S.-China trade policy, international sales concentration, and foreign currency movements.
- Review asbestos reserve assumptions, insurance recoverability, claim trends, and potential uninsured costs.
- Monitor goodwill and intangible-asset impairment sensitivity, particularly for EMS and the curamik reporting unit.