Rogers Corporation 2018 Form 10-K Summary
Business context and reporting period
Rogers Corporation designs and manufactures engineered materials and components for mission-critical applications. Its strategic segments are Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), and Power Electronics Solutions (PES), with remaining activities reported as Other. The filing covers the fiscal year ended December 31, 2018; fourth-quarter data are included but this is an annual Form 10-K.
Key growth themes include advanced mobility, electric and hybrid vehicles, advanced driver assistance systems, next-generation wireless infrastructure, renewable energy, aerospace and defense, and consumer electronics. Rogers employed approximately 3,700 people and served more than 5,000 customers worldwide. No customer represented more than 10% of annual net sales.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $879.1 million | $821.0 million | Up 7.1% |
| Gross margin | 35.4% | 38.8% | Down 340 bps |
| Operating income | $112.7 million | $129.1 million | Down 12.7% |
| Operating margin | 12.8% | 15.7% | Down 290 bps |
| Income before tax | $110.6 million | $132.9 million | Down 16.8% |
| Net income | $87.7 million | $80.5 million | Up 8.9% |
| Diluted EPS | $4.70 | $4.34 | Up 8.3% |
| Effective tax rate | 20.7% | 39.5% | Down 1,880 bps |
Net income benefited materially from the lower effective tax rate, including the absence of the 2017 one-time U.S. Tax Reform impact. Operating performance weakened despite revenue growth because of capacity and infrastructure investments, raw-material inflation, facility consolidation, new product launches, unfavorable fixed-cost absorption, and lower ACS utilization.
| Segment | 2018 sales | Sales change | 2018 operating margin |
|---|---|---|---|
| ACS | $294.2 million | Down 2.3% | 11.5% |
| EMS | $341.4 million | Up 9.2% | 15.4% |
| PES | $223.3 million | Up 20.8% | 8.8% |
| Other | $20.2 million | Down 9.4% | 33.3% |
Cash flow from operations declined to $66.8 million from $139.0 million, primarily reflecting working-capital investment, a $22.7 million contract-asset increase under the new revenue standard, and $25.4 million of pension and postretirement contributions. Investing cash outflow was $167.4 million, including $78.0 million for Griswold, $43.4 million for the Isola asset acquisition, and $47.1 million of capital expenditures. Financing cash flow was $88.7 million, including $102.5 million of new revolving-facility borrowings.
| Balance-sheet metric | December 31, 2018 | December 31, 2017 |
|---|---|---|
| Cash and equivalents | $167.7 million | $181.2 million |
| Current assets | $485.8 million | $454.5 million |
| Current liabilities | $107.2 million | $113.8 million |
| Net working capital | $378.6 million | $340.7 million |
| Revolver borrowings | $228.5 million | $131.0 million |
| Shareholders’ equity | $848.3 million | $766.6 million |
Liquidity remained strong, with current assets equal to approximately 4.5 times current liabilities. The secured revolving facility provides up to $450 million of capacity plus a $175 million accordion feature and matures February 17, 2022. Rogers reported compliance with its covenants and a leverage ratio below the 2.75-to-1.00 dividend restriction threshold. The company does not anticipate paying cash dividends in the foreseeable future and repurchased $3.0 million of stock during 2018, with $49.0 million remaining under the authorization.
Material changes versus the prior comparable period
- Revenue increased 7.1%, driven by EMS and PES growth, Griswold sales of $13.7 million, favorable currency effects of $15.5 million, and a $4.6 million benefit from adopting ASC 606.
- ACS sales and operating income declined because of weaker wireless 4G LTE and portable-electronics demand, copper costs, qualification expenses, process issues, downtime, and capacity investments.
- EMS benefited from Griswold and higher portable-electronics and automotive demand, but margin declined due to raw-material costs, consolidation costs, fixed-cost under-absorption, and higher amortization.
- PES benefited from electric and hybrid vehicle and micro-channel-cooler demand; its sales rose 20.8% and operating income rose 25.4%.
- Gross margin fell 340 basis points and operating margin fell 290 basis points.
- R&D expense rose 11.9% to $33.1 million, or 3.8% of sales, as Rogers realigned resources toward product extensions and future technologies.
- Rogers acquired Griswold for $78.0 million net of cash and acquired the Isola Chandler facility and equipment for $43.4 million in cash. Goodwill increased to $264.9 million from $237.1 million.
- Borrowings increased by $97.5 million, primarily to fund Griswold and a $20.0 million voluntary pension contribution.
- ASC 606 was adopted using the modified retrospective method, increasing opening retained earnings by approximately $4.2 million and producing a $4.6 million 2018 revenue benefit.
Guidance, outlook, management commentary, risks and unusual items
Management expects available cash, operating cash flow, and credit facilities to fund operations, planned capital expenditures, research and development, and debt service for at least the next 12 months. The filing does not provide specific numerical revenue or earnings guidance. Management is investing in capacity, infrastructure, research and development, and new products to support expected demand related to 5G, advanced mobility, electric vehicles, and advanced connectivity.
- International exposure is significant: approximately 72% of net sales were from foreign markets, including approximately 47% from Asia and 22% from Europe. Currency, political, economic, tariff, trade-policy, and export-control risks are material.
- The U.S.-China trade dispute and potential tariff or trade restrictions could affect demand, costs, supply chains, and manufacturing operations.
- Growth drivers may be cyclical or delayed, and customer adoption of new technologies or end products may not meet expectations.
- Rogers relies on sole or limited-source suppliers for certain key raw materials, including copper, polymers, ceramics, silicone, and other specialty materials.
- Raw-material pricing, global competition, product substitution, customer concentration within certain end markets, and intellectual-property risks may pressure margins and demand.
- Asbestos-related claims totaled 745 cases at December 31, 2018, compared with 687 a year earlier. Projected liability through 2058 was $70.3 million, with estimated insurance recoveries of $63.8 million and approximately $6.5 million of net estimated expense exposure recorded.
- Rogers recorded $4.0 million of restructuring and impairment charges, including $1.5 million related to Isola assets and costs from headquarters relocation and facility consolidation. Approximately $0.5 million of additional consolidation costs were expected in 2019.
- Other operating income included a $4.2 million antitrust litigation settlement gain, a $0.7 million DSP indemnity settlement gain, $0.6 million of economic incentive grants, and Isola leaseback-related income and depreciation.
- Rogers made a $25.0 million voluntary contribution to the Merged Plan and intended to terminate that plan, subject to management and IRS approval. The company stated that the financial impact of the proposed termination could not yet be determined.
- The company expects to adopt the new lease standard in 2019, increasing assets and liabilities by an estimated $9 million to $11 million at adoption.
- Foreign exchange sensitivity was significant: a 10% strengthening of the U.S. dollar was estimated to reduce annual sales by approximately $37 million and net income by approximately $5 million.
Most important facts an investor should verify
- Whether ACS demand stabilizes and whether capacity investments improve utilization and margins.
- Whether EMS and PES growth, including Griswold synergies and electric-vehicle demand, offsets margin pressure and weaker ACS results.
- Progress on raw-material pricing, supplier transitions, facility consolidation, and new-product qualification costs.
- Debt reduction, covenant headroom, floating-rate exposure, and the February 2022 revolving-facility maturity.
- The conversion of contract assets and inventory into cash following ASC 606 adoption.
- The integration and purchase-accounting finalization of Griswold, including goodwill and intangible-asset amortization.
- The ultimate cost, insurance recovery, and claim trend associated with asbestos litigation.
- The timing, regulatory approval, and cash-flow impact of the proposed Merged Plan termination.
- The effects of tariffs, China-related trade restrictions, foreign exchange, and international economic conditions.