Rogers Corporation 2015 Form 10-K Summary
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. The filing covers the fiscal year ended December 31, 2015, including fourth-quarter results. Rogers serves Internet Connectivity, Clean Energy, and Safety & Protection markets and generated approximately 75% of sales from foreign markets.
On January 22, 2015, Rogers acquired Arlon for approximately $157 million, funded partly with $125 million of new borrowings. Arlon contributed approximately $100 million of 2015 sales and was integrated primarily into ACS and EMS. Rogers sold Arlon's specialty polyimide and thermoset laminate business in December 2015 for $1.3 million and recorded a $4.8 million loss.
Financial Performance, Cash Flow, Margins, Debt, and Liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $641.4 million | $610.9 million | 5.0% increase |
| Gross margin | $235.4 million; 36.7% | $234.8 million; 38.4% | 170 basis-point decline |
| Operating income | $76.3 million; 11.9% | $81.2 million; 13.3% | 6.1% decrease |
| Income from continuing operations | $46.3 million | $53.4 million | 13.3% decrease |
| Diluted EPS | $2.48 | $2.86 | 13.3% decrease |
| Cash from operating activities | $73.9 million | $85.2 million | 13.2% decrease |
| Capital expenditures | $24.8 million | $28.8 million | 13.6% decrease |
| Cash and cash equivalents | $204.6 million | $237.4 million | 13.8% decrease |
| Outstanding credit-facility borrowings | $178.6 million | $60.0 million | $118.6 million increase |
Net sales growth was driven by Arlon acquisition-related growth of 16.4%, partly offset by a 6.9% organic sales decline and a 4.5% negative currency impact. Special charges increased to approximately $11.2 million from $7.7 million in 2014, including Arlon integration costs, severance, environmental reserves, purchase-accounting adjustments, and the loss on the Arlon business sale. Other expense also included approximately $2.4 million related to reversed tax-indemnity receivables.
Net cash used in investing activities was $180.3 million, including $158.4 million for Arlon. Net cash provided by financing activities was $83.0 million, primarily reflecting $125.0 million of acquisition financing, partly offset by $40.0 million of share repurchases and $6.4 million of debt repayments.
Current assets were $429.1 million versus current liabilities of $79.1 million, producing a current ratio of 4.7 to 1 and net working capital of $350.0 million. Total assets were $932.5 million and shareholders' equity was $584.6 million. Rogers paid no dividends and had $60.0 million remaining under its $100 million share-repurchase authorization at year-end.
The amended secured credit agreement provides $350 million of borrowing capacity plus a $50 million expansion feature and matures in June 2020. Year-end leverage and interest-coverage ratios were approximately 1.47 to 1.00 and 23.82 to 1.00, respectively, compared with covenant limits of 3.25 to 1.00 and a minimum of 3.00 to 1.00. The company stated that available liquidity and expected operating cash flow were sufficient for at least the next twelve months.
Segment Results and Material Changes Versus 2014
| Segment | 2015 Sales | 2015 Operating Income | Year-over-Year Commentary |
|---|---|---|---|
| ACS | $267.6 million | $45.1 million | Sales increased 11.1%; organic sales declined 11.4%, offset by Arlon. Automotive radar and aerospace/defense improved, while Chinese 4G LTE base-station demand weakened. |
| EMS | $180.9 million | $20.0 million | Sales increased 4.2%; organic sales declined 7.9%, offset by Arlon. Portable electronics and consumer applications declined. |
| PES | $150.3 million | $3.8 million | Sales declined 12.5%, primarily due to currency and weaker demand in motor drives, vehicle electrification, and renewable-energy applications. |
| Other | $42.6 million | $7.4 million | Sales increased 73.7%, primarily from Arlon; operating income declined 10.0% after integration costs and weaker organic volume. |
- Backlog declined to $63.3 million from $77.0 million, with the 2015 balance including $7.4 million attributable to Arlon. Management expects fulfillment within twelve months.
- Research and development expense increased 20.8% to $27.6 million, or 4.3% of sales, reflecting investment in innovation centers and new platforms.
- Goodwill increased to $175.5 million from $98.2 million and other intangible assets increased to $75.0 million from $38.3 million, principally because of Arlon. No goodwill or other intangible impairment was recorded.
- Rogers retrospectively changed inventory accounting from LIFO to FIFO, increasing previously reported 2014 continuing-operations income by $0.5 million and diluted EPS by $0.03.
- Foreign currency translation reduced other comprehensive income by $27.2 million in 2015.
Outlook, Management Commentary, Risks, and Unusual Items
Management cited uncertain macroeconomic conditions in China, Europe, and the United States, delayed customer projects, weaker demand in selected applications, and continued currency pressure. Management expected a moderate recovery in sales but remained cautious regarding its timing. The filing does not provide formal quantitative revenue or earnings guidance.
- Key market risks include volatility in the Internet Connectivity, Clean Energy, and Safety & Protection megatrends, intense global competition, pricing pressure, and customers' ability to commercialize products incorporating Rogers materials.
- Approximately 28% of 2015 sales related to Internet Connectivity, 26% to Clean Energy, and 10% to Safety & Protection.
- Foreign exchange exposure is significant; management estimated that a 10% exchange-rate movement would affect annual sales by approximately $26.1 million and net income by approximately $2.9 million.
- Rogers relies on single- or limited-source suppliers for certain raw materials, including copper, polymer, polyurethane, silicone, and ceramic materials.
- Asbestos-related cases increased to 488 from 440. Projected ten-year liabilities through 2025 were $56.6 million, with estimated insurance recoveries of $53.4 million and a recorded accrual of $3.2 million. Management stated that future costs could exceed existing accruals but could not reasonably estimate the excess.
- Environmental reserves included $3.2 million for remediation at the Rogers, Connecticut headquarters and approximately $0.2 million for remaining PCB-related pond remediation.
- Pension and retiree health obligations remained material, although U.S. defined benefit pension plans were frozen and the retirement health program was amended to reduce future liabilities.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2015. Arlon, representing 6% of assets and 15% of revenues, was excluded from the internal-control assessment because it was acquired during 2015.
Important Facts for Investors to Verify
- Whether organic demand recovers, particularly in Chinese telecommunications, European markets, portable electronics, power electronics, and renewable-energy applications.
- Arlon integration benefits, sustainable margins, and the effect of approximately $5.8 million of expected annual acquired-intangible amortization through 2019.
- Debt repayment and refinancing capacity, including the large scheduled 2020 maturity and compliance with secured-credit covenants.
- Cash conversion, working-capital requirements, capital spending, and the future pace of share repurchases.
- Changes in asbestos claim volumes, insurance recoverability, environmental remediation costs, and potential unrecorded obligations beyond 2025.
- Foreign exchange sensitivity and exposure to copper and other raw-material costs.
- The impact of the LIFO-to-FIFO accounting change when comparing 2015 results with prior filings.