Rogers Corporation 2019 Form 10-K Summary
Business Context and Reporting Period
Rogers Corporation designs and manufactures engineered materials and components serving advanced connectivity, advanced mobility, automotive, telecommunications, aerospace and defense, industrial, portable electronics, mass transit, renewable energy and other markets. Reported segments are Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), Power Electronics Solutions (PES) and Other.
This filing covers the fiscal year ended December 31, 2019, compared primarily with fiscal 2018. The company reported approximately 3,600 employees, about 4,400 customers and 71% of sales from foreign markets. Backlog declined to $130.6 million from $152.8 million at December 31, 2018.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $898.3 million | $879.1 million | +2.2% |
| Gross margin | $314.3 million; 35.0% | $310.8 million; 35.4% | Margin down 40 bps |
| Operating income | $110.5 million; 12.3% | $112.7 million; 12.8% | Down 2.0% |
| Income before tax | $55.1 million | $110.6 million | Down 50.2% |
| Net income | $47.3 million | $87.7 million | Down 46.0% |
| Diluted EPS | $2.53 | $4.70 | Down 46.2% |
| Operating cash flow | $161.3 million | $66.8 million | Up $94.5 million |
| Capital expenditures | $51.6 million | $47.1 million | Up $4.5 million |
| Cash and equivalents | $166.8 million | $167.7 million | Down $0.9 million |
| Revolver borrowings | $123.0 million | $228.5 million | Down $105.5 million |
The sharp decline in pre-tax and net income primarily reflected a $53.2 million non-cash pension settlement charge associated with terminating and settling the Merged Plan. Excluding the unusual pension charge, operating performance was comparatively resilient, although gross margin and operating income percentages declined modestly.
Liquidity remained strong: current assets were $464.1 million, current liabilities were $100.2 million and working capital was $363.9 million. The current ratio was 4.6 to 1. The revolving credit facility has $450.0 million of capacity, subject to covenants and availability, and matures February 17, 2022.
Segment Results and Material Changes
| Segment | 2019 Sales | Sales Change | 2019 Operating Income |
|---|---|---|---|
| ACS | $316.6 million | +7.6% | $48.7 million; 15.4% margin |
| EMS | $361.6 million | +5.9% | $57.1 million; 15.8% margin |
| PES | $198.5 million | -11.1% | $(1.4) million; (0.7%) margin |
| Other | $21.5 million | +6.4% | $6.2 million; 28.7% margin |
- ACS benefited from higher 5G wireless infrastructure and aerospace and defense sales, improved product mix and productivity, partly offset by trade tensions, tariffs and currency effects.
- EMS benefited from the Griswold acquisition, which contributed approximately $15.0 million of first-half sales, and higher portable electronics sales. General industrial demand, tariffs and the absence of a 2018 antitrust settlement gain were offsets.
- PES deteriorated materially because of lower general industrial, vehicle electrification, ROLINX EV/HEV interconnect and renewable energy sales, unfavorable fixed-cost absorption, lower productivity and higher overhead.
- Reported sales were reduced by approximately $20.9 million due to depreciation of the euro, Chinese renminbi and South Korean won. Trade tensions, including U.S.-China restrictions involving Huawei, adversely affected demand and remain a significant uncertainty.
- Quarterly fourth-quarter 2019 sales were $193.8 million versus $222.9 million in fourth-quarter 2018. Fourth-quarter net loss was $28.8 million, or $(1.55) diluted EPS, primarily reflecting the pension settlement charge.
Cash Flow, Debt and Capital Allocation
Operating cash flow of $161.3 million substantially exceeded capital expenditures of $51.6 million. The company used $105.5 million to repay revolver borrowings, resulting in year-end debt of $123.0 million. Management stated that cash from operations, existing liquidity and available credit facilities should fund operations, planned capital expenditures, research and development and debt service for at least the next 12 months.
Expected 2020 capital spending is approximately $40 million to $45 million, funded from operating cash flow. No share repurchases occurred in 2019; $49.0 million remained available under the $100.0 million authorization. The company does not anticipate paying cash dividends in the foreseeable future.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal revenue or earnings guidance. Management’s stated strategy emphasizes advanced mobility, including ADAS and EV/HEV applications, advanced connectivity, including 5G, innovation, operational excellence and selective acquisitions.
- The company expects an additional approximately $0.7 million non-cash pre-tax pension settlement charge in the first half of 2020.
- Key risks include trade restrictions and tariffs, particularly involving China and Huawei; foreign currency volatility; cyclical demand and technology adoption; intense competition; sole- or limited-source raw materials; supply-chain interruptions; cybersecurity and information technology disruptions; environmental liabilities; tax uncertainty; and pension assumptions.
- Asbestos-related cases declined to 592 at year-end from 745, but projected liabilities through 2064 were $85.9 million against estimated insurance recoveries of $78.3 million. Management acknowledges that actual costs and recoveries could differ materially from estimates.
- The company adopted lease accounting guidance in 2019, recognizing operating lease right-of-use assets and obligations. The filing states that the adoption did not materially affect results.
- Goodwill totaled $262.9 million. No goodwill or indefinite-lived intangible impairment was recorded in 2019, but valuation depends on projections, discount rates and terminal growth assumptions.
- PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matters were goodwill impairment for the curamik reporting unit and asbestos-related liabilities and insurance receivables.
Important Facts for Investors to Verify
- Assess sustainable earnings and cash generation excluding the $53.2 million pension settlement charge, while recognizing that pension and other unusual charges may recur.
- Monitor whether PES returns to profitability and whether ACS and EMS growth offsets weakness in industrial, electrification and renewable energy markets.
- Verify the effect of tariffs, Huawei-related restrictions, China demand and foreign exchange on future sales and margins.
- Review revolver covenants, the February 2022 maturity, floating-rate exposure and the potential effect of LIBOR replacement.
- Evaluate the assumptions supporting asbestos liabilities, insurance recoveries and the estimated $7.6 million net uninsured exposure.
- Reconcile the 2020 capital expenditure plan with operating cash flow, debt repayment priorities and potential acquisition or repurchase activity.