Rogers Corporation 2013 Form 10-K Summary
Business context and reporting period
Rogers Corporation designs and manufactures specialty materials for portable communications, communications infrastructure, consumer electronics, automotive, defense, mass transit and clean-technology markets. Its principal segments are High Performance Foams (HPF), Printed Circuit Materials (PCM), Power Electronics Solutions (PES) and Other. The filing covers the fiscal year ended December 31, 2013; prior periods were recast for the 2013 segment realignment and discontinued operations.
Rogers had approximately 2,500 employees, served more than 3,000 customers worldwide, and generated approximately 78% of sales from foreign customers. The largest individual customer represented approximately 4% of 2013 sales.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $537.5 million | $498.8 million | 7.8% increase |
| Gross margin | 34.9% | 31.8% | 310 basis-point improvement |
| Operating income | $49.3 million | $25.7 million | 92.0% increase |
| Income from continuing operations | $37.7 million | $69.1 million | Decrease; 2012 benefited from a large tax benefit |
| Net income | $37.8 million | $68.7 million | Decrease |
| Diluted EPS from continuing operations | $2.12 | $4.07 | Decrease |
| Cash from continuing operations | $77.2 million | $40.4 million | Increase |
| Capital expenditures | $16.9 million | $23.8 million | Decrease |
| Cash and cash equivalents | $191.9 million | $114.9 million | Increase of $77.0 million |
| Total debt under credit facilities | $77.5 million | $98.0 million | Decrease of $20.5 million |
Operating margin increased to 9.2% from 5.1%. Management reported adjusted operating margin of 11.5% in 2013 versus 9.1% in 2012, excluding identified special charges. Income before taxes was $48.9 million, and the effective tax rate was 23.0%, compared with a negative 205.2% rate in 2012 due primarily to the 2012 reversal of a U.S. deferred-tax valuation allowance.
Current assets were $377.7 million and current liabilities were $90.0 million, resulting in a current ratio of approximately 4.2 to 1. Working capital was $287.7 million. Cash was distributed geographically as follows: United States $40.1 million, Europe $93.8 million and Asia $58.1 million. Certain foreign cash balances are considered permanently reinvested and may incur additional taxes if repatriated.
Operating cash flow benefited from higher earnings, working-capital management and a $7.2 million inventory reduction. Cash uses included $13.8 million of pension contributions, $20.5 million of debt repayments and $16.9 million of capital expenditures. The company received $32.4 million from stock-option exercises. No common-stock dividends were paid in 2013 or 2012.
Segment performance and material changes
- HPF: Sales declined 6.3% to $168.1 million and operating income declined 13.2% to $22.3 million. Mobile internet-device demand weakened because of smaller tablets, customer material-use efficiencies, market-share shifts and thinner designs.
- PCM: Sales increased 14.2% to $184.9 million and operating income increased to $18.8 million from $8.2 million. Growth came from mobile-device antennas, automotive radar and 4G-LTE base-station infrastructure.
- PES: Sales increased 19.7% to $160.7 million, and operating results improved from a $12.1 million loss to $1.1 million of income. Clean-technology sales increased 28.4%, including strong growth in electric and hybrid vehicles, solar and wind applications, and industrial motor drives.
- Other: Sales increased 2.4% to $23.7 million and operating income increased to $7.1 million from $3.8 million.
Backlog increased to $50.5 million at December 31, 2013 from $43.3 million at December 31, 2012, principally reflecting increases in PES and PCM. The 2013 segment structure combined the former Curamik and Power Distribution Systems operations under PES; prior periods were recast.
Gross-margin improvement reflected higher volumes, streamlining initiatives, manufacturing efficiencies, supply-chain improvements, product-quality improvements and procurement savings. Selling and administrative expense increased to $106.4 million, partly because of higher incentive and equity compensation, amortization and strategic investments in sales, information technology and executive recruiting. R&D expense increased 12.1% to $21.6 million, or 4.0% of sales.
Guidance, outlook, commentary and unusual items
Management expects continued opportunities in communications infrastructure, clean technology, mass transit, new applications and geographic expansion. It cautioned that PES growth should normalize after its 2013 recovery and that mobile-internet-device markets may face technology shifts and increased competition. Rogers plans to invest up to approximately 6% of sales in R&D over time and launched the Rogers Innovation Center with Northeastern University.
- 2013 restructuring and impairment charges totaled $10.4 million, including a $4.6 million impairment of the Solicore investment, $4.2 million of severance and related charges, and a $1.5 million pension-plan curtailment charge.
- The U.S. defined-benefit pension plans were frozen in 2013. Pension liability declined materially, but the company expects approximately $13.0 million of voluntary pension contributions in 2014.
- The $265 million secured credit agreement matures in July 2016. Debt outstanding was $77.5 million, with $17.5 million of required principal repayment in 2014. The company was in compliance with its covenants at year-end, including a leverage ratio of approximately 1.00 and a fixed-charge coverage ratio of 2.39 versus a 1.50 minimum.
- Asbestos-related liabilities and estimated insurance recoveries for the ten-year period through 2023 were $59.7 million and $57.1 million, respectively. Management stated that actual costs and recoveries could differ materially from estimates.
- The company had 362 pending asbestos claims at year-end, compared with 319 at year-end 2012. Insurance carriers paid substantially all historical settlement and defense costs, but coverage could be exhausted or disputed.
- Environmental matters include the Chatham Superfund site, PCB remediation at Woodstock, Connecticut, and potential contamination matters in Killingly and at corporate headquarters. Certain exposures cannot currently be estimated and have no recorded reserve.
Key investor verification points
- Verify the sustainability of the 2013 recovery in PCM and PES and whether HPF mobile-device weakness persists.
- Reconcile GAAP earnings with management’s adjusted operating results and separately evaluate the $10.4 million of special charges.
- Assess the quality and geographic availability of the $191.9 million cash balance, including permanently reinvested foreign cash.
- Review the $77.5 million debt balance, 2014 mandatory repayment, floating-rate exposure and credit-agreement covenants.
- Monitor asbestos claims, insurance recoveries, policy exhaustion and the potential for future charges beyond recorded reserves.
- Evaluate pension funding requirements after the plan freeze and the expected $13.0 million 2014 contribution.
- Consider raw-material, copper, foreign-exchange, technology-obsolescence, customer-demand and international-operating risks.
- Review the Solicore impairment and test whether additional investment or goodwill impairments could arise.