Rogers Corporation — Fiscal 2012 Form 10-K Summary
Business context and reporting period
Rogers Corporation is a global specialty-materials manufacturer serving portable communications, communications infrastructure, consumer electronics, mass transit, automotive, defense and clean-technology markets. Its operating segments are High Performance Foams (HPF), Printed Circuit Materials (PCM), Curamik Electronics Solutions (CES), Power Distribution Systems (PDS) and Other. The filing covers the fiscal year ended December 31, 2012, with continuing operations recast for discontinued Thermal Management Solutions and non-woven composite materials activities.
Rogers employed approximately 2,400 people at year-end, and foreign customers represented approximately 76.9% of fiscal 2012 sales. Management’s strategy emphasizes internet growth, mass transit and clean technology, supported by organic product development and potential acquisitions or technology investments.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $498.8 million | $548.3 million | Down 9.0% |
| Gross margin | 31.8% | 32.6% | Down 80 bps |
| Operating income | $25.7 million | $53.5 million | Down 52.0% |
| Income from continuing operations | $69.1 million | $44.3 million | Up 56.2% |
| Net income | $68.7 million | $37.1 million | Up 85.4% |
| Diluted EPS from continuing operations | $4.07 | $2.64 | Up 54.2% |
| Cash flow from continuing operations | $40.4 million | $22.1 million | Up $18.3 million |
| Capital expenditures | $23.8 million | $21.3 million | Up $2.5 million |
| Cash and cash equivalents | $114.9 million | $79.7 million | Up $35.2 million |
| Total debt under credit facilities | $98.0 million | $122.5 million | Down $24.5 million |
The reported increase in earnings was substantially affected by a $58.3 million deferred tax benefit, primarily from reversing the valuation allowance on U.S. deferred tax assets. The resulting effective tax rate was negative 205.2%, compared with 20.7% in 2011; therefore, reported net income and EPS are not representative of underlying operating performance.
Current assets were $306.9 million and current liabilities were $84.5 million, implying current liquidity of approximately 3.6 times current liabilities. Working capital was $221.7 million. Shareholders’ equity increased to $434.2 million from $338.3 million. The company paid no dividends in 2012.
Material changes versus the prior comparable period
- HPF sales increased 1.0% to $179.4 million, although operating income declined to $25.7 million from $28.3 million, largely due to special charges and facility-related actions.
- PCM sales declined 2.7% to $161.9 million and operating income declined to $8.2 million from $11.1 million. Automotive radar and communications-infrastructure applications grew, while high-reliability and satellite-TV applications weakened.
- CES sales declined 30.5% to $92.4 million, and the segment moved from $7.8 million of operating income to an $11.7 million operating loss. Weak renewable-energy and industrial motor-drive demand, inventory corrections and unfavorable currency effects were significant factors.
- PDS sales declined 11.5% to $41.9 million, and operating results moved from $3.5 million of income to a $0.4 million loss, reflecting weaker European and Chinese infrastructure, wind and solar markets.
- Backlog increased to $43.3 million from $33.1 million, principally because CES backlog increased by $10.7 million.
- Gross margin declined because of lower volumes and unfavorable inventory absorption, partly offset by cost reductions. Selling and administrative expense declined 3.7%, while R&D expense declined 10.3% to $19.3 million, or 3.9% of sales.
- Management implemented an early-retirement program, organizational realignment, facility closures, production relocations and other restructuring actions. Net pre-tax charges were approximately $20.4 million, with management estimating annualized savings approaching $20.0 million.
- Rogers liquidated its auction-rate securities portfolio for $25.4 million of net proceeds and recognized a $3.2 million realized loss.
- The company ceased production of non-woven composite materials; final inventory sales were expected to end in the first quarter of 2013.
Liquidity, debt and cash flow
Operating cash flow from continuing operations was $40.4 million. Investing activities provided $1.4 million, including auction-rate securities proceeds, while capital expenditures were $23.8 million. Financing activities used $8.5 million, including $25.5 million of debt and lease repayments, partly offset by $17.0 million from stock-option exercises.
The secured $265.0 million credit agreement matures in July 2016. At December 31, 2012, borrowings comprised a $90.0 million term loan and an $8.0 million revolving balance. Mandatory 2013 principal payments were $12.5 million, and management expected an additional $8.0 million of discretionary revolver repayment. The company was compliant with all covenants, reporting a leverage ratio of approximately 1.35 versus a maximum of 3.0 and fixed-charge coverage of 2.18 versus a minimum of 1.25.
Cash was distributed across the United States, Europe and Asia. Foreign cash may be subject to additional taxes if repatriated, and approximately $130.9 million of unremitted foreign earnings had not been provisioned for U.S. tax because management considered them permanently reinvested.
Outlook, management commentary and risks
Management expected near-term market conditions in CES and PDS to remain weak but maintained a positive long-term outlook. The company cited potential growth from 4G/LTE telecommunications infrastructure and Chinese stimulus benefiting mass transit and energy markets. Management expected restructuring benefits to improve operating leverage and intended to increase R&D spending toward a longer-term target of approximately 6% of sales.
- Demand is difficult to forecast because of short customer lead times, inventory adjustments and dependence on end-market products incorporating Rogers materials.
- Major risks include global economic weakness, pricing pressure, rapid technology changes, customer concentration, foreign-exchange exposure, raw-material availability and copper and resin costs.
- International operations create exposure to currency, political, tax, regulatory, labor and intellectual-property risks. A 10% exchange-rate movement was estimated to affect sales and net income by approximately $6.2 million and $0.5 million, respectively.
- The company’s goodwill impairment analysis for CES showed only a 14.6% excess of estimated fair value over carrying value at September 30, 2012; a 10% decline in fair value would reduce that excess to approximately 3.1%. CES had approximately $78.8 million of goodwill, making future impairment a material sensitivity.
- Asbestos claims increased to 319 pending claims from 242. The company recorded estimated ten-year asbestos liabilities of $51.4 million and related insurance recoveries of $48.3 million, including a $2.9 million fourth-quarter charge. Actual liabilities and insurance recoveries could differ materially.
- The Chatham Superfund exposure was recorded at approximately $0.3 million and was largely insured. PCB remediation at Woodstock had a remaining reserve of approximately $0.3 million. Other Connecticut environmental matters had no established reserve because exposure could not yet be estimated.
- Pension and retiree health obligations remained significant: the pension liability was $65.9 million and retiree health and life-insurance liability was $10.7 million. Management expected approximately $13.0 million of voluntary pension contributions in 2013.
Important facts for investors to verify
- Separate recurring operating performance from the $46.5 million income-tax benefit and other unusual items when evaluating 2012 earnings.
- Assess whether CES can achieve the growth and margin assumptions supporting its goodwill valuation and whether restructuring savings materialize.
- Monitor CES and PDS demand, backlog conversion, renewable-energy and industrial markets, and fourth-quarter order volatility.
- Review debt maturities, required and discretionary repayments, covenant headroom and the effect of variable interest rates despite the interest-rate swap.
- Evaluate the collectability and timing of asbestos insurance recoveries, future claims, insurance exhaustion and the January 2015 cost-sharing agreement expiration.
- Consider pension funding requirements, foreign-cash repatriation constraints, deferred-tax-asset utilization and unrecognized tax benefits of $17.3 million.
- Confirm the effect of discontinued operations and facility closures on future revenue, costs, capital expenditures and reported segment comparability.