Rogers (ROG) - 2022 Q4 - Annual Report

Part I Business The company sells engineered materials through its AES and EMS segments, focusing on growth markets like EV/HEV, ADAS, and 5G communications - The company operates through two main strategic segments, Advanced Electronics Solutions (AES) and Elastomeric Material Solutions (EMS), with non-core businesses reported under "Other"[13] - The company's growth strategy focuses on capitalizing on opportunities in EV/HEV, ADAS, aerospace and defense, and 5G smartphones[14][15] - The merger agreement with DuPont was terminated on November 1, 2022; Rogers received a regulatory termination fee of $162.5 million and incurred a transaction-related fee of $20.4 million[20][21] - The AES segment provides materials for applications in EV/HEV, wireless infrastructure, and automotive, among others[23] - The EMS segment provides polyurethane and silicone materials for applications such as cushioning, gasketing, and sealing across various industries[24] - In 2022, the company sold to approximately 3,500 customers worldwide, with no single customer accounting for more than 10% of total net sales[26] - As of December 31, 2022, Rogers employed approximately 3,800 people globally, with about 1,350 in the U.S, 1,300 in Europe, and 1,100 in China[37] Risk Factors The company faces significant risks from the COVID-19 pandemic, dependency on volatile markets, international operations, and environmental regulations - The COVID-19 pandemic continues to present risks to the company's workforce, operations, supply chain, and customer demand, with recent policy changes in China adding to the uncertainty[50][51] - Approximately 32% and 15% of 2022 net sales were derived from the advanced mobility and advanced connectivity markets, respectively, making the company susceptible to volatility and technological shifts in these areas[52] - In 2022, approximately 69% of net sales came from foreign markets, with 40% in Asia and 27% in Europe, exposing the company to currency fluctuations, geopolitical instability, and trade policy risks[53] - The company relies on sole or limited-source suppliers for certain critical raw materials, which creates risks of supply disruption and significant cost increases[59] - The company is subject to litigation risks, including ongoing asbestos-related product liability claims, which could lead to costs exceeding insurance coverage[80] - The business is subject to numerous environmental laws, with increasing focus on "forever chemicals" (PFAS), which could lead to substantial costs for transitioning away from their use or for remediation[82] Unresolved Staff Comments The company reports no unresolved staff comments - None[84] Properties Rogers Corporation operates a global network of owned and leased facilities for manufacturing, administration, and research and development Key Manufacturing and Administrative Facilities | Location | Type of Facility | Operating Segment(s) | | :--- | :--- | :--- | | Chandler, Arizona | Manufacturing / Administrative | AES, All | | Rogers, Connecticut | Manufacturing / Administrative | All | | Eschenbach, Germany | Manufacturing / Administrative | AES | | Evergem, Belgium | Manufacturing / Administrative | All | | Suzhou, China | Manufacturing / Administrative | All | Legal Proceedings The company is primarily involved in asbestos-related product liability litigation, with 537 cases outstanding as of December 31, 2022 - As of December 31, 2022, Rogers was a defendant in 537 asbestos-related product liability cases, a slight decrease from 543 cases at the end of 2021[86] Asbestos Litigation Financials (as of Dec 31, 2022) | Metric | Amount (in millions) | | :--- | :--- | | Estimated Liability (through 2064) | $65.0 | | Estimated Insurance Recovery (through 2064) | $59.8 | | Net Accrual on Balance Sheet | $5.2 | Mine Safety Disclosures This item is not applicable to the company - Not applicable[89] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE under "ROG", and while no dividends are paid, the company repurchased $25.0 million of its stock in 2022 - The company's capital stock is traded on the New York Stock Exchange under the symbol "ROG"[91] - The company has never declared or paid cash dividends and does not anticipate doing so in the foreseeable future, retaining earnings for business operations and expansion[92] - In 2022, the company repurchased $25.0 million of its capital stock, with $24.0 million remaining available for repurchase under the program as of year-end[94][95] [Reserved] This item is reserved Management's Discussion and Analysis of Results of Operations and Financial Position Net sales grew 4.1% in 2022, but gross margin declined, with operating income boosted by the DuPont merger termination fee amid restructuring charges Executive Summary Net sales grew 4.1% to $971.2 million in 2022, while gross margin fell, and operating income was significantly boosted by the DuPont merger termination fee 2022 vs 2021 Financial Highlights | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $971.2M | $932.9M | | Gross Margin | 33.1% | 37.4% | | Operating Income as % of Sales | 14.9% | 12.6% | - Recognized income of $144.0 million in 'Other operating (income) expense, net', primarily from the DuPont merger regulatory termination fee ($162.5M) net of a transaction-related fee ($20.4M)[106][107] - Recognized $65.1 million of impairment charges, primarily related to certain AES equipment-in-process and EMS intangible assets[107] - A reduction in force plan was announced on Feb 16, 2023, with estimated pre-tax restructuring charges of $10 million to $13 million expected in the first half of 2023[107] Results of Operations Net sales increased 4.1% to $971.2 million, while gross margin fell 430 basis points due to higher costs and unfavorable factory utilization Net Sales and Gross Margin (2022 vs 2021) | (Dollars in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net sales | $971,171 | $932,886 | | Gross margin | $321,015 | $349,139 | | Percentage of net sales | 33.1% | 37.4% | - The 4.1% sales increase was driven by the EMS segment (+11.1%), partially offset by a decrease in the AES segment (-0.8%); foreign currency fluctuations had an unfavorable impact of $36.9 million[109] - SG&A expenses increased 13.3% to $218.8 million, mainly due to an $11.2 million increase in professional services and a $5.0 million increase in compensation, both largely related to the terminated DuPont merger[112][113] - The company recognized $66.6 million in restructuring and impairment charges in 2022, compared to $3.6 million in 2021[115][116] Operating Segment Net Sales and Operating Income The AES segment's operating income surged due to the merger termination fee, while the EMS segment's sales grew driven by an acquisition Advanced Electronics Solutions (AES) Performance | (Dollars in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net sales | $530,215 | $534,429 | | Operating income | $77,163 | $50,198 | - AES operating income increased significantly due to favorable shared service expense allocations, including the merger termination fee, which offset $41.5 million in restructuring and impairment charges and unfavorable factory utilization[123] Elastomeric Material Solutions (EMS) Performance | (Dollars in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net sales | $420,006 | $378,017 | | Operating income | $60,351 | $60,051 | - EMS net sales increased 11.1%, with 8.5% of the growth from the Silicone Engineering acquisition; operating income was flat as merger-related benefits were offset by $25.0 million in charges[125][126] Liquidity, Capital Resources and Financial Position The company maintained a solid liquidity position with $235.9 million in cash, despite a 36.7% increase in inventories and higher borrowings Key Financial Position Accounts (as of Dec 31) | (Dollars in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $235,850 | $232,296 | | Inventories | $182,402 | $133,384 | | Borrowings under revolving credit facility | $215,000 | $190,000 | - Inventories increased by 36.7% primarily due to raw material cost increases and a ramp-up of purchases to meet anticipated demand[133] Key Cash Flow Measures (Year Ended Dec 31) | (Dollars in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $129,461 | $124,363 | | Net cash used in investing activities | ($113,117) | ($238,615) | | Net cash (used in) provided by financing activities | ($10,104) | $159,057 | - Capital spending for 2023 is expected to be in the range of approximately $65.0 million to $75.0 million[136] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency, interest rate, and commodity price risks, which it manages through hedging strategies - A hypothetical 10% strengthening of the U.S. dollar would have decreased 2022 net sales by approximately $38 million and net income by approximately $2 million[149] - As of December 31, 2022, the company had $215.0 million in borrowings under its revolving credit facility; a 100 basis point increase in LIBOR would have increased annual interest expense by approximately $2.2 million[150] - The company is subject to commodity price fluctuations, especially for copper, and uses hedging strategies to insulate against price volatility[151] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, which show 2022 net sales of $971.2 million and net income of $116.6 million Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion and identified the accounting for asbestos-related liabilities as a critical audit matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified (clean) opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[154] - A Critical Audit Matter was identified concerning the estimation of asbestos-related liabilities and insurance receivables due to the significant management judgment involved[161][162] Consolidated Financial Statements The financial statements detail the company's performance, reporting net sales of $971.2 million and total assets of $1.646 billion for 2022 Consolidated Statement of Operations Highlights (Year ended Dec 31, 2022) | (In thousands) | Amount | | :--- | :--- | | Net sales | $971,171 | | Gross margin | $321,015 | | Operating income | $144,432 | | Net income | $116,629 | | Diluted earnings per share | $6.15 | Consolidated Statement of Financial Position Highlights (As of Dec 31, 2022) | (In thousands) | Amount | | :--- | :--- | | Total current assets | $659,867 | | Total assets | $1,646,214 | | Total current liabilities | $142,537 | | Total liabilities | $473,748 | | Total shareholders' equity | $1,172,466 | Consolidated Statement of Cash Flows Highlights (Year ended Dec 31, 2022) | (In thousands) | Amount | | :--- | :--- | | Net cash provided by operating activities | $129,461 | | Net cash used in investing activities | ($113,117) | | Net cash used in financing activities | ($10,104) | Notes to Consolidated Financial Statements The notes detail key accounting policies and events, including segment realignment, goodwill, debt, asbestos liability, and the terminated DuPont merger - In Q1 2021, the company realigned its segments, combining Advanced Connectivity Solutions (ACS) and Power Electronics Solutions (PES) into the new Advanced Electronics Solutions (AES) segment[176] - As of December 31, 2022, Goodwill stood at $352.4 million, with no impairment charges recorded during the year[190][234] - The company has a $450.0 million revolving credit facility maturing in March 2024, with $215.0 million outstanding as of year-end 2022[251][259] - As of December 31, 2022, the estimated liability for asbestos-related claims was $65.0 million, with a corresponding estimated insurance receivable of $59.8 million[287][292] - In 2022, the company recognized $66.6 million in restructuring and impairment charges, including a $47.2 million fixed asset impairment and a $17.9 million other intangible asset impairment[309][233][236] - Following the termination of the merger agreement with DuPont, Rogers received a regulatory termination fee of $162.5 million and incurred a related transaction fee of $20.4 million[331] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[334] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[335] - There were no material changes in the company's internal control over financial reporting during the fourth quarter of 2022[336] - Management assessed the company's internal control over financial reporting as effective as of December 31, 2022, based on the COSO framework, an assessment audited by PricewaterhouseCoopers, LLP[338][339] Other Information The company reports no other information - None[339] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[339] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the 2023 Definitive Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's upcoming 2023 Definitive Proxy Statement[341] - The company has adopted a Code of Business Ethics applicable to all employees, officers, and directors, which is available on its website[342] Executive Compensation Detailed information regarding executive and director compensation is incorporated by reference from the 2023 Definitive Proxy Statement - Information regarding executive compensation is incorporated by reference from the company's 2023 Definitive Proxy Statement[343] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides details on equity compensation plans, with further information on security ownership incorporated by reference Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Equity Compensation Plans Approved by Security Holders | 262,160 | 974,050 | - Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's 2023 Definitive Proxy Statement[344] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2023 Definitive Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2023 Definitive Proxy Statement[345] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2023 Definitive Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the company's 2023 Definitive Proxy Statement[346] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K - This item contains the list of financial statements and schedules included in the report, such as the Report of Independent Registered Public Accounting Firm and Schedule II - Valuation and Qualifying Accounts[347] - A detailed list of exhibits filed with the Form 10-K is provided, including governance documents, credit agreements, compensation plans, and required certifications under the Sarbanes-Oxley Act[348][349][350] Form 10-K Summary This item is not applicable - Not Applicable[351]