Rogers Earnings 2018-12-31

ROG 10K Annual Report

Balance Sheet	Income Statement	Cash Flow

10-K 1 rog-20181231x10k.htm 10-K Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________

FORM 10‑K

_______________________________



þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number 1-4347

_______________________________

ROGERS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

_______________________________



Massachusetts	06-0513860
(State or Other Jurisdiction of Incorporation or Organization)	(I. R. S. Employer Identification No.)

2225 W. Chandler Blvd., Chandler, Arizona	85224-6155
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (480) 917-6000



Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $1 Par Value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

_______________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ý	Accelerated filer o	Non-accelerated filer o
Smaller reporting company o	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No ý

The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2,026,896,605. Rogers has no non-voting common equity. The number of shares outstanding of common stock as of February 15, 2019 was 18,438,502.

Documents Incorporated by Reference:

Portions of Rogers’ Definitive Proxy Statement for its 2019 Annual Meeting of Shareholders, currently scheduled for May 9, 2019, are incorporated by reference into Part III of this Form 10-K.

ROGERS CORPORATION

FORM 10-K

December 31, 2018



TABLE OF CONTENTS
Part I
Item 1.	Business	4
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	14
Item 3.	Legal Proceedings	15
Item 4.	Mine Safety Disclosures	16
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Results of Operations and Financial Position	19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 8.	Financial Statements and Supplementary Data	35
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	82
Item 9A.	Controls and Procedures	82
Item 9B.	Other Information	82
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	83
Item 11.	Executive Compensation	83
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	83
Item 13.	Certain Relationships and Related Transactions, and Director Independence	83
Item 14.	Principal Accountant Fees and Services	83
Part IV
Item 15.	Exhibits, Financial Statement Schedules	83
Item 16.	Form 10-K Summary	85
	Signatures	86

Part I

Item 1. Business

As used herein, the “Company,” “Rogers,” “we,” “us,” “our” and similar terms include Rogers Corporation and its subsidiaries, unless the context indicates otherwise.

Forward-Looking Statements

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are generally accompanied by words such as “anticipate,” “assume,” “believe,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “seek,” “target” or similar expressions that convey uncertainty as to future events or outcomes. Forward-looking statements are based on assumptions and beliefs that we believe to be reasonable; however, assumed facts almost always vary from actual results, and the differences between assumed facts and actual results could be material depending upon the circumstances. Where we express an expectation or belief as to future results, that expectation or belief is expressed in good faith and based on assumptions believed to have a reasonable basis. We cannot assure you, however, that the stated expectation or belief will occur or be achieved or accomplished. Among the factors that could cause our results to differ materially from those indicated by forward-looking statements are risks and uncertainties inherent in our business including, without limitation:


•	failure to capitalize on, volatility within, or other adverse changes with respect to the Company’s growth drivers, including advanced mobility and advanced connectivity, such as delays in adoption or implementation of new technologies;


•	uncertain business, economic and political conditions in the United States and abroad, particularly in China, South Korea, Germany, Hungary and Belgium, where we maintain significant manufacturing, sales or administrative operations;


•	the ongoing trade policy dispute between the United States and China, as well as adverse changes in trade policy, tariff regulation or other trade restrictions;


•	fluctuations in foreign currency exchange rates;


•	our ability to develop innovative products and have them incorporated into end-user products and systems;


•	the extent to which end-user products and systems incorporating our products achieve commercial success;


•	the ability of our sole or limited source suppliers to deliver certain key raw materials, including commodities, to us in a timely manner;


•	intense global competition affecting both our existing products and products currently under development;


•	failure to realize, or delays in the realization of, anticipated benefits of acquisitions and divestitures due to, among other things, the existence of unknown liabilities or difficulty integrating acquired businesses;


•	our ability to attract and retain management and skilled technical personnel;


•	our ability to protect our proprietary technology from infringement by third parties and/or allegations that our technology infringes third party rights;


•	changes in effective tax rates or tax laws and regulations in the jurisdictions in which we operate;


•	failure to comply with financial and restrictive covenants in our credit agreement or restrictions on our operational and financial flexibility due to such covenants;


•	the outcome of ongoing and future litigation, including our asbestos-related product liability litigation;


•	changes in environmental laws and regulations applicable to our business; and


•	disruptions in, or breaches of, our information technology systems.

Our forward-looking statements are expressly qualified by these cautionary statements, which you should consider carefully, along with the risks discussed under the headings “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Position” and elsewhere in this report, any of which could cause actual results to differ materially from historical results or anticipated results. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Overview

Rogers Corporation designs, develops, manufactures and sells high-quality and high-reliability engineered materials and components for mission critical applications. We operate three strategic operating segments: Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS) and Power Electronics Solutions (PES). The remaining operations, which represent our non-core businesses, are reported in the Other operating segment. We have a history of innovation and have established Innovation Centers for our research and development activities in Chandler, Arizona; Burlington, Massachusetts; Eschenbach, Germany; and Suzhou, China. We are headquartered in Chandler, Arizona.

Growth Strategy and Recent Acquisitions

Our growth strategy is based upon the following principles: (1) market-driven organization, (2) innovation leadership, (3) synergistic mergers and acquisitions, and (4) operational excellence. As a market-driven organization, we are focused on growth drivers, including advanced mobility and advanced connectivity. More specifically, the key trends currently affecting our business include the increasing use of advanced driver assistance systems and adoption of electric and hybrid electric vehicles in the automotive industry and new technology adoption in the telecommunications industry, including next generation wireless infrastructure. In addition to our focus on advanced mobility and advanced connectivity in the automotive and telecommunications industries, we sell into a variety of other end markets including renewable energy, consumer electronics, aerospace and defense and diverse general industrial applications.

Our sales and marketing approach is based on addressing these trends, while our strategy focuses on factors for success as a manufacturer of engineered materials and components: quality, service, cost, efficiency, innovation and technology. We have expanded our capabilities through organic investment and acquisitions, and we strive to ensure high quality solutions for our customers. We continue to review and re-align our manufacturing and engineering footprint in an effort to attain a leading competitive position globally. We have established or expanded our capabilities in various locations in support of our customers’ growth initiatives.

We seek to enhance our operational and financial performance by investing in research and development, manufacturing and materials efficiencies, and new product initiatives that respond to the needs of our customers. We strive to evaluate operational and strategic alternatives to improve our business structure and align our business with the changing needs of our customers and major industry trends affecting our business.

In executing on our growth strategy, we have completed three strategic acquisitions in the last three fiscal years: (1) in July 2018, we acquired Griswold LLC (Griswold), a manufacturer of a wide range of high-performance engineered cellular elastomer and microcellular polyurethane products and solutions, (2) in January 2017, we acquired the principal operating assets of Diversified Silicone Products, Inc. (DSP), a custom silicone product development and manufacturing business serving a wide range of high reliability applications, and (3) in November 2016, we acquired DeWAL Industries LLC (DeWAL), a manufacturer of polytetrafluoroethylene and ultra-high molecular weight polyethylene films, pressure sensitive tapes and specialty products for the industrial, aerospace, automotive and electronics markets. Additionally, in August 2018, we acquired a production facility and related machinery and equipment located in Chandler, Arizona from Isola USA Corp (Isola).

Operating Segments

Advanced Connectivity Solutions

Our ACS operating segment designs, develops, manufactures and sells circuit materials and solutions enabling high-performance and high-reliability connectivity for applications in wireless infrastructure (e.g., power amplifiers, antennas, small cells and distributed antenna systems), automotive (e.g., active safety, advanced driver assistance systems, telematics and thermal management), aerospace and defense, connected devices (e.g., mobile internet devices and Internet of Things), wired infrastructure (e.g., computing and IP infrastructure) and consumer electronics. We believe these products have characteristics that offer performance and other functional advantages in many market applications that serve to differentiate our products from other commonly available materials. These products are sold principally to independent and captive printed circuit board fabricators that convert our laminates to custom printed circuits. Trade names for our ACS products include: RO3000^®, RO4000^®, RT/duroid^®, TMM^®, AD Series^TM and CLTE Series^TM. As of December 31, 2018, our ACS operating segment had manufacturing and administrative facilities in Chandler, Arizona; Rogers, Connecticut; Bear, Delaware; Evergem, Belgium; and Suzhou, China.

Elastomeric Material Solutions

Our EMS operating segment designs, develops, manufactures and sells engineered material solutions for a wide variety of applications and end markets. These include polyurethane and silicone materials used in critical cushioning, sealing and vibration management applications for portable electronics (e.g., smart phones), automotive, aerospace, rail, footwear and printing end markets; customized silicones used in flex heater and semiconductor thermal applications; polytetrafluoroethylene and ultra-high molecular weight polyethylene materials used in wire and cable, pressure-sensitive tapes and automotive applications. We believe these materials have characteristics that offer functional advantages in many market applications which serve to differentiate Rogers’ products from other commonly available materials. EMS products are sold globally to converters, fabricators, distributors and original equipment manufacturers (OEMs). Trade names for our EMS products include: PORON^®, BISCO^®, DeWAL^®, ARLON^®, DSP^®, Griswold^®, eSORBA^®, XRD^®, HeatSORB™ and R/bak^®.

As of December 31, 2018, our EMS operating segment had administrative and manufacturing facilities in Moosup, Connecticut; Rogers, Connecticut; Woodstock, Connecticut; Bear, Delaware; Carol Stream, Illinois; Narragansett, Rhode Island; Santa Fe Springs, California; Ansan, South Korea; and Suzhou, China. We also own 50% of: (1) Rogers Inoac Corporation (RIC), a joint venture established in Japan to design, develop, manufacture and sell PORON products predominantly for the Japanese market and (2) Rogers INOAC Suzhou Corporation (RIS), a joint venture established in China to design, develop, manufacture and sell PORON products primarily for RIC customers in various Asian countries. INOAC Corporation owns the remaining 50% of both

RIC and RIS. RIC has manufacturing facilities at the INOAC facilities in Nagoya and Mie, Japan, and RIS has manufacturing facilities at Rogers’ facilities in Suzhou, China.

Power Electronics Solutions

Our PES operating segment designs, develops, manufactures and sells ceramic substrate materials for power module applications (e.g., variable frequency drives, vehicle electrification and renewable energy), laminated busbars for power inverter and high power interconnect applications (e.g., mass transit, hybrid-electric and electric vehicles, renewable energy and variable frequency drives) and micro-channel coolers (e.g., laser cutting equipment). We sell our ceramic substrate materials and micro-channel coolers under the curamik^® trade name, and our busbars under the ROLINX^® trade name. As of December 31, 2018, our PES operating segment had manufacturing and administrative facilities in Evergem, Belgium; Eschenbach, Germany; Budapest, Hungary; and Suzhou, China.

Other

Our Other operating segment consists of elastomer components for applications in ground transportation, office equipment, consumer and other markets; elastomer floats for level sensing in fuel tanks, motors, and storage tanks; and inverters for portable communications and automotive markets. Trade names for our elastomer components include: NITROPHYL^® floats for level sensing in fuel tanks, motors, and storage tanks and ENDUR^® elastomer rollers.

Sales and Competition

We sell our materials and components primarily through direct sales channels positioned near major concentrations of our customers in North America, Europe and Asia. We sold to over 5,000 customers worldwide in 2018, primarily OEMs and component suppliers. No individual customer represented more than 10% of our total net sales for 2018; however, there are concentrations of OEM customers in our ACS (Chinese telecommunications equipment manufacturers) and PES (semiconductor and automotive manufacturers) operating segments. Although the loss of any one of our larger customers would require a period of adjustment, during which the results of operations could be materially adversely impacted, we believe that such events could be successfully mitigated over a period of time due to the diversity of our customer base.

We employ a technical sales and marketing approach pursuant to which we work collaboratively to provide design engineering, testing, product development and other technical support services to OEMs that incorporate our engineered materials and components in their products. Component suppliers convert, modify or otherwise incorporate our engineered materials and components into their components for these OEMs in accordance with their specifications. Accordingly, we provide similar technical support services to component suppliers.

We compete primarily with manufacturers of high-end materials, some of which are large, multi-national companies, principally on the basis of innovation, historical customer relationships, product quality, reliability, performance and price, technical and engineering service and support, breadth of product line, and manufacturing capabilities. We also compete with manufacturers of commodity materials, including smaller regional producers with lower overhead costs and profit requirements located in Asia that attempt to upsell their products based principally upon price, particularly for products that have matured in their life cycle. We believe that we have a competitive advantage because of our reputation for innovation, the quality and reliability of our materials and components, and our commitment to technical support and customer service.

Research and Development

We have a history of innovation, and innovation leadership is a key component of our overall business strategy. The markets we serve are typically characterized by rapid technological changes and advances. Accordingly, the success of our strategy is in part dependent on our ability to develop market-leading products, which is primarily driven by efforts in research and development. We are focused on identifying technologies and innovations related to both our current product portfolio as well as initiatives targeted at further diversifying and growing our business. As part of this technology commitment, we have Rogers Innovation Centers at Northeastern University in Burlington, Massachusetts, as well as at our facilities in Chandler, Arizona, Eschenbach, Germany and Suzhou, China. Our Innovation Centers focus on early stages of technical and commercial development of new high-tech materials solutions in an effort to align with market direction and needs.

Patents and Other Intellectual Property

We have many domestic and foreign patents, licenses and have additional patent applications pending related to technology in each of our operating segments. These patents and licenses vary in duration and provide some protection from competition. We also own a number of registered and unregistered trademarks and have acquired and developed certain confidential and proprietary technology, including trade secrets that we believe to be of some importance to our business.

While we believe our patents and other intellectual property provide a competitive advantage to our operating segments, we believe that a significant part of our competitive position and future success will be determined by factors such as the innovative skills, systems and process knowledge, and technological expertise of our personnel; the range of new products we develop; and our customer service and support.

Manufacturing and Raw Materials

The key raw materials used in our business are as follows: for our ACS operating segment, copper, polymer and polytetraflouroethylene materials; for our EMS operating segment, polyurethane, polytetraflouroethylene, polyethylene, silicone and natural rubber materials; and for our PES operating segment, copper, ceramic and brazing paste materials.

Some of the raw materials used in our business are available through sole or limited-source suppliers. While we have undertaken strategies to mitigate the risks associated with sole or limited source suppliers, these strategies may not be effective in all cases, and price increases or disruptions in our supply of raw materials could have a material adverse impact on our business. For additional information, refer to “Item 1A. Risk Factors.”

Seasonality

Except for some minor seasonality for consumer products, which often aligns with year-end holidays and product launch cycles, the operations of our segments have not been seasonal.

Our Employees

As of December 31, 2018, we employed approximately 3,700 people.

Backlog

Our backlog of firm orders was $152.8 million as of December 31, 2018, compared to $122.8 million as of December 31, 2017. The year-over-year increase in backlog was mainly comprised of a $24.1 million increase in the backlog for our PES operating segment, primarily due to overall sales growth in 2018 compared to 2017 and favorable foreign currency fluctuations, in addition to $4.2 million of backlog related to Griswold. The backlog of firm orders is expected to be filled within the next 12 months.

Executive Officers

Our executive officers as of February 20, 2019 were as follows:



Name	Age	Present Position	Year Appointed to Present Position	Other Relevant Positions Held
Bruce D. Hoechner	59	President and Chief Executive Officer, Director, Principal Executive Officer	2011
Michael M. Ludwig	57	Senior Vice President, Chief Financial Officer and Treasurer, Principal Financial Officer	2018	Senior Vice President and Chief Financial Officer, FormFactor, Inc., from May 2011 to March 2018.
Marc J. Beulque	54	Vice President, Global Operations	2016	Vice President, Power Electronics Solutions Operations and Research and Development, Rogers, from June 2013 to April 2016; General Manager, Power Distribution Systems from December 2011 to May 2013. Mr. Beulque was promoted to Vice President, Global Operations in April 2016 and was appointed as an executive officer in February 2018 as a result of an expansion of his responsibility to oversee all global operations of the Company.
Benjamin M. Buckley	46	Vice President and Chief Human Resources Officer	2019	Associate General Counsel and Director of Global Compliance and Integrity, Rogers, from October 2014 to January 2019. President and Chief Executive Officer, Verge America Ltd., from May 2013 to October 2014.
Robert C. Daigle	55	Senior Vice President and Chief Technology Officer	2009
Jeffrey M. Grudzien	57	Senior Vice President and General Manager, Advanced Connectivity Solutions	2017	Vice President, Advanced Connectivity Solutions, Rogers, from February 2012 to February 2017.
Jay B. Knoll	55	Senior Vice President, Corporate Development, General Counsel and Secretary	2017	Vice President and General Counsel, Rogers, from November 2014 to February 2017; Senior Vice President, General Counsel PKC Group Oyj - North America from June 2012 to November 2014.
Helen Zhang	55	Senior Vice President and General Manager, Power Electronics Solutions and President, Rogers Asia	2017	Vice President, Power Electronics Solutions and President, Rogers Asia, Rogers, from May 2012 to February 2017.

Available Information

We make available on our website (http://www.rogerscorp.com), or through a link posted on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, reports filed by our executive officers and directors pursuant to Section 16 of the Securities Exchange Act of 1934, as amended (the Exchange Act), and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). In addition, the SEC maintains an internet site that contains these reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

We also make available on our website, in a printable format, the charters for our Audit Committee, Compensation and Organization Committee, and Nominating and Governance Committee, in addition to our Corporate Governance Guidelines, Bylaws, Code of Business Ethics, Related Party Transactions Policy and Compensation Recovery Policy. Our website is not incorporated into or a part of this Form 10-K.

Item 1A. Risk Factors

Our business, results of operations and financial position are subject to various risks, including those discussed below, which may affect the value of our capital stock. The risks discussed below are those that we believe are currently the most significant, although additional risks not presently known to us or that we currently deem less significant may also impact our business, results of operations and financial position, perhaps materially.

Failure to capitalize on, volatility within, or other adverse changes with respect to the Company’s growth drivers, including advanced connectivity and advanced mobility, may adversely affect our business.

We derived approximately 25% and 27% of our net sales for the year ended December 31, 2018 from sales relating to the key market growth drivers of advanced connectivity and advanced mobility, respectively. These growth drivers are served by our direct and indirect customers in a variety of end markets, including transportation (specifically including the advanced driver assistance systems and electric and hybrid electric vehicles markets), communications, wireless infrastructure and portable electronics. These growth drivers, as well as specific market and industry trends within them, may be volatile, cyclical and sensitive to a variety of factors, including general economic conditions, technology disruptions, consumer preferences and political priorities. Adverse or cyclical changes to and within these growth drivers, such as delays in adoption or implementation of new technologies, has resulted in, and may continue to result in, reduced demand for certain of our products, production overcapacity, increased inventory levels and related risks of obsolescence, as well as price erosion, ultimately leading to a decline in our operating results. Acceleration within these growth drivers and corresponding rapid increases in demand for certain products may also require us to make significant capital investments or acquisitions in order to increase production levels and to maintain customer relationships and market positions. However, we may not be able to increase our production levels with sufficient speed or efficiency to capitalize on such increases in demand.

We have extensive international operations, and events and circumstances that have general international consequence or specific impact in the countries in which we operate may materially adversely affect our business.

For the year ended December 31, 2018, approximately 72% of our net sales resulted from sales in foreign markets, with approximately 47% and 22% of such net sales occurring in Asia and Europe, respectively. We expect our net sales in foreign markets to continue to represent a substantial majority of our consolidated net sales. We maintain significant manufacturing and administrative operations in China, South Korea, Germany, Hungary and Belgium, and approximately 62% of our employees are located outside the United States. Risks related to our extensive international operations include the following:


•	foreign currency fluctuations, particularly in the value of the Euro, the Hungarian forint, the Japanese yen, the Chinese yuan and the South Korean won against the U.S. dollar;


•	economic and political instability, due to regional or country-specific events or changes in relations between the United States and the countries in which we operate;


•	accounts receivable practices across countries, including longer payment cycles;


•	export control or customs matters, the ongoing trade policy dispute between the United States and China and adverse changes in trade policy, tariff regulations or other trade restrictions;


•	complications in complying, and failure to comply, with a variety of foreign laws, including due to unexpected changes in the laws or regulations of the countries in which we operate;


•	failure to comply with the Foreign Corrupt Practices Act or other applicable anti-corruption laws;


•	greater difficulty protecting our intellectual property;


•	compliance with foreign employment regulations, as well as work stoppages and labor and union disputes.

The foregoing risks may be particularly acute in emerging markets such as China and India, where our operations are subject to greater uncertainty due to increased volatility associated with the developing nature of the economic, legal and governmental systems of these countries, changes in bilateral and multilateral arrangements with the United States and other governments, and challenges that some multinational customers that are headquartered in emerging markets may have complying fully with United States and other developed market extraterritorial regulations. In addition, our business has been, and may continue to be, adversely affected by the lack of development, or disruptions, of transportation or other critical infrastructure in emerging markets. If we are unable to successfully manage the risks associated with expanding our global business, or to adequately manage operational fluctuations, it may materially adversely affect our business, results of operations and financial position.

Our business is dependent upon our development of innovative products and our customers’ incorporation of those products into end user products and systems that achieve commercial success.

As a manufacturer and supplier of engineered materials and components, our business depends upon our ability to innovate and sell our materials and components for inclusion in other products that are developed, manufactured and sold by our customers. We strive to differentiate our products and secure long-term demand through our engagement with our customers to design in our materials and components as part of their product development processes. The value of any design-in largely depends upon the decision of our customers to manufacture their products or systems in sufficient production quantities, the commercial success of the end product and the extent to which the design of our customers’ products or systems could accommodate substitution of

competitor products. A consistent failure to introduce new products in a timely manner, achieve design-ins or achieve market acceptance on commercially reasonable terms could materially adversely affect our business, results of operations and financial position. The introduction of new products presents particularly significant business challenges in our business because product development commitments and expenditures must be made well in advance of product sales.

Our dependence on sole or limited source suppliers for certain of our raw materials could materially adversely affect our ability to manufacture products and materially increase our costs.

We rely on sole and limited source suppliers for certain of the raw materials that are critical to the manufacturing of our products. This reliance subjects us to risks related to our potential inability to obtain an adequate supply of required raw materials, particularly given our use of lean manufacturing and just-in-time inventory techniques, and our reduced control over pricing and timing of delivery of raw materials. Our operating results could be materially adversely affected if we were unable to obtain adequate supplies of these materials in a timely manner or if their cost increased significantly.

While we believe we could obtain and qualify alternative sources for most sole and limited source supplier materials if necessary, the transition time could be long, particularly if the change requires us to redesign our systems. Ultimately, we may be unable to redesign our systems, which could further increase delays or prevent us from manufacturing our products at all. Even if a system redesign is feasible, increased costs associated with such a redesign would decrease our profit margins, perhaps materially, if we could not effectively pass such costs along to our customers. Further, it would likely result in production and delivery delays, which could lead to lost sales and damage to our relationships with current and potential customers.

We face intense global competition, which could reduce demand for our products or create additional pricing pressure on our products.

We operate in a highly competitive global environment and compete with domestic and international companies principally on the basis of the following:


•	innovation;


•	historical customer relationships;


•	product quality, reliability, performance and price;


•	technical and engineering service and support;


•	breadth of product line; and


•	manufacturing capabilities.

Our competitors include commodity materials suppliers, which offer product substitutions based mostly on price, and suppliers of alternate solutions, which offer product substitutions or eliminations based mostly on disruptive technology. Furthermore, our customers may engage in internal manufacturing of products that may result in reduced demand for our products. Certain of these competitors have greater financial and other resources than we have and, in some cases, these competitors are well established in specific product niches. We expect that our competitors will continue to improve the design and performance of their products, which could result in the development of products that offer price or performance features superior to our products. If we are unable to maintain our competitive advantage for any reason, demand for our products may be materially reduced, which may adversely affect our business, results of operations and financial position.

We may acquire or dispose of businesses, or engage in other transactions, which expose us to a variety of risks that could materially adversely affect our business operating results and financial position.

From time to time, we have explored and pursued transaction opportunities that we believe complement our core businesses, and we expect to do so again in the future. We have divested and may again consider divesting businesses or assets that we do not regard as part of our core businesses. These transaction opportunities may come in the form of acquisitions, joint ventures, investments, divestitures or other structures. There are risks associated with such transactions, including, without limitation, general business risk, technology risk, market acceptance risk, litigation risk, environmental risk, regulatory approval risk and risks associated with the failure to complete announced transactions. In addition, if we are unsuccessful in integrating any acquired company or business into our operations or if integration is more difficult than anticipated, we may experience disruptions that could harm our business and result in our failure to realize the anticipated benefits of the acquisitions. In the case of acquisitions, we may not be able to discover, during the due diligence process or otherwise, all known and unknown risks associated with the business we are acquiring, including the existence of liabilities. We may spend a significant portion of available cash, incur substantial debt or issue equity securities, which would dilute current shareholders’ equity ownership, to pay for the acquisitions. In the case of divestitures, we may agree to indemnify acquiring parties for known or unknown liabilities arising from the businesses we are divesting. We have incurred, and may in the future incur, significant costs in the pursuit and evaluation of transactions that we do not consummate for a variety of reasons.

As a result, these transactions may not ultimately create value for us or our shareholders and may harm our reputation and materially adversely affect our business, results of operations and financial position.

Our business may be materially adversely affected if we cannot protect our proprietary technology or if we infringe the proprietary rights of others.

Our proprietary technology supports our ability to compete effectively with other companies, and we seek to protect our intellectual property rights by obtaining domestic and foreign patents, trademarks and copyrights, and maintaining trade secrets for our manufacturing processes. It is possible, however, that our efforts to obtain such protection in the United States and abroad will be unsuccessful or that the protection afforded will not be sufficiently broad to protect our technology.

Even if domestic and foreign laws do grant initial protection to our technology, our competitors or other third parties may subsequently obtain and unlawfully copy, use or disclose our technologies, products, and processes. We believe that the risk of piracy of our technology is particularly acute in the foreign countries in which we operate. In circumstances in which we conclude that our proprietary technology has been infringed, we have pursued, and may again pursue, litigation to enforce our rights. The defense and prosecution of intellectual property infringement suits are both costly and time consuming, even if the outcome is favorable to us. If we are not successful in protecting our proprietary technology or if the protection afforded to us is not sufficiently broad, our competitors may be able to manufacture and offer products substantially similar to our own, thereby reducing demand for our products and adversely affecting our results of operations and financial position. We may also be adversely affected by, and subject to increased competition as a result of, the normal expiration of our issued patents.

Our competitors or other third parties may also assert infringement or invalidity claims against us in the future. In addition to the significant costs associated with such suits, as noted above, an adverse outcome could subject us to significant liabilities to third parties and require us to license rights from third parties or cease selling our products. Any of these events may have a material adverse effect on our business, results of operations and financial position.

The failure to attract and retain specialized technical and management personnel could impair our expected growth and future success.

We depend upon the continued services and performance of key executives, senior management and skilled technical personnel, particularly our sales engineers and other professionals with significant experience in the key industries we serve. Competition for these personnel from other companies, academic institutions and government entities is intense, and our expected growth and future success will depend, in large part, upon our ability to attract and retain these individuals.

As a multinational corporation doing business in the United States and various foreign jurisdictions, changes in tax laws or exposures to additional tax liability could negatively impact our operating results.

As a result of the variability and uncertainty in global taxation, we are subject to a wide variety of tax-related risks, any of which could provoke changes in our global structure, international operations or intercompany agreements, which could materially reduce our net income in future periods or result in restructuring costs, increased effective tax rates and other expenses. Given the global nature of our business, a number of factors may increase our effective tax rates, including:


•	decisions to redeploy foreign earnings outside of their country of origin for which we have not previously provided for income taxes;


•	increased scrutiny of our transactions by taxing authorities;


•	changes in the geographic mix of our profits among jurisdictions with differing statutory income tax rates;


•	ability to utilize, or changes in the valuation of, deferred tax assets; and


•	changes in tax laws and regulations or issuance of new interpretations of the law applicable to us.

For instance, on December 22, 2017, the Tax Cuts and Jobs Act of 2017 (U.S. Tax Reform) was signed into law, making significant changes to the Internal Revenue Code. As a result, we recognized an income tax expense in 2017 and made adjustments to the original estimate in 2018. This tax expense is related to the transition tax on our previously untaxed foreign earnings and the remeasurement of deferred income taxes. For additional information regarding U.S. Tax Reform, refer to “Note 14 – Income Taxes” to “Item 8. Financial Statements and Supplementary Data.”

The terms of our credit agreement subject us to risks, including potential acceleration of our outstanding indebtedness if we fail to satisfy financial ratios and comply with numerous covenants.

Our credit agreement contains, and any future debt agreements into which we enter may contain, certain financial ratios and certain restrictive covenants that, among other things, limit our ability to incur indebtedness or liens, acquire other businesses, dispose of assets, or make investments. Our ability to make scheduled payments on these borrowings and to satisfy financial ratios may be adversely affected by changes in economic or business conditions beyond our control, while the restrictive covenants to which we are subject may limit our ability to take advantage of potential business opportunities as they arise. Failure to satisfy these financial ratios or to comply with the covenants in our credit agreement would constitute a default. An uncured default with respect to one or more of our covenants could result in outstanding borrowings thereunder being declared immediately due and payable, which may also trigger an obligation to repay other outstanding indebtedness. Any such acceleration of our indebtedness would have a material adverse effect on our cash flows, financial position and results of operations.

Our credit agreement currently permits us to borrow euro-currency loans that bear interest based on the London interbank offered rate (LIBOR), plus a specified spread. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. LIBOR borrowings may become unavailable before that date, and it is unclear what reference rate might replace it. If LIBOR becomes unavailable, the credit agreement presently provides for the interest rate on our loans to convert to a higher base reference rate plus a spread. Even if we agree with our lenders to amend the credit agreement to identify a new reference rate for borrowings thereunder, this rate may be higher than our present interest rate, thereby causing the cost of our borrowings to increase.

We may be adversely affected by litigation stemming from product liability and other claims.

Our products may contain defects that we do not detect before sale, which may lead to warranty or damage claims against us or product recalls. We are involved in various unresolved legal matters that arise in the ordinary course of our operations, including asbestos-related product liability claims related to our operations before the 1990s. For additional information, refer to “Item 3. Legal Proceedings” and “Note 13 – Commitments and Contingencies” to “Item 8. Financial Statements and Supplementary Data.” We maintain insurance coverage with respect to certain claims, but the policy coverage limits may not be adequate or cover a particular loss. Costs associated with, among other things, the defense of, or settlements or judgments relating to, claims against us that are not covered by insurance or that result in recoveries in excess of insurance coverage may adversely affect our business, results of operations and financial position. Irrespective of insurance coverage, claims against us could divert the attention of our senior management and/or result in reputational damage, thereby adversely affecting our business.

Our projections on the potential exposure and expected insurance coverage relating to our asbestos-related product liability claims are based on a number of assumptions, including the number of new claims to be filed each year, the average cost of disposing of such claims, the length of time it takes to dispose of such claims, coverage issues among insurers and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States. To the extent such assumptions are inaccurate, the net liabilities that we have recorded in our financial statements may fail to approximate the losses we could suffer in connection with such claims.

We are subject to many environmental laws and regulations as well as potential environmental liabilities that could adversely affect our business.

We are subject to a variety of federal, state, local and foreign laws, rules and regulations related to the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals, gases and other substances used in manufacturing our products. Some of these laws in the United States include the Federal Clean Water Act, Clean Air Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act, Toxic Substances Control Act, and similar state statutes and regulations. In the European Union (EU) we are subject to the EU regulation on Registration, Evaluation, Authorization and Restriction of Chemicals. Compliance with these laws and regulations could require us to incur substantial expenses, including in connection with the acquisition of new equipment. Any failure to comply with present or future environmental laws, rules and regulations could result in criminal and civil liabilities, fines, suspension of production or cessation of certain operations, any of which could have a material adverse effect on our business, results of operations and financial position.

In addition, some environmental laws impose liability, sometimes without fault, for investigating and/or cleaning up contamination on, or emanating from, properties currently or formerly owned, leased or operated by us, as well as for damages to property or natural resources and for personal injury arising out of such contamination. Such liability may be joint and several, meaning that we could be held responsible for more than our share of the liability involved, or even the entire liability. For additional information, refer to “Note 13 – Commitments and Contingencies” to “Item 8. Financial Statements and Supplementary Data.”

A significant disruption in, or breach in security of, our information technology systems or violations of data protection laws could materially adversely affect our business and reputation.

In the ordinary course of business, we collect and store confidential information, including proprietary business information belonging to us, our customers, suppliers, business partners and other third parties and personally identifiable information of our employees. We rely on information technology systems to protect this information and to keep financial records, process orders, manage inventory, coordinate shipments to customers, and operate other critical functions. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, telecommunication failures and user errors. If we experience a disruption in our information technology systems, it could result in the loss of sales and customers and significant incremental costs, which could materially adversely affect our business.

We may also be subject to security breaches caused by computer viruses, illegal break-ins or hacking, sabotage, or acts of vandalism by disgruntled employees or third parties. The risk of a security breach or disruption, particularly through cyberattack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our information technology network and systems have been and, we believe, continue to be under constant attack. Accordingly, despite our security measures or those of our third party service providers, a security breach may occur, including breaches that we may not be able to detect. Security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential

information belonging to us or to our customers, suppliers, business partners, employees or other third parties, which could result in our suffering significant financial and reputational damage. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our security processes and procedures and our compliance with evolving government cyber security requirements for government contractors.

In addition, the processing and storage of certain information is increasingly subject to privacy and data security regulations, and many such regulations are country-specific. The interpretation and application of data protection laws in the United States, Europe, and elsewhere, including the EU General Data Protection Regulation and the California Consumer Privacy Act, are uncertain, evolving and may be inconsistent among jurisdictions. Compliance with these various laws may be onerous and require us to incur substantial costs or to change our business practices in a manner that adversely affects our business, while failure to comply with such laws may subject us to substantial penalties.

Employee benefit cost increases and costs associated with the proposed termination of certain of our pension plans could reduce our profitability.

Our profitability is affected by employee benefit costs, particularly medical, pension and other employee benefits. In recent years, employee medical costs have increased due to factors such as the increase in health care costs in the United States. These factors will continue to put pressure on our business and financial performance, as employee benefit costs continue to escalate. We may not succeed in limiting future cost increases. Continued employee benefit cost increases could have an adverse effect on our results of operations, cash flows and financial position.

We also sponsor various defined benefit pension plans that cover certain employees. Our costs of providing defined benefit pension plans have risen dramatically in recent years, and are dependent upon a number of factors and assumptions that drive our projected liabilities and annual expenses, such as discount rates, the actual and projected rates of return on the plans’ assets, governmental regulation, global equity prices, portfolio composition, mortality rates and required or voluntary contributions to the plans. Changes in assumptions, the inability to grow our pension investments over time to increase the value of the plans’ assets, and other factors relating to worldwide and domestic economic trends and financial market conditions, could all have a negative impact on our pension plans, which could result in an increase in our pension liabilities, a reduction in the funded status of our plan, increases in annual expense recognized related to the plans, and requirements to increase funding for some or all of our defined benefit pension plans, among other factors, all of which could negatively impact our results of operations and financial position.

In October 2017, the Company merged two of its qualified noncontributory defined benefit pension plans (the Merged Plan). The Company currently intends to terminate the Merged Plan and has requested a determination letter from the IRS. The termination of the Merged Plan remains subject to final approval by both management and the IRS. We expect the settlement process to be completed in 2019, but the process for finalizing the termination of the Merged Plan includes compliance with a regulatory review by the IRS and the timing of the resolution of the compliance process may be delayed. Following receipt of approval from the IRS and upon the effectiveness of the termination of the Merged Plan, we plan to distribute the benefits remaining in the Merged Plan. This distribution could have an adverse effect on our results of operations, cash flows and financial position.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We operate various general offices and manufacturing facilities throughout the United States, Europe and Asia. The following table provides certain information about the principal general offices and manufacturing facilities used by our operating segments:



Location	Floor Space (Square Feet)	Type of Facility	Leased / Owned	Operating Segment
United States
Chandler, Arizona	147,000	Manufacturing	Owned	ACS
Chandler, Arizona	105,100	Manufacturing	Owned	ACS
Chandler, Arizona	100,000	Manufacturing	Owned	ACS
Chandler, Arizona	75,000	Administrative Offices	Owned	All
Chandler, Arizona	17,000	Warehouse / Administrative Offices	Leased through 3/2020	ACS
Rogers, Connecticut	388,100	Manufacturing / Administrative Offices	Owned	All
Moosup, Connecticut	185,500	Manufacturing	Owned	EMS
Woodstock, Connecticut	150,600	Manufacturing	Owned	EMS
Carol Stream, Illinois	216,600	Manufacturing	Owned	EMS
Bear, Delaware	125,000	Manufacturing / Administrative Offices	Owned	ACS & EMS
Burlington, Massachusetts	6,000	R&D Lab / Administrative Offices	Leased through 2/2021	All
Narragansett, Rhode Island	84,600	Manufacturing	Owned	EMS
North Kingston, Rhode Island	10,000	Warehouse	Leased through 3/2020	EMS
Santa Fe Springs, California	42,000	Manufacturing / Administrative Offices	Leased through 3/2019	EMS
Europe
Eschenbach, Germany	149,000	Manufacturing / Administrative Offices	Leased through 6/2021	PES
Eschenbach, Germany	24,100	Warehouse / Administrative Offices	Leased through 3/2020	PES
Eschenbach, Germany	1,050	Warehouse	Leased through 3/2020	PES
Evergem, Belgium	122,000	Manufacturing / Administrative Offices	Owned	ACS & PES
Evergem, Belgium	55,700	Warehouse / Administrative Offices	Leased through 5/2021	ACS & PES
Ghent, Belgium	45,000	Warehouse	Leased through 3/2020	ACS & EMS
Budapest, Hungary	64,000	Manufacturing	Leased through 2/2023	PES
Asia
Suzhou, China	821,000	Manufacturing / Administrative Offices	Owned	All
Ansan, South Korea	40,000	Manufacturing	Leased through 10/2021	EMS

Item 3. Legal Proceedings

Asbestos Products Litigation

We, like many other industrial companies, have been named as a defendant in a number of lawsuits filed in courts across the country by persons alleging personal injury from exposure to products containing asbestos. We were a defendant in 745 asbestos-related product liability cases as of December 31, 2018, compared to 687 cases as of December 31, 2017, with the change reflecting new cases, dismissals, settlements and other dispositions. We have never mined, milled, manufactured or marketed asbestos; rather, we made and provided to industrial users a limited number of products that contained encapsulated asbestos, but we stopped manufacturing these products in the late 1980s. In virtually all of the cases against us, the plaintiffs are seeking unspecified damages above a jurisdictional minimum against multiple defendants who may have manufactured, sold or used asbestos-containing products to which the plaintiffs were allegedly exposed and from which they purportedly suffered injury. Most of these cases are being litigated in Illinois, Maryland, Missouri and New York; however, we are also defending cases in other states. We intend to vigorously defend these cases, primarily on the basis of the plaintiffs’ inability to establish compensable loss as a result of exposure to our products. As of December 31, 2018, the estimated liability and estimated insurance recovery for all current and future claims projected through 2058 was $70.3 million and $63.8 million, respectively.

The defense and settlement costs of our asbestos-related product liability litigation to date have been substantially covered by insurance. As of December 31, 2018, our consolidated statements of financial position include approximately $6.5 million of estimated asbestos-related expenses that exceed asbestos-related insurance coverage for all current and future claims projected through 2058. For additional information regarding our asbestos-related product liability litigation, refer to “Note 13 – Commitments and Contingencies” to “Item 8. Financial Statements and Supplementary Data.”

Other Matters

We are currently involved in a variety of other legal proceedings that we view as ordinary routine litigation incidental to our business, including commercial disputes, intellectual property matters, personal injury claims, tax claims and employment matters. Although the outcome of no legal matter can be predicted with certainty, we do not believe that the outcome of any of these legal proceedings, either individually or in the aggregate, will have a material adverse effect on our business, results of operations, cash flows or financial position. In addition, we are involved in certain environmental matters, principally investigations, which we do not view as material legal proceedings, either pending or known to be contemplated. For additional information regarding these matters, refer to “Note 13 – Commitments and Contingencies” to “Item 8. Financial Statements and Supplementary Data.”

Item 4. Mine Safety Disclosures

Not applicable.

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Capital Stock Market Prices and Dividend Policy

Our capital stock is traded on the New York Stock Exchange under the symbol “ROG”. As of the end of business on February 15, 2019, we had 312 shareholders of record. On the same date, the trading price of our capital stock closed at $136.05 per share.

We expect to maintain a policy of emphasizing longer-term growth of capital rather than immediate dividend income and do not anticipate paying cash dividends in the foreseeable future.

Performance Graph

The following graph compares the cumulative total return on Rogers’ capital stock over the past five fiscal years with the cumulative total return on the Standard & Poor’s Industrials Index (S&P Industrials) and the S&P Small Cap 600 Electronic Equipment, Instruments & Components Index. The graph tracks the performance of a $100 investment in the Company’s common stock and in each of the indexes (with the reinvestment of all dividends) on the date specified.

Issuer Purchases of Equity Securities

In 2015, we initiated a share repurchase program (the Program) of up to $100.0 million of the Company’s capital stock. We initiated the Program to mitigate dilutive effects of stock option exercises and vesting of restricted stock units granted by the Company, in addition to enhancing shareholder value. The Program has no expiration date, and may be suspended or discontinued at any time without notice.

During the year ended December 31, 2018, we made $3.0 million of repurchases using cash from operations and cash on hand. As of December 31, 2018, $49.0 million remained available to purchase under the Program. For additional information regarding share repurchases, refer to “Note 21 – Share Repurchases” to “Item 8. Financial Statements and Supplementary Data.”

Item 6. Selected Financial Data



(Dollars in thousands, except per share amounts)	2018			2017			2016			2015			2014
Financial Results
Net sales	$	879,091		$	821,043		$	656,314		$	641,443		$	610,911
Income before income tax expense	$	110,589		$	132,925		$	82,280		$	66,173		$	81,224
Net income	$	87,651		$	80,459		$	48,283		$	46,320		$	53,412
Per Share Data
Basic earnings per share	$	4.77		$	4.43		$	2.68		$	2.52		$	2.94
Diluted earnings per share	$	4.70		$	4.34		$	2.65		$	2.48		$	2.86
Book value	$	46.12		$	41.99		$	35.28		$	32.55		$	31.91
Financial Position
Current assets	$	485,786		$	454,523		$	458,401		$	428,665		$	438,174
Current liabilities	$	107,180		$	113,808		$	101,185		$	78,648		$	120,445
Ratio of current assets to current liabilities	4.5 to 1			4.0 to 1			4.5 to 1			5.5 to 1			3.6 to 1
Cash and cash equivalents	$	167,738		$	181,159		$	227,767		$	204,586		$	237,375
Net working capital	$	378,606		$	340,715		$	357,216		$	350,017		$	317,729
Property, plant and equipment, net	$	242,759		$	179,611		$	176,916		$	178,661		$	150,420
Total assets	$	1,279,344		$	1,125,134		$	1,056,500		$	930,355		$	840,435
Borrowings under revolving credit facility	$	228,482		$	130,982		$	235,877		$	173,557		$	25,000
Shareholders’ equity	$	848,324		$	766,573		$	635,786		$	584,582		$	587,281
Borrowings under revolving credit facility as a percentage of shareholders’ equity	26.9		%	17.1		%	37.1		%	29.7		%	4.3		%
Other Data
Depreciation and amortization	$	50,073		$	44,099		$	37,847		$	34,054		$	26,268
Research and development expenses	$	33,075		$	29,547		$	28,582		$	27,644		$	22,878
Capital expenditures	$	90,549		$	27,215		$	18,136		$	24,837		$	28,755
Number of employees (approximate)	3,700			3,400			3,100			2,800			2,800
Net sales per employee	$	238		$	241		$	212		$	229		$	218
Number of shares outstanding at year end	18,395			18,255			18,021			17,957			18,403

Amounts disclosed above for 2014 have been adjusted for our 2015 change in accounting principle from the last in, first out (LIFO) cost method to the first in, first out (FIFO) cost method for valuing inventory for all operations that were using the LIFO cost method. The financial data included within the preceding table should be read in conjunction with our Management’s Discussion and Analysis of Results of Operations and Financial Position as well as the Financial Statements and Supplementary Data included in Items 7 and 8, respectively, of this Form 10-K, and with our previously filed Forms 10-K.

Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Position

The following discussion and analysis of our results of operations and financial position should be read together with the Selected Financial Data and our Consolidated Financial Statements and the related notes that appear elsewhere in this Form 10-K.

Business Overview

Rogers Corporation designs, develops, manufactures and sells high-quality and high-reliability engineered materials and components for mission critical applications. We operate three strategic operating segments: Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS) and Power Electronics Solutions (PES). The remaining operations, which represent our non-core businesses, are reported in the Other operating segment. We have a history of innovation and have established Innovation Centers for our research and development activities in Chandler, Arizona; Burlington, Massachusetts; Eschenbach, Germany and Suzhou, China. We are headquartered in Chandler, Arizona.

Growth Strategy and Recent Acquisitions

2018 Executive Summary

In 2018 as compared to 2017, our net sales increased 7.1% to $879.1 million, gross margin decreased approximately 340 basis points to 35.4%, and operating income as a percentage of net sales decreased approximately 290 basis points to 12.8%. The following key factors should be considered when reviewing our results of operations, financial position and liquidity for the periods discussed:

•

Our net sales increase in 2018 was attributable to increases in net sales in our EMS and PES strategic operating segments. Net sales were favorably impacted by higher net sales in electric and hybrid electric vehicle and micro-channel cooler applications in our PES operating segment and higher net sales in portable electronics and automotive applications in our EMS operating segment, partially offset by lower net sales in wireless 4G LTE and portable electronics applications in our ACS operating segment. The increase in net sales was also driven in part by net sales of $13.7 million, or 1.7%, related to our acquisition of Griswold, as well as $15.5 million, or 1.9%, of favorable impacts from appreciation in value of the Euro and Renminbi relative to the U.S. dollar. The adoption of new accounting guidance for revenue recognition favorably impacted net sales in 2018 by $4.6 million, or 0.6%.


•	Our gross margin decreased approximately 340 basis points to 35.4% in 2018 from 38.8% in 2017. Gross margin was unfavorably impacted as a result of strategic investments in capacity optimization and infrastructure to support future growth initiatives, increased costs for raw materials, facility consolidation and new product launch, as well as unfavorable

absorption of fixed costs. The adoption of new accounting guidance for revenue recognition favorably impacted gross margin in 2018 by $1.5 million, or 0.5%.

•

Our operating income decreased 12.7% to $112.7 million in 2018, as compared to $129.1 million in 2017. The decrease was primarily due to a decrease in gross margin, as well as a $2.4 million increase in selling, general & administrative (SG&A) expenses and a $3.5 million increase in research and development (R&D) expenses, furthered by a decrease in other operating income of $2.2 million. The increase in SG&A expenses was driven by increases in acquisition expenses as well as other intangible assets amortization related to Griswold. SG&A expenses decreased as a percentage of net sales from 19.7% in 2017 to 18.7% in 2018. The decrease in other operating income was primarily due to the $3.5 million of depreciation expense on leased assets netted against the $0.9 million of imputed income related to the Isola asset acquisition.

•

We are an innovation company, and in 2018 we continued our investment in R&D, with R&D expenses comprising 3.8% of net sales, an increase of approximately 20 basis points from 2017. R&D expenses were $33.1 million in 2018, as compared to $29.5 million in 2017. We have made concerted efforts to realign our R&D organization to better fit the expected future direction of our Company, including dedicating resources to focus on current product extensions and enhancements to meet our expected short-term and long-term technology needs.

•

We acquired Griswold in July 2018, as we continue to execute on our synergistic acquisition strategy. Acquisitions are a core part of our growth strategy, and the Griswold acquisition extends the product portfolio and technology capabilities of our EMS operating segment. We financed our acquisition of Griswold with $82.5 million in borrowings under our revolving credit facility. As a result, borrowings under our revolving credit facility increased in 2018.

•

In preparation for expected demand in advanced connectivity and advanced mobility, we acquired a production facility and related machinery and equipment from Isola in August 2018. We intend to use the purchased assets for capacity expansion within our ACS operating segment in contemplation of expected future demand from our 5G customers. We financed the asset acquisition with $43.4 million in cash on hand.

Results of Operations

The following table sets forth, for the periods indicated, selected operations data expressed as a percentage of net sales.



	2018		2017		2016
Net sales	100.0	%	100.0	%	100.0	%
Gross margin	35.4	%	38.8	%	38.0	%

Selling, general and administrative expenses	18.7	%	19.7	%	21.2	%
Research and development expenses	3.8	%	3.6	%	4.4	%
Restructuring and impairment charges	0.5	%	0.4	%	0.1	%
Other operating (income) expense, net	(0.4	)%	(0.6	)%	—	%
Operating income	12.8	%	15.7	%	12.3	%

Equity income in unconsolidated joint ventures	0.6	%	0.6	%	0.6	%
Other income (expense), net	(0.1	)%	0.6	%	0.2	%
Interest expense, net	(0.7	)%	(0.7	)%	(0.6	)%
Income before income tax expense	12.6	%	16.2	%	12.5	%
Income tax expense	2.6	%	6.4	%	5.1	%
Net income	10.0	%	9.8	%	7.4	%

2018 vs. 2017



Net Sales
(Dollars in thousands)	2018		2017		Percent Change
Net sales	$	879,091	$	821,043	7.1%

Net sales increased by 7.1% in 2018 compared to 2017. Our EMS and PES operating segments had net sales increases of 9.2% and 20.8%, respectively, while our ACS operating segment had a net sales decrease of 2.3%. The increase in net sales was favorably impacted by higher net sales in electric and hybrid electric vehicles and micro-channel cooler applications in our PES operating segment and higher net sales in portable electronics and automotive applications in our EMS operating segment, partially offset by lower net sales in wireless 4G LTE and portable electronics applications in our ACS operating segment. The increase in net sales was also driven in part by net sales of $13.7 million, or 1.7%, related to our acquisition of Griswold, as well as $15.5 million, or 1.9%, of favorable currency fluctuations due to the appreciation in value of the Euro and Renminbi relative to the U.S. dollar. The adoption of new accounting guidance for revenue recognition favorably impacted net sales in 2018 by $4.6 million, or 0.6%. For additional information regarding the impacts of adoption of new accounting guidance for revenue recognition, refer to “Note 16 – Revenue from Contracts with Customers,” as well as “Note 15 – Operating Segment and Geographic Information” to “Item 8. Financial Statements and Supplementary Data.”



Gross Margin
(Dollars in thousands)	2018			2017			Percent Change
Gross margin	$	310,783		$	318,575		(2.4)%
Percentage of net sales	35.4		%	38.8		%

Gross margin as a percentage of net sales decreased approximately 340 basis points to 35.4% in 2018 compared to 38.8% in 2017. Gross margin in 2018 was unfavorably impacted by strategic investments in capacity optimization and infrastructure to support future growth initiatives, increased costs for raw materials, facility consolidation and new product launch, as well as unfavorable absorption of fixed costs. The adoption of new accounting guidance for revenue recognition favorably impacted gross margin in 2018 by $1.5 million, or 0.5%.



Selling, General and Administrative Expenses
(Dollars in thousands)	2018			2017			Percent Change
Selling, general and administrative expenses	$	164,046		$	161,651		1.5%
Percentage of net sales	18.7		%	19.7		%

SG&A expenses increased 1.5% in 2018 from 2017, due to a $2.0 million increase in other intangible assets amortization and a $0.5 million increase in acquisition expenses year-over-year. SG&A expenses were also unfavorably impacted by increases in sales and marketing investments to support future growth initiatives and other SG&A expenses, which were almost completely offset by decreases in total compensation and benefits. The total year-over-year increase in other SG&A expenses was favorably impacted by cost control initiatives executed in the fourth quarter. SG&A expenses decreased as a percentage of net sales to 18.7% in 2018 from 19.7% from 2017.



Research and Development Expenses
(Dollars in thousands)	2018			2017			Percent Change
Research and development expenses	$	33,075		$	29,547		11.9%
Percentage of net sales	3.8		%	3.6		%

R&D expenses increased 11.9% in 2018 from 2017 due to concerted efforts to realign our R&D organization to better fit the expected future direction of our Company, including dedicating resources to focus on current product extensions and enhancements to meet our expected short-term and long-term technology needs. R&D expenses increased as a percentage of net sales to 3.8% in 2018 from 3.6% from 2017.



Restructuring and Impairment Charges and Other Operating (Income) Expense, Net
(Dollars in thousands)	2018			2017			Percent Change
Restructuring and impairment charges	$	4,038		$	3,567		13.2%
Other operating (income) expense, net	$	(3,087	)	$	(5,329	)	(42.1)%

We incurred restructuring charges associated with the relocation of our global headquarters from Rogers, Connecticut to Chandler, Arizona and the consolidation of our Santa Fe Springs, California operations into the Company’s facilities in Carol Stream, Illinois and Bear, Delaware. We recognized $2.0 million and $0.6 million of restructuring charges associated with the facility consolidation and our global headquarters relocation, respectively, in 2018, and $2.8 million of restructuring charges related to the global headquarters relocation in 2017. We did not recognize any restructuring charges related to the facility consolidation in 2017. We estimate that approximately $0.5 million of additional costs related to the facility consolidation will be incurred in 2019.

In 2018, we recognized $1.5 million in impairment charges on certain assets in connection with the Isola asset acquisition, which was allocated to our ACS operating segment. In 2017, we recognized a $0.3 million impairment charge related to our remaining investment in BrightVolt, Inc. and recognized a $0.5 million impairment charge related to the remaining net book value of an other intangible asset within our ROLINX^®product line in our PES operating segment. The impairment of our remaining investment in BrightVolt, Inc. was allocated ratably among the three operating segments, while the impairment of the ROLINX^® related other intangible asset was allocated to our PES operating segment.

In 2018, we recognized lease income of approximately $0.9 million and related depreciation expense on leased assets of approximately $3.5 million in connection with the transitional leaseback of a portion of the facility and certain machinery and equipment acquired from Isola in August 2018. We recorded a gain from the settlement of antitrust litigation in the amount of $4.2 million, a gain of $0.7 million for the settlement of indemnity claims related to the DSP acquisition, income of $0.6 million from economic incentive grants related to the physical relocation of our global headquarters from Rogers, Connecticut to Chandler, Arizona and a gain on sale of property, plant and equipment of $0.2 million. In 2017, we recognized other operating income of $5.3 million as a result of the sales of a facility and a parcel of land located in Belgium. For additional information related to the year-over-year changes in other operating income (expense), refer to “Note 18 – Supplemental Financial Information” to “Item 8. Financial Statements and Supplementary Data.”



Equity Income in Unconsolidated Joint Ventures
(Dollars in thousands)	2018		2017		Percent Change
Equity income in unconsolidated joint ventures	$	5,501	$	4,898	12.3%

Equity income in unconsolidated joint ventures increased 12.3% in 2018 from 2017 due to higher demand, primarily in portable electronics applications.



Other Income (Expense), Net
(Dollars in thousands)	2018			2017		Percent Change
Other income (expense), net	$	(994	)	$	5,019	(119.8)%

Other income (expense), net decreased 119.8% in 2018 from 2017 due to declines in the value of our copper derivatives and foreign exchange contracts, as well as unfavorable changes in foreign currency transaction costs.



Interest Expense, Net
(Dollars in thousands)	2018			2017			Percent Change
Interest expense, net	$	(6,629	)	$	(6,131	)	8.1%

Interest expense, net, increased by 8.1% in 2018 from 2017 due to higher interest rates, partially offset by a lower average outstanding balance on our revolving credit facility in 2018 compared to 2017. The lower average outstanding balance was a result of discretionary payments of $50.0 million and $60.0 million during the second and third quarters of 2017, respectively, to reduce our outstanding borrowings under our revolving credit facility, largely offset by new borrowings under our revolving credit facility during the third quarter of 2018 to fund our acquisition of Griswold and our voluntary pension contribution in connection with the proposed plan termination process.



Income Tax Expense
(Dollars in thousands)	2018			2017			Percent Change
Income tax expense	$	22,938		$	52,466		(56.3)%
Effective tax rate	20.7		%	39.5		%

Our effective income tax rate for 2018 was 20.7% compared to 39.5% for 2017. The 2018 rate decrease was primarily due to a lower U.S. statutory tax rate in 2018 and the absence of the one-time impact from the enactment of the Tax Cuts and Jobs Act of 2017 (U.S. Tax Reform) in 2017, an increase in reversal of reserves associated with uncertain tax positions and lower foreign tax impact on remitted and unremitted foreign earnings and profits.

On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Reform. December 22, 2018 marked the end of the measurement period for purposes of SAB 118. As such, we completed our analysis based on currently available legislative updates relating to the U.S. Tax Reform, as well as a more detailed analysis of the post-1986 undistributed earnings and profits that required further adjustment, resulting in a tax expense of $0.2 million in the fourth quarter of 2018 and a total tax expense of $0.2 million for the year ended December 31, 2018. The total tax expense included a $7.5 million benefit related to adjustments to the transition tax and a $7.7 million expense related to the establishment of a valuation allowance against deferred tax assets associated with carried over research and developments credits. There were no significant adjustments recorded with respect to finalization of the impact of the U.S. Tax Reform on state taxes and the remeasurement of certain deferred tax assets and liabilities. For additional information regarding U.S. Tax Reform, refer to “Note 14 – Income Taxes” to “Item 8. Financial Statements and Supplementary Data.”

2017 vs. 2016



Net Sales
(Dollars in thousands)	2017		2016		Percent Change
Net sales	$	821,043	$	656,314	25.1%

Net sales increased by 25.1% in 2017 compared to 2016. This increase was driven by the net sales from our acquisitions of DeWAL and DSP, as well as higher organic net sales in our three strategic operating segments (ACS, EMS and PES). The ACS operating segment had an increase in net sales of 8.4% due to higher end-market demand in automotive radar, consumer electronics, and aerospace and defense applications, partially offset by lower demand in wireless infrastructure applications and satellite TV dish applications. EMS net sales increased 53.9% primarily due to the acquisitions of DeWAL and DSP, and from higher end-market product demand from core markets, including automotive, mass transit, portable electronics, general industrial and consumer products applications. PES had increased net sales of 21.4% due to higher end-market demand in laser diode cooler applications, renewable energy, mass transit, electric and hybrid electric vehicles and variable frequency motor drives. Net sales were unfavorably impacted by 0.1% due to currency fluctuations primarily as a result of the depreciation in value of the Renminbi relative to the U.S. dollar, offset in part by appreciation in value of the Euro relative to the U.S. dollar.



Gross Margin
(Dollars in thousands)	2017			2016			Percent Change
Gross Margin	$	318,575		$	249,485		27.7%
Percentage of sales	38.8		%	38.0		%

Gross margin as a percentage of net sales increased by 79 basis points to 38.8% in 2017 compared to 38.0% in 2016. In 2017, gross margin was favorably impacted by an increase in net sales combined with operational excellence initiatives across our operating segments, including increased capacity utilization, operational process enhancements and automation, conversion of fixed cost structure to variable, benefits from low cost country manufacturing expansion, and synergies from the acquisitions of DeWAL and DSP.



Selling, General and Administrative Expenses
(Dollars in thousands)	2017			2016			Percent Change
Selling, general and administrative expenses	$	161,651		$	139,272		16.1%
Percentage of net sales	19.7		%	21.2		%

SG&A expenses increased by 16.1% in 2017 compared to 2016, due principally to $6.1 million of additional equity and incentive compensation expense, $4.8 million of additional other intangible assets amortization and depreciation related to the acquisitions, $4.7 million of additional SG&A expenses from the operations of the acquired businesses, $3.6 million of additional sales and marketing costs, $1.3 million of corporate development activity costs, and $3.4 million for additional asbestos liability accruals. Our 2017 results also included $3.2 million of acquisition and integration costs related to DeWAL and DSP. SG&A decreased as a percent of net sales to 19.7% in 2017 compared to 21.2% in 2016 as a result of administrative cost containment activities.



Research and Development Expenses
(Dollars in thousands)	2017			2016			Percent Change
Research and development expenses	$	29,547		$	28,582		3.4%
Percentage of net sales	3.6		%	4.4		%

R&D expenses increased by 3.4% in 2017 compared to 2016. The increase was due to continued investments that are targeted at developing new platforms and technologies focused on long-term growth initiatives at our Innovation Centers in the United States, Europe and Asia. As a percentage of sales, R&D costs decreased from 4.4% in 2016 to 3.6% in 2017 primarily due to sales growth increasing at a higher rate than the increase in R&D spend.



Restructuring and Impairment Charges and Other Operating (Income) Expense, Net
(Dollars in thousands)	2017			2016		Percent Change
Restructuring and impairment charges	$	3,567		$	734	386.0%
Other operating (income) expense, net	$	(5,329	)	$	—	N/A

In the second quarter of 2017, we completed the physical relocation of our global headquarters from Rogers, Connecticut to Chandler, Arizona. We recorded $2.8 million of expense related to this project in 2017 compared to $0.7 million recorded in 2016.

In the third quarter of 2017, we recognized a $0.3 million impairment charge related to our remaining investment in BrightVolt, Inc. As this investment did not relate to a specific operating segment, we allocated it ratably among the three operating segments.

In the fourth quarter of 2017, we recognized a $0.5 million impairment charge related to the remaining net book value of an other intangible asset within our ROLINX^®product line in our PES operating segment.

In the first quarter of 2017, we completed the planned sale of a parcel of land in Belgium that had been classified as held for sale as of December 31, 2016 and recognized a gain on sale of approximately $0.9 million in operating income.

Also in the third quarter of 2017, we completed the sale of a facility located in Belgium and recognized a gain on sale of approximately $4.4 million in operating income.



Equity Income in Unconsolidated Joint Ventures
(Dollars in thousands)	2017		2016		Percent Change
Equity income in unconsolidated joint ventures	$	4,898	$	4,146	18.1%

Equity income in unconsolidated joint ventures increased 18.1% in 2017 from 2016. The increase was due to higher demand, primarily in the portable electronics market.



Other Income (Expense), Net
(Dollars in thousands)	2017		2016		Percent Change
Other income (expense), net	$	5,019	$	1,167	(330.1)%

In 2017, the increase in other income (expense), net was attributable to gains in copper derivative transactions of approximately $1.9 million compared to gains of $0.5 million in 2016, as well as gains from foreign currency fluctuations of $0.8 million compared to losses of $1.8 million in 2016. In 2016, we also recorded an additional loss related to the sale of the Arlon polyimide and thermoset laminate business of $0.2 million, and $0.8 million of expense for tax indemnity receivables that were reversed due to the release of uncertain tax positions.



Interest Expense, Net
(Dollars in thousands)	2017			2016			Percent Change
Interest expense, net	$	(6,131	)	$	(3,930	)	56.0%

Interest expense, net, increased by 56.0% in 2017 from 2016. This increase was primarily due to higher outstanding borrowings on our credit facility in 2017 compared to 2016 due to borrowings to fund the acquisitions of DeWAL and DSP. As explained in “Liquidity, Capital Resources and Financial Position” below, we made discretionary principal payments of $110.2 million in 2017 to reduce our outstanding borrowings under our credit facility to $131.0 million as of December 31, 2017.



Income Tax Expense
(Dollars in thousands)	2017			2016			Percent Change
Income tax expense	$	52,466		$	33,997		54.3%
Effective tax rate	39.5		%	41.3		%

Our effective tax rate for 2017 was 39.5%, including our provisional estimate of the impact of the U.S. Tax Reform, compared to 41.3% in 2016. The 2017 rate decrease was primarily due to lower foreign tax impact on remitted and unremitted foreign earnings and profits, equity compensation excess tax deductions recognized in 2017 and increased international tax rate benefits due to earnings mix. This was substantially offset by our provisional estimate of the impact of U.S. Tax Reform, a decrease in reversal of reserves associated with uncertain tax positions and a change in valuation allowance associated with deferred tax assets that are capital in nature. For additional information regarding U.S. Tax Reform, refer to “Note 14 – Income Taxes” to “Item 8. Financial Statements and Supplementary Data.”

On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Reform. In accordance with SAB 118, we determined that the $1.7 million of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $12.0 million of tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. Under SAB 118, we completed our analysis based on currently available legislative updates relating to the U.S. Tax Reform, as well as a more detailed analysis of the post-1986 undistributed earnings and profits that required further adjustment, resulting in a tax expense of $0.2 million in the fourth quarter of 2018 and a total tax expense of $0.2 million for the year ended December 31, 2018. The total tax expense included a $7.5 million benefit related to adjustments to the transition tax and a $7.7 million expense related to the establishment of a valuation allowance against deferred tax assets associated with carried over research and developments credits. There were no significant adjustments recorded with respect to finalization of the impact of the U.S. Tax Reform on state taxes and the remeasurement of certain deferred tax assets and liabilities. For additional information regarding U.S. Tax Reform, refer to “Note 14 – Income Taxes” to “Item 8. Financial Statements and Supplementary Data.”

Operating Segment Net Sales and Operating Income

Advanced Connectivity Solutions



(Dollars in thousands)	2018		2017		2016
Net sales	$	294,154	$	301,092	$	277,787
Operating income	$	33,827	$	55,410	$	42,455

2018 vs. 2017

ACS net sales decreased by 2.3% in 2018 compared to 2017. The decrease in net sales was primarily driven by lower demand in wireless 4G LTE and portable electronics applications, partially offset by favorable currency fluctuations of $2.8 million, or 0.9%, due to the appreciation in value of the Euro and Renminbi relative to the U.S. dollar, as well as higher demand in automotive radar and aerospace and defense applications. The adoption of new accounting guidance for revenue recognition did not impact ACS net sales in 2018.

Operating income decreased by 39.0% in 2018 compared to 2017. The decrease in operating income was due to lower net sales, increased costs for copper commodities and multi-site product qualification, including freight, lower capacity utilization due to process issues and machine downtime, as well as strategic investments in capacity optimization, infrastructure and sales and marketing to support future growth initiatives. Additionally, we recognized $1.5 million in impairment charges on certain assets in connection with the Isola asset acquisition. The adoption of new accounting guidance for revenue recognition did not impact ACS operating income in 2018. As a percentage of net sales, the 2018 operating income was 11.5%, an approximately 690 basis point decrease as compared to the 18.4% reported in 2017.

2017 vs. 2016

Net sales in this segment increased by 8.4% in 2017 compared to 2016. The increase in net sales was primarily driven by end market demand in automotive radar, consumer electronics and aerospace and defense applications, partially offset by lower demand in wireless infrastructure and satellite TV dish applications. Net sales were unfavorably impacted by 0.4% due to currency fluctuations, primarily as a result of the depreciation in value of the Renminbi relative to the U.S. dollar.

Operating income improved by 30.5% in 2017 compared to 2016. As a percentage of net sales in 2017, operating income was 18.4%, a 310 basis point increase, compared to 15.3% in 2016. This increase was primarily due to higher net sales as well as lower costs from continued operational efficiencies and cost reduction initiatives.

Elastomeric Material Solutions



(Dollars in thousands)	2018		2017		2016
Net sales	$	341,364	$	312,661	$	203,181
Operating income	$	52,502	$	50,908	$	25,884

2018 vs. 2017

EMS net sales increased by 9.2% in 2018 compared to 2017. The increase in net sales was primarily driven by net sales related to our acquisition of Griswold of $13.7 million, or 4.4%, higher demand in portable electronics and automotive applications, as well as favorable currency fluctuations of $3.5 million, or 1.1%, due to the appreciation in value of the Euro and Renminbi relative to the U.S. dollar. The adoption of new accounting guidance for revenue recognition favorably impacted EMS net sales in 2018 by $0.7 million, or 0.2%.

Operating income increased by 3.1% in 2018 compared to 2017. The increase in operating income was primarily due to increased net sales related to our acquisition of Griswold and organic growth, a gain from the settlement of antitrust litigation of $4.2 million, discussed in “Note 18 – Supplemental Financial Information” to “Item 8. Financial Statements and Supplementary Data,” a gain of $0.7 million for the settlement of indemnity claims related to the DSP acquisition, as well as discretionary cost control. These increases in operating income were partially offset by increased costs for raw materials and facility consolidation, unfavorable absorption of fixed costs, strategic investments in sales and marketing to support future growth initiatives, as well as increases in other intangible assets amortization. The adoption of new accounting guidance for revenue recognition favorably impacted EMS operating income in 2018 by $0.2 million, or 0.4%. As a percentage of net sales, the 2018 operating income was 15.4%, an approximately 90 basis point decrease as compared to the 16.3% reported in 2017.

2017 vs. 2016

Net sales in this segment increased 53.9% in 2017 compared to 2016. The increase in net sales was primarily driven by the acquisitions of DeWAL and DSP, 38.8%, as well as an increase in organic net sales 15.1%. EMS experienced higher end-market demand in core markets including automotive, mass transit, portable electronics, general industrial and consumer products

applications. Net sales were unfavorably impacted by 0.4% due to currency fluctuations, primarily as a result of the depreciation in value of the Renminbi relative to the U.S. dollar, partially offset by the appreciation in value of the Korean Won and Euro relative to the U.S. dollar.

Operating income improved 96.7% in 2017 as compared to 2016. As a percentage of net sales, 2017 operating income was 16.3%, a 360 basis point increase compared to 12.7% in 2016. This increase was primarily due to higher net sales attributable to both acquisitions and organic growth, as well as lower costs from continued operational efficiencies. Operating income in 2017 included a $1.6 million charge to reflect a purchase accounting fair value adjustment for inventory related to the DeWAL and DSP acquisitions and $3.2 million of acquisition and integration costs. Operating income in 2017 also included increased other intangible assets amortization and depreciation expense of $4.9 million related to the DeWAL and DSP acquisitions.

Power Electronics Solutions



(Dollars in thousands)	2018		2017		2016
Net sales	$	223,338	$	184,954	$	152,367
Operating income	$	19,648	$	15,668	$	5,229

2018 vs. 2017

PES net sales increased by 20.8% in 2018 compared to 2017. Net sales increased in electric and hybrid electric vehicles and micro-channel coolers applications, primarily due to higher demand. Net sales were also impacted by favorable currency fluctuations of $8.9 million, or 4.8%, due to the appreciation in value of the Euro and Renminbi relative to the U.S. dollar. The adoption of new accounting guidance for revenue recognition favorably impacted PES net sales in 2018 by $6.3 million, or 3.4%.

Operating income increased 25.4% in 2018 compared to 2017. The adoption of new accounting guidance for revenue recognition favorably impacted PES operating income in 2018 by $2.0 million, or 12.8%. The increase in operating income was also due to increases in net sales from higher demand, partially offset by strategic investments in capacity optimization and sales and marketing to support future growth initiatives, a commercial settlement, increased costs for facility consolidation and new product launch, as well as process issues. As a percentage of net sales, the 2018 operating income was 8.8%, an approximately 30 basis point increase as compared to the 8.5% reported in 2017.

2017 vs. 2016

Net sales in this segment increased 21.4% in 2017 compared to 2016. The increase in net sales was driven by higher demand for laser diode coolers, renewable energy, mass transit, electric and hybrid electric vehicles and variable frequency motor drives applications. Net sales were favorably impacted by 0.8% due to currency fluctuations primarily as a result of the appreciation in value of the Euro relative to the U.S. dollar, partially offset by the depreciation in value of the Renminbi relative to the U.S. dollar.

Operating income increased 199.6% in 2017 compared to 2016. As a percentage of net sales, 2017 operating income was 8.5%, a 510 basis point increase as compared to 3.4% in 2016. This increase was primarily due to higher net sales and increased equipment utilization, supply chain volume discounts, and improved productivity from operational excellence initiatives, partially offset by a $0.5 million impairment charge related to the remaining net book value of an other intangible asset within our ROLINX^®product line in our PES operating segment.

Other



(Dollars in thousands)	2018		2017		2016
Net sales	$	20,235	$	22,336	$	22,979
Operating income	$	6,734	$	7,153	$	7,329

2018 vs 2017

Net sales in this segment decreased by 9.4% in 2018 compared to 2017. The decrease in net sales was primarily driven by the adoption of new accounting guidance for revenue recognition, which resulted in a $2.4 million unfavorable impact, or 10.5%. Currency fluctuations had a $0.3 million favorable impact on net sales during 2018 due to the appreciation in value of the Euro and Renminbi relative to the U.S. dollar.

Operating income decreased by 5.9% in 2018 compared to 2017. This decrease in operating income was primarily driven by lower net sales, partially offset by operational improvements and efficiency initiatives. Operating income in 2018 was unfavorably impacted by $0.7 million, or 10.5%, from the adoption of new accounting guidance for revenue recognition. As a percentage of net sales, the 2018 operating income was 33.3%, an approximately 130 basis point increase as compared to the 32.0% reported in the 2017.

2017 vs. 2016

Net sales decreased 2.8% in 2017 compared to 2016, primarily due to lower demand in global light vehicles, as well as a negative impact from currency fluctuations of 0.7% resulting from a depreciation in the value of the Renminbi relative to the U.S. dollar.

Operating income in 2017 decreased by 2.4% compared to 2016 primarily due to lower net sales, partially offset by the impact of continuing operating efficiencies.

Product and Market Development

Our research and development team is dedicated to growing our business by developing cost effective solutions that improve the performance of customers’ products and by identifying business and technology acquisition or development opportunities to expand our market presence.

Liquidity, Capital Resources and Financial Position

We believe that our existing sources of liquidity and cash flows that are expected to be generated from our operations, together with our available credit facilities, will be sufficient to fund our operations, currently planned capital expenditures, research and development efforts and our debt service commitments, for at least the next 12 months. We regularly review and evaluate the adequacy of our cash flows, borrowing facilities and banking relationships seeking to ensure that we have the appropriate access to cash to fund both our near-term operating needs and our long-term strategic initiatives.



(Dollars in thousands)	As of December 31,
Key Financial Position Accounts:	2018		2017
Cash and cash equivalents	$	167,738	$	181,159
Accounts receivable, less allowance for doubtful accounts	144,623		140,562
Contract assets	22,728		—
Inventories	132,637		112,557
Borrowings under revolving credit facility	228,482		130,982

The following table illustrates the location of our cash and cash equivalents by our three major geographic areas:



	As of December 31,
(Dollars in thousands)	2018		2017		2016
United States	$	41,833	$	35,653	$	95,481
Europe	31,244		41,307		37,791
Asia	94,661		104,199		94,495
Total cash and cash equivalents	$	167,738	$	181,159	$	227,767

Approximately $125.9 million of cash and cash equivalents were held by non-U.S. subsidiaries as of December 31, 2018. The Company did not make any changes in 2018 to its position on the permanent reinvestment of its earnings from foreign operations. With the exception of certain of our Chinese subsidiaries, we continue to assert that historical foreign earnings are indefinitely reinvested.

Net working capital was $378.6 million, $340.7 million and $357.2 million as of December 31, 2018, 2017 and 2016, respectively.

Significant changes in our statement of financial position accounts from December 31, 2017 to December 31, 2018 were as follows:


•	Accounts receivable, less allowance for doubtful accounts increased 2.9% to $144.6 million as of December 31, 2018, from $140.6 million as of December 31, 2017. The increase was primarily due to higher net sales at the end of 2018 compared to at the end of the 2017.


•	We recorded contract assets of $22.7 million as of December 31, 2018 related to the adoption of ASU 2014-09. For additional information, refer to “Note 16 – Revenue from Contracts with Customers” to “Item 8. Financial Statements and Supplementary Data.”

•

Inventories increased 17.8% to $132.6 million as of December 31, 2018, from $112.6 million as of December 31, 2017, as a result of our acquisition of Griswold, additional purchases as a result of changes in vendor allocations, supplier transition, safety stock replenishment and raw material cost increases, partially offset by the impact from the adoption of new accounting guidance for revenue recognition. For additional information regarding the impact of the new revenue recognition adoption, refer to “Note 16 – Revenue from Contracts with Customers” to “Item 8. Financial Statements and Supplementary Data.”


•	Accrued employee benefits and compensation decreased to $30.5 million as of December 31, 2018, from $39.4 million as of December 31, 2017. This decrease is primarily due to incentive compensation payouts of $18.2 million that occurred during 2018, partially offset by $5.8 million of accruals for projected incentive compensation payouts for the 2018 performance year.


•	Goodwill increased 11.7% to $264.9 million as of December 31, 2018, from $237.1 million as of December 31, 2017, primarily due to the acquisition of Griswold in July 2018.


•	Other intangible assets, net of amortization, increased 10.4% to $177.0 million as of December 31, 2018, from $160.3 million as of December 31, 2017, primarily due to the acquisition of Griswold in July 2018.



(Dollars in thousands)	For the year ended December 31,
Key Cash Flow Measures:	2018			2017			2016
Net cash provided by operating activities	$	66,820		$	138,982		$	116,967
Net cash used in investing activities	(167,437		)	(78,270		)	(151,804		)
Net cash provided by (used in) financing activities	88,682			(113,187		)	57,869

As of December 31, 2018, cash and cash equivalents were $167.7 million as compared to $181.2 million as of December 31, 2017, a decrease of $13.4 million, or 7.4%. This decrease was primarily due to $78.0 million paid for the Griswold acquisition, net of cash acquired, $47.1 million in capital expenditures, $43.4 million paid for the Isola asset acquisition, and $25.4 million in pension and other postretirement benefits contributions, along with $6.6 million in tax payments related to net share settlement of equity awards, $5.0 million of principal payments made on our outstanding borrowings on our revolving credit facility and $3.0 million in repurchases of capital stock. This activity was partially offset by proceeds of $102.5 million from additional borrowings under our revolving credit facility, of which $82.5 million and $20.0 million were used to fund the Griswold acquisition and the voluntary pension plan contribution, respectively, and by cash flows generated by operations.

In 2017, cash and cash equivalents decreased $46.6 million, primarily due to $110.2 million of principal payments made on our outstanding borrowings on our revolving credit facility, $60.2 million cash paid for the DSP acquisition, net of cash acquired and $27.2 million in capital expenditures, partially offset by cash flows generated by operations.

In 2016, cash and cash equivalents increased $23.2 million, primarily due to proceeds of $166.0 million from borrowings under our revolving credit facility and cash flows generated by operations, partially offset by $133.9 million of cash paid for the DeWAL acquisition, net of cash acquired, $100.0 million of principal payments made on our outstanding borrowings under our revolving credit facility and $18.1 million in capital expenditures.

Revolving Credit Facility

On February 17, 2017, we entered into a secured five year credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (the Third Amended Credit Agreement), which amended and restated the Second Amended Credit Agreement. The Third Amended Credit Agreement refinanced the Second Amended Credit Agreement, eliminated the term loan under the Second Amended Credit Agreement, increased the principal amount of our revolving credit facility to up to $450.0 million of borrowing capacity, with sublimits for multicurrency borrowings, letters of credit and swing-line notes, and provided an additional $175.0 million accordion feature.

All revolving loans under the Third Amended Credit Agreement are due on the maturity date, February 17, 2022. We are not required to make any quarterly principal payments under the Third Amended Credit Agreement. During 2018, 2017 and 2016, we made discretionary principal payments of $5.0 million, $110.2 million and $100.0 million, respectively on the outstanding borrowings under our revolving credit facility. As of December 31, 2018, we had $228.5 million in outstanding borrowings under our revolving credit facility. For additional information regarding the Third Amended Credit Agreement, refer to “Note 11 – Debt and Capital Leases” to “Item 8. Financial Statements and Supplementary Data.”

Restriction on Payment of Dividends

Our Third Amended Credit Agreement generally permits us to pay cash dividends to our shareholders, provided that (i) no default or event of default has occurred and is continuing or would result from the dividend payment and (ii) our leverage ratio does not exceed 2.75 to 1.00. If our leverage ratio exceeds 2.75 to 1.00, we may nonetheless make up to $20.0 million in restricted payments, including cash dividends, during the fiscal year, provided that no default or event of default has occurred and is continuing or would result from the payments. Our leverage ratio did not exceed 2.75 to 1.00 as of December 31, 2018.

Contractual Obligations

The following table summarizes our significant contractual obligations as of December 31, 2018.



	Payments Due by Period
(Dollars in thousands)	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Operating leases	$	11,217	$	3,951	$	5,268	$	1,998	$	—
Capital leases	5,344		543		4,801		—		—
Interest payments on capital lease	295		125		170		—		—
Inventory purchase obligations	344		344		—		—		—
Capital commitments⁽¹⁾	17,606		17,606		—		—		—
Borrowings under revolving credit facility⁽²⁾	228,482		—		—		228,482		—
Interest payments on outstanding borrowings⁽³⁾	28,000		8,955		17,851		1,194		—
Retiree health and life insurance benefits	1,880		334		436		285		825
Total	$	293,168	$	31,858	$	28,526	$	231,959	$	825


⁽¹⁾	This amount represents non-cancelable vendor purchase commitments.


⁽²⁾	All outstanding borrowings under our revolving credit facility are due on February 17, 2022.

⁽³⁾

Estimated future interest payments are based on a leverage ratio based spread that ranges from 1.375% to 1.75%, plus projected forward 1-month LIBOR rates, and have been adjusted for the impact of the floating to fixed rate interest rate swap on $75.0 million of the outstanding borrowings under our revolving credit facility. For additional information, refer to “Note 3 – Hedging Transactions and Derivative Financial Instruments” to “Item 8. Financial Statements and Supplementary Data.”

Unfunded pension benefit obligations, which amount to $0.2 million as of December 31, 2018, are expected to be paid from operating cash flows and the timing of payments is not definitive. Retiree health and life insurance benefits, which amount to $1.9 million, are expected to be paid from operating cash flows.

Other long-term liabilities, such as deferred taxes, unrecognized tax benefits and asbestos-related product liability reserves, have been excluded from the table due to the uncertainty of the timing of payments combined with the absence of historical trends to be used as a predictor for such payments.

Effects of Inflation

We do not believe that inflation had a material impact on our business, net sales, or operating results during the periods presented.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have, a current or future material effect on our results of operations or financial position.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances and believe that appropriate reserves have been established based on reasonable methodologies and appropriate assumptions based on facts and circumstances that are known; however, actual results may differ from these estimates under different assumptions or conditions. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions that are highly judgmental and uncertain at the time the estimate is made, if different estimates could reasonably have been used, or if changes to those estimates are reasonably likely to periodically occur that could affect the amounts carried in the financial statements. A summary of our critical accounting estimates is presented below:

Inventory Valuation

Inventories are stated at the lower of cost or net realizable value with costs determined primarily on a first-in first-out basis. We also maintain a reserve for excess, obsolete and slow-moving inventory that is primarily developed by utilizing both specific product identification and historical product demand as the basis for our analysis. Products and materials that are specifically identified as obsolete are fully reserved. In general, most products that have been held in inventory greater than one year are fully reserved unless there are mitigating circumstances, including forecasted sales or current orders for the product. The remainder of the allowance is based on our estimates and fluctuates with market conditions, design cycles and other economic factors. Risks associated with this allowance include unforeseen changes in business cycles that could affect the marketability of certain products and an unexpected decline in current production. We closely monitor the marketplace and related inventory levels and have historically maintained reasonably accurate allowance levels. Our obsolescence reserve has ranged from 9% to 14% of gross inventory over the last three years.

Goodwill and Other Intangible Assets

We have made acquisitions over the years that included the recognition of intangible assets. Intangible assets are classified into three categories: (1) goodwill; (2) other intangible assets with definite lives subject to amortization; and (3) other intangible assets with indefinite lives not subject to amortization. Other intangible assets can include items such as trademarks and trade names, licensed technology, customer relationships and covenants not to compete, among other things. Each definite-lived other intangible asset is amortized over its respective economic useful life using the economic attribution method.

Goodwill is tested for impairment annually and between annual impairment tests if events or changes in circumstances indicate the carrying value may be impaired. If it is more likely than not that our goodwill is impaired, then we compare the estimated fair value of each of our reporting units to their respective carrying value. If a reporting unit’s carrying value is greater than its fair value, then an impairment is recognized for the excess and charged to operations. We currently have four reporting units with goodwill: ACS, EMS, curamik^® and Elastomer Components Division (ECD). Consistent with historical practice, the annual impairment test on these reporting units was performed as of November 30, 2018.

The application of the annual goodwill impairment test requires significant judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units and determination of the fair value of each reporting unit. Determining the fair value is subjective and requires the use of significant estimates and assumptions, including financial projections for net sales, gross margin and operating margin, discount rates, terminal year growth rates and future market conditions, among others. We estimated the fair value of our reporting units using an income approach based on the present value of future cash flows through a five year discounted cash flow analysis. The discounted cash flow analysis utilized the discount rates for each of the reporting units ranging from 11.3% for EMS to 12.9% for ECD, and terminal year growth rates ranging from 4.9% for curamik^® to 5.9% for ACS. We believe this approach yields the most appropriate evidence of fair value as our reporting units are not easily compared to other corporations involved in similar businesses. We further believe that the assumptions and rates used in our annual goodwill impairment test are reasonable, but inherently uncertain. There were no impairment charges resulting from our goodwill impairment analysis for the year ended December 31, 2018. Our ACS, EMS, curamik^® and ECD reporting units had allocated goodwill of approximately $51.7 million, $142.6 million, $68.4 million and $2.2 million respectively, as of December 31, 2018.

Indefinite-lived other intangible assets are tested for impairment annually and between annual impairment tests if events or changes in circumstances indicate the carrying value may be impaired. If it is more likely than not that an indefinite-lived other intangible asset is impaired, then we compare the estimated fair value of that indefinite-lived other intangible asset to its respective carrying value. If an indefinite-lived other intangible asset’s carrying value is greater than its fair value, then an impairment charge is recognized for the excess and charged to operations. The application of the annual indefinite-lived other intangible asset impairment test requires significant judgment, including the determination of fair value of each indefinite-lived other intangible asset. Fair value is primarily based on income approaches using discounted cash flow models, which have significant assumptions. Such assumptions are subject to variability from year to year and are directly impacted by global market conditions. There were no impairment charges resulting from our indefinite-lived other intangible assets impairment analysis for the year ended December 31, 2018. Our curamik^® reporting unit had an indefinite-lived other intangible asset of approximately $4.5 million as of December 31, 2018.

Definite-lived other intangible assets are tested for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. The recoverability test involves comparing the estimated sum of the undiscounted cash flows for each definite-lived other intangible asset to its respective carrying value. If a definite-lived other intangible asset’s carrying value is greater than the sum of its undiscounted cash flows, then the definite-lived other intangible asset’s carrying value is compared to its estimated fair value and an impairment charge is recognized for the excess and charged to operations. The application of the recoverability test requires significant judgment, including the identification of the asset group and determination of undiscounted cash flows and fair value of the underlying definite-lived other intangible asset. Determination of undiscounted cash flows requires the use of significant estimates and assumptions, including certain financial projections. Fair value is primarily based on income approaches using discounted cash flow models, which have significant assumptions. Such assumptions are subject to variability from year to year and are directly impacted by global market conditions. There were no impairment charges resulting from our definite-lived other intangible assets impairment analysis for the year ended December 31, 2018. Our ACS, EMS and curamik^® reporting units had definite-lived other intangible assets of approximately $7.9 million, $152.2 million and $12.4 million, respectively, as of December 31, 2018.

Product Liabilities

We endeavor to maintain insurance coverage with reasonable deductible levels to protect us from potential exposures to product liability claims. Any liability associated with such claims is based on management’s best estimate of the potential claim value, while insurance receivables associated with related claims are not recorded until verified by the insurance carrier.

For asbestos-related claims, we recognize projected asbestos liabilities and related insurance receivables, with any difference between the liability and related insurance receivable recognized as an expense in the consolidated statements of operations. Our estimates of asbestos-related contingent liabilities and related insurance receivables are based on an independent actuarial analysis and an independent insurance usage analysis prepared annually by third parties. The actuarial analysis contains numerous

assumptions, including number of claims that might be received, the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, dismissal rates, average settlement costs, average defense costs, costs of medical treatment, the financial resources of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards, including potential tort reform. Furthermore, any predictions with respect to these assumptions are subject to even greater uncertainty as the projection period lengthens. The insurance usage analysis considers, among other things, applicable deductibles, retentions and policy limits, the solvency and historical payment experience of various insurance carriers, the likelihood of recovery as estimated by external legal counsel and existing insurance settlements.

The liability projection period covers all current and future claims through 2058, which represents the expected end of our asbestos liability exposure with no further ongoing claims expected beyond that date. This conclusion was based on our history and experience with the claims data, the diminished volatility and consistency of observable claims data, the period of time that has elapsed since we stopped manufacturing products that contained encapsulated asbestos and an expected downward trend in claims due to the average age of our claimants, which is approaching the average life expectancy.

There can be no assurance that our accrued asbestos liabilities will approximate our actual asbestos-related settlement and defense costs, or that our accrued insurance recoveries will be realized. We believe that it is reasonably possible that we may incur additional charges for our asbestos liabilities and defense costs in the future, that could exceed existing reserves and insurance recovery. We plan to continue to vigorously defend ourselves and believe we have substantial unutilized insurance coverage to mitigate future costs related to this matter.

We review our asbestos-related projections annually in the fourth quarter of each year unless facts and circumstances materially change during the year, at which time we would analyze these projections. We believe the assumptions made on the potential exposure and expected insurance coverage are reasonable at the present time, but are subject to uncertainty based on the actual future outcome of our asbestos litigation.

As of December 31, 2018, the estimated liability and estimated insurance recovery for all current and future claims projected through 2058 was $70.3 million and $63.8 million, respectively.

Revenue Recognition

Recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of our shipping terms permit us to recognize revenue at point of shipment. Some shipping terms require the goods to be through customs or be received by the customer before title passes. In those instances, revenue is not recognized until either the customer has received the goods or they have passed through customs, depending on the circumstances. Shipping and handling costs are treated as fulfillment costs. Sales tax or value added tax (VAT) are excluded from the measurement of the transaction price.

The Company manufactures some products to customer specifications which are customized to such a degree that it is unlikely that another entity would purchase these products or that we could modify these products for another customer. These products are deemed to have no alternative use to the Company whereby we have an enforceable right to payment evidenced by contractual termination clauses. In accordance with ASC 606, for those circumstances we recognize revenue on an over-time basis. Revenue recognition does not occur until the product meets the definition of “no alternative use” and therefore, items that have not yet reached that point in the production process are not included in the population of items with over-time revenue recognition.

As appropriate, we record estimated reductions to revenue for customer returns, allowances, and warranty claims. Provisions for such reductions are made at the time of sale and are typically derived from historical trends and other relevant information.

Pension and Other Postretirement Benefits

We provide various defined benefit pension plans for our U.S. employees and sponsor three defined benefit health care plans and a life insurance plan. The costs and obligations associated with these plans are dependent upon various actuarial assumptions used in calculating such amounts. These assumptions include discount rates, long-term rates of return on plan assets, mortality rates, and other factors. The assumptions used were determined as follows: (i) the discount rate used is based on the PruCurve high quality corporate bond index, with comparisons against other similar indices; and (ii) the long-term rate of return on plan assets is determined based on historical portfolio results, market conditions and our expectations of future returns. We determine these assumptions based on consultation with outside actuaries and investment advisors. Any changes in these assumptions could have a significant impact on future recognized pension costs, assets and liabilities.

The rates used to determine our costs and obligations under our pension and postretirement plans are disclosed in “Note 12 – Pension, Other Postretirement Benefits and Employee Savings and Investment Plans” to “Item 8. Financial Statements and Supplementary Data.” Each assumption has different sensitivity characteristics. For the year ended December 31, 2018, a 25 basis

point decrease in the discount rate would have increased our pension expense for Rogers Corporation Employees’ Pension Plan (the Union Plan), the Rogers Corporation Defined Benefit Pension Plan (following its merger with the Hourly Employees Pension Plan of Arlon LLC, Microwave Material and Silicone Technologies Divisions, Bear, Delaware (the Merged Plan)), and the Rogers Corporation Amended and Restated Pension Restoration Plan and the Rogers Corporation Amended and Restated Pension Restoration Plan (the Nonqualified Plans) by a de minimis amount. A 25 basis point decrease in the discount rate would have decreased the other post-employment benefits (OPEB) expense by a de minimis amount. A 25 basis point decrease in the expected return on assets would have increased the total 2018 pension expense for the Union Plan and the Merged Plan by approximately $0.4 million. Since the OPEB and Nonqualified Plans are unfunded, those plans would not be impacted by this assumption change.

Equity Compensation

Determining the amount of equity compensation expense to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of performance-based restricted stock units.

Performance-Based Restricted Stock Units

As of December 31, 2018, we had performance-based restricted stock units from 2018, 2017 and 2016 outstanding. These awards generally cliff vest at the end of a three year measurement period. However, employees whose employment terminates during the measurement period due to death, disability, or, in certain cases, retirement may receive a pro-rata payout based on the number of days they were employed during the measurement period. Participants are eligible to be awarded shares ranging from 0% to 200% of the original award amount, based on certain defined performance measures.

The 2018, 2017 and 2016 awards have one measurement criteria: the three year total shareholder return (TSR) on the performance of our capital stock as compared to that of a specified group of peer companies. The TSR measurement criteria of the awards is considered a market condition. As such, the fair value of this measurement criteria was determined on the grant date using a Monte Carlo simulation valuation model. We recognize compensation expense on all of these awards on a straight-line basis over the vesting period with no changes for final projected payout of the awards. We account for forfeitures as they occur.

Below were the assumptions used in the Monte Carlo calculation on the respective grant dates for awards granted in 2018 and 2017:



	September 17, 2018	February 8, 2018	February 9, 2017
Expected volatility	36.6%	34.8%	33.6%
Expected term (in years)	3.0	3.0	3.0
Risk-free interest rate	2.85%	2.28%	1.38%

Expected volatility – In determining expected volatility, we have considered a number of factors, including historical volatility.

Expected term – We use the measurement period of the award to determine the expected term assumption for the Monte Carlo simulation valuation model.

Risk-free interest rate – We use an implied “spot rate” yield on U.S. Treasury Constant Maturity rates as of the grant date for our assumption of the risk-free interest rate.

Expected dividend yield – We do not currently pay dividends on our capital stock; therefore, a dividend yield of 0% was used in the Monte Carlo simulation valuation model.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk


•	Foreign Currency Risk

Our financial results are affected by changes in foreign exchange rates and economic conditions in foreign countries in which we operate. Our primary overseas markets are in Europe and Asia, thus exposing us to exchange rate risk from fluctuations in the Euro and the various currencies used in Asia. Exposure to variability in currency exchange rates is mitigated, when possible, through the use of natural hedges, whereby purchases and sales in the same foreign currency and with similar maturity dates offset one another. We further mitigate this exposure through hedging activities by entering into foreign exchange forward contracts with third parties when the use of natural hedges is not possible or desirable. We currently do not use derivative instruments for trading or speculative purposes. We monitor foreign exchange risks and at times manage such risks on specific transactions. Our risk management process primarily uses analytical techniques and sensitivity analysis. In 2018, a 10% strengthening of the U.S dollar relative to other currencies would have resulted in a decrease to net sales and net income of approximately $37 million and $5 million, respectively, while a 10% weakening of the U.S. dollar relative to other currencies would have resulted in an increase to net sales and net income of approximately $45 million and $6 million, respectively.


•	Interest Rate Risk

As of December 31, 2018, we had $228.5 million in borrowings outstanding under our revolving credit facility. The interest charged on these borrowings fluctuates with movements in the benchmark LIBOR. As of December 31, 2018, the effective all-in rate of interest on our revolving credit facility was 3.77%, net of the impact of our interest rate swap, and a 100 basis point increase in LIBOR would have increased the amount of interest expense by approximately $1.8 million for the year ended December 31, 2018.


•	Commodity Risk

We are subject to fluctuations in the cost of raw materials used to manufacture our materials and products. In particular, we are exposed to market fluctuations in commodity pricing as we utilize certain materials, such as copper and ceramic, that are key materials in certain of our products. In order to minimize the risk of market driven price changes in these commodities, we utilize hedging strategies to insulate us against price fluctuations of copper, the most frequently used commodity in our manufacturing processes. We currently do not use hedging strategies to minimize the risk of price fluctuations on other commodity-based raw materials; however, we regularly review such strategies to hedge market risk on an ongoing basis.

For additional discussion, refer to “Note 2 – Fair Value Measurements” and “Note 3 – Hedging Transactions and Derivative Financial Instruments” to “Item 8. Financial Statements and Supplementary Data.”

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Rogers Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of financial position of Rogers Corporation and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 16 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2018.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Griswold LLC (Griswold) from its assessment of internal control over financial reporting as of December 31, 2018, because it was acquired by the Company in a purchase business combination during 2018. We have also excluded Griswold from our audit of internal control over financial reporting. Griswold is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 1.3% and 1.6%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

February 20, 2019

We have served as the Company’s auditor since 2015.

ROGERS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

For each of the fiscal years in the three-year period ended December 31, 2018



(Dollars and shares in thousands, except per share amounts)	2018			2017			2016
Net sales	$	879,091		$	821,043		$	656,314
Cost of sales	568,308			502,468			406,829
Gross margin	310,783			318,575			249,485

Selling, general and administrative expenses	164,046			161,651			139,272
Research and development expenses	33,075			29,547			28,582
Restructuring and impairment charges	4,038			3,567			734
Other operating (income) expense, net	(3,087		)	(5,329		)	—
Operating income	112,711			129,139			80,897

Equity income in unconsolidated joint ventures	5,501			4,898			4,146
Other income (expense), net	(994		)	5,019			1,167
Interest expense, net	(6,629		)	(6,131		)	(3,930		)
Income before income tax expense	110,589			132,925			82,280
Income tax expense	22,938			52,466			33,997
Net income	$	87,651		$	80,459		$	48,283

Basic earnings per share	$	4.77		$	4.43		$	2.68
Diluted earnings per share	$	4.70		$	4.34		$	2.65

Shares used in computing:
Basic earnings per share	18,374			18,154			17,991
Diluted earnings per share	18,659			18,547			18,223

The accompanying notes are an integral part of the consolidated financial statements.

ROGERS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For each of the fiscal years in the three-year period ended December 31, 2018



(Dollars in thousands)	2018			2017			2016
Net income	$	87,651		$	80,459		$	48,283

Foreign currency translation adjustment	(12,505		)	28,463			(5,081		)
Derivative instrument designated as cash flow hedge:
Change in unrealized gain (loss) before reclassifications, net of tax (Note 4)	519			(6		)	—
Unrealized (gain) loss reclassified into earnings, net of tax (Note 4)	(191		)	32			11
Pension and other postretirement benefits:
Actuarial net gain (loss) incurred, net of tax (Note 4)	(1,678		)	(1,481		)	1,106
Amortization of gain, net of tax (Note 4)	176			99			160
Other comprehensive income (loss)	(13,679		)	27,107			(3,804		)
Comprehensive income	$	73,972		$	107,566		$	44,479

The accompanying notes are an integral part of the consolidated financial statements.

ROGERS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



(Dollars and share amounts in thousands, except par value of capital stock)	As of December 31,
	2018			2017
Assets
Current assets
Cash and cash equivalents	$	167,738		$	181,159
Accounts receivable, less allowance for doubtful accounts of $1,354 and $1,525	144,623			140,562
Contract assets	22,728			—
Inventories	132,637			112,557
Prepaid income taxes	3,093			3,087
Asbestos-related insurance receivables, current portion	4,138			5,682
Assets held for sale	—			896
Other current assets	10,829			10,580
Total current assets	485,786			454,523
Property, plant and equipment, net of accumulated depreciation of $317,414 and $289,909	242,759			179,611
Investments in unconsolidated joint ventures	18,667			18,324
Deferred income taxes	8,236			6,008
Goodwill	264,885			237,107
Other intangible assets, net of amortization	177,008			160,278
Asbestos-related insurance receivables, non-current portion	59,685			63,511
Other long-term assets	22,318			5,772
Total assets	$	1,279,344		$	1,125,134
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	40,321		$	36,116
Accrued employee benefits and compensation	30,491			39,394
Accrued income taxes payable	7,032			6,408
Capital lease obligations, current portion	420			579
Asbestos-related liabilities, current portion	5,547			5,682
Other accrued liabilities	23,369			25,629
Total current liabilities	107,180			113,808
Borrowings under revolving credit facility	228,482			130,982
Capital lease obligations, non-current portion	4,629			5,873
Pension liability	270			8,720
Retiree health care and life insurance benefits	1,469			1,685
Asbestos-related liabilities, non-current portion	64,799			70,500
Non-current income tax	8,418			12,823
Deferred income taxes	10,806			10,706
Other long-term liabilities	4,967			3,464
Commitments and contingencies (Note 13)
Shareholders’ equity
Capital stock - $1 par value; 50,000 authorized shares; 18,395 and 18,255 shares issued and outstanding	18,395			18,255
Additional paid-in capital	132,360			128,933
Retained earnings	776,403			684,540
Accumulated other comprehensive loss	(78,834		)	(65,155		)
Total shareholders' equity	848,324			766,573
Total liabilities and shareholders' equity	$	1,279,344		$	1,125,134

The accompanying notes are an integral part of the consolidated financial statements.

ROGERS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For each of the fiscal years in the three-year period ended December 31, 2018



(Dollars in thousands)	Capital Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance as of December 31, 2015	$	17,957		$	112,017		$	543,066	$	(88,458	)	$	584,582

Net income	—			—			48,283		—			48,283
Other comprehensive income (loss)	—			—			—		(3,804		)	(3,804		)
Shares issued for vested restricted stock units, net of cancellations for tax withholding	63			(1,440		)	—		—			(1,377		)
Stock options exercised	95			4,048			—		—			4,143
Shares issued for employee stock purchase plan	23			835			—		—			858
Shares issued to directors	24			(24		)	—		—			—
Equity compensation expense	—			11,275			—		—			11,275
Tax adjustments on share-based compensation	—			(179		)	—		—			(179		)
Shares repurchased	(141		)	(7,854		)	—		—			(7,995		)
Balance as of December 31, 2016	18,021			118,678			591,349		(92,262		)	635,786

Net income	—			—			80,459		—			80,459
Other comprehensive income (loss)	—			—			—		27,107			27,107
Shares issued for vested restricted stock units, net of cancellations for tax withholding	121			(5,430		)	—		—			(5,309		)
Stock options exercised	83			3,002			—					3,085
Shares issued for employee stock purchase plan	15			880			—					895
Shares issued to directors	15			(15		)	—					—
Equity compensation expense	—			11,818			—					11,818
Cumulative-effect adjustment of change in accounting for share-based compensation	—			—			12,732		—			12,732

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$172.08	19	$3,190

10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-02-20	Earnings, Regulation FD, Exhibits
8-K	2019-02-07	Officers, Exhibits
8-K	2018-11-01	Earnings, Regulation FD, Exhibits
8-K	2018-09-17	Officers, Exhibits
8-K	2018-08-29	Regulation FD, Exhibits
8-K	2018-07-31	Earnings, Regulation FD, Exhibits
8-K	2018-07-09	Regulation FD, Exhibits
8-K	2018-05-18	Officers
8-K	2018-05-03	Shareholder Vote
8-K	2018-04-26	Earnings, Regulation FD, Exhibits
8-K	2018-03-16	Officers, Regulation FD, Exhibits
8-K	2018-02-27	Earnings, Regulation FD, Exhibits

KMI	Kinder Morgan	44,840
DLR	Digital Realty Trust	24,790
MCY	Mercury General	2,850
CRNX	Crinetics Pharmaceuticals	569
RM	Regional Management	307
SOLY	Soliton	216
GRNQ	Greenpro Capital	126
AMNL	Applied Minerals	0
SKKY	Skkynet Cloud Systems	0
HRGG	Heritage Nola Bancorp	0

EX-21	rog-20181231x10kex21.htm
EX-23.1	rog-20181231x10kex231.htm
EX-31.1	rog-20181231x10kex311.htm
EX-31.2	rog-20181231x10kex312.htm
EX-32	rog-20181231x10kex32.htm