Rogers Corporation 2023 Q1 Form 10-Q Summary
Business context and reporting period
Rogers Corporation designs and manufactures engineered materials and components for advanced electronics, electrification, automotive, aerospace and defense, renewable energy, communications, industrial and other markets. Its strategic segments are Advanced Electronics Solutions (AES) and Elastomeric Material Solutions (EMS), with remaining non-core operations reported as Other. The filing covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $243.8 million | $248.3 million | Down 1.8% |
| Gross margin | $79.7 million; 32.7% | $85.4 million; 34.4% | Down 170 bps |
| Operating income (loss) | $(0.3) million; (0.1%) | $19.9 million; 8.0% | Material decline |
| Net income (loss) | $(3.5) million; $(0.19) per diluted share | $16.6 million; $0.87 per diluted share | Turned to loss |
| Cash flow from operations | $1.8 million | $(13.7) million | Improved by $15.6 million |
| Capital expenditures | $16.4 million | $28.2 million | Down $11.8 million |
| Interest expense, net | $3.5 million | $1.1 million | Up $2.4 million |
At March 31, 2023, cash and cash equivalents were $193.7 million, down from $235.9 million at December 31, 2022. Borrowings under the revolving credit facility were $190.0 million, compared with $215.0 million at year-end. Total current assets were $611.9 million and total current liabilities were $127.5 million. The company reported total shareholders’ equity of $1.18 billion.
Net cash used in investing activities was $15.4 million and net cash used in financing activities was $29.4 million. The financing outflow included a $25.0 million discretionary repayment on the revolving credit facility, $1.7 million of credit facility issuance costs and $2.5 million of taxes related to net share settlement of equity awards.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower wireless infrastructure sales in AES and lower EV/HEV, portable electronics and general industrial sales in EMS. Foreign currency movements reduced reported sales by approximately $7.4 million.
- AES revenue increased 2.0% to $135.9 million, but operating results declined to a $5.5 million loss from $1.3 million of income.
- EMS revenue decreased 7.3% to $102.2 million, while operating income fell to $3.2 million from $17.0 million.
- Gross margin contracted because of lower volume, unfavorable mix, higher inventory reserves, unfavorable EMS factory utilization and yield performance.
- Selling, general and administrative expense increased 4.1% to $60.1 million, primarily due to higher professional services, including $7.6 million of non-routine shareholder advisory costs and $1.0 million related to the sale of a business.
- Research and development expense increased 16.1% to $9.6 million, driven by alternative raw-material trial costs and compensation.
- Restructuring charges increased to $10.5 million from $0.1 million, principally for a global workforce reduction and facility consolidations.
- Interest expense increased because of higher borrowing costs and higher weighted-average interest rates.
- Equity income from unconsolidated joint ventures declined 94.0% to $0.1 million, reflecting lower sales and productivity at the joint ventures.
Guidance, outlook, commentary and unusual items
Management did not provide specific quarterly or annual revenue or earnings guidance in the filing. It expects 2023 capital spending of approximately $65 million to $75 million. Management believes existing cash, expected operating cash flow and available credit facilities will be sufficient for operations, planned capital expenditures, research and development, and debt service for at least the next 12 months.
Management expects the workforce reduction and facility-consolidation plans to be completed in the first half of 2023. Estimated pre-tax charges are approximately $7.5 million to $8.5 million for the workforce reduction and approximately $5.5 million to $6.5 million for facility consolidations. The company also agreed to sell its high-performance engineered cellular elastomer business for $1.8 million; the first phase closed in March 2023 and the land and building sale was expected to close in the second quarter.
The March 24, 2023 Fifth Amended and Restated Credit Agreement increased the expansion feature to $225 million and extended maturity from March 31, 2024 to March 24, 2028. The facility provides up to $450 million of revolving loans. As of March 31, 2023, Rogers complied with its leverage and interest coverage covenants; the reported net leverage ratio did not exceed 2.75 to 1.00 and the interest coverage ratio was at least 3.00 to 1.00.
Key risks include demand volatility in automotive, wireless infrastructure and portable electronics; foreign exchange, commodity and supply-chain exposure; China-U.S. trade restrictions and geopolitical conditions; execution of restructuring and growth initiatives; litigation and asbestos claims; environmental matters; cybersecurity; tax changes; and the terminated DuPont merger. The company continues to carry asbestos-related liabilities of $65.0 million and related insurance receivables of $59.8 million. It had 594 outstanding asbestos claims at March 31, 2023.
The company received a $162.5 million pre-tax regulatory termination fee from DuPont after the merger was terminated in November 2022 and incurred a $20.4 million transaction-related fee. The filing also notes continuing uncertainty from COVID-19 effects, particularly in international operations and logistics.
Important facts for investors to verify
- Whether restructuring, facility-consolidation and footprint-optimization actions deliver the expected cost savings and whether estimated charges remain within stated ranges.
- Whether AES and EMS demand recovers, particularly in EV/HEV, wireless infrastructure, portable electronics and general industrial markets.
- The effect of higher interest rates on the $190.0 million revolving-credit balance and compliance with leverage and interest-coverage covenants.
- Whether operating cash flow can fund the planned $65 million to $75 million of 2023 capital expenditures without materially increasing borrowings.
- Progress and final proceeds from the sale of the engineered cellular elastomer business and related facility.
- Foreign exchange, copper prices, inventory reserves, factory utilization and manufacturing yields, all of which affected first-quarter margins.
- Development of asbestos claims, insurance recoveries, environmental remediation and other litigation exposures.
- Management’s ability to convert design wins and market opportunities in EV/HEV, ADAS, aerospace and defense, portable electronics and renewable energy into sustained revenue growth.