Rogers Corporation: Q1 2020 Form 10-Q Summary
Business context and reporting period
Rogers Corporation designs and manufactures engineered materials and components through Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), Power Electronics Solutions (PES), and Other. The filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. Results were affected by the COVID-19 pandemic, including temporary Chinese operating suspensions, weaker automotive and industrial demand, and disruption to wireless infrastructure deployments.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $198.8 million | $239.8 million | Down 17.1% |
| Gross margin | $65.6 million; 33.0% | $85.4 million; 35.6% | Down 260 bps |
| Operating income | $17.5 million; 8.8% | $32.8 million; 13.7% | Down 49.0% dollar; down 490 bps margin |
| Net income | $13.3 million | $28.4 million | Down 53.3% |
| Diluted EPS | $0.71 | $1.52 | Down $0.81 |
| Operating cash flow | $8.6 million | $17.1 million | Down $8.4 million |
| Capital expenditures | $11.2 million | $12.6 million | Down $1.5 million |
Gross margin was pressured by lower volume, unfavorable product mix, fixed-cost underabsorption, inventory reserve provisions, and approximately $0.6 million of COVID-19-related costs. Total incremental COVID-19 costs were approximately $0.7 million, primarily employee compensation and benefits.
Cash and cash equivalents increased to $308.3 million from $166.8 million at December 31, 2019. The increase primarily reflected $150.0 million of precautionary revolver borrowings, supplemented by operating cash flow. Accounts receivable were $144.2 million and inventories were $127.5 million at March 31, 2020.
Revolver borrowings were $273.0 million versus $123.0 million at year-end. The secured facility has $450.0 million of stated capacity, plus a $175.0 million accordion feature, and matures February 17, 2022. The company reported compliance with applicable leverage and interest coverage covenants; its leverage ratio did not exceed 2.75 to 1.00 at quarter-end.
Material changes versus the prior comparable period
- ACS sales declined 19.8% to $64.6 million and operating income declined 58.2% to $5.5 million, primarily due to weaker 4G and 5G infrastructure demand, the China deployment pause, waning 4G spending, and Huawei-related trade restrictions.
- EMS sales declined 10.0% to $83.5 million and operating income declined 14.3% to $11.5 million, driven by lower portable electronics, general industrial, and EV/HEV demand.
- PES sales declined 21.9% to $46.7 million, and the segment moved to a $0.7 million operating loss from $4.3 million of operating income, reflecting weaker variable-frequency-drive, mass transit, and vehicle-electrification demand.
- Other segment sales declined 40.6% to $4.0 million, partly because the prior-year period benefited from a non-recurring Durel last-time buy.
- SG&A decreased 6.8% in dollars but increased to 20.3% of sales from 18.0%; R&D increased 2.6% and rose to 3.9% of sales from 3.2%.
- Restructuring and impairment charges fell to zero from $0.8 million, and other operating expense declined to $0.02 million from $0.9 million.
- Other expense, net was $0.8 million versus $1.4 million of other income in the prior-year quarter, reflecting unfavorable copper derivative and foreign-currency effects.
- The effective tax rate increased to 20.6% from 14.2%, primarily because of fewer reversals of uncertain tax reserves and lower excess tax deductions from stock compensation.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal full-year financial guidance. Management expects COVID-19 to continue affecting operations and demand in the short and medium term. Management anticipated year-over-year declines in several ACS and EMS markets during the second quarter, while expecting sequential improvement in China-related 5G infrastructure demand. Management also expected sequential weakness in automotive, EV/HEV, general industrial, portable electronics, and vehicle-electrification markets.
Management stated that existing cash, expected operating cash flow, and available credit facilities should fund operations, planned capital expenditures, R&D, and debt service for at least the next 12 months. However, COVID-19 could cause sustained demand reductions, supply-chain or operational disruption, higher costs, asset impairments, and lower cash flow. Other significant risks include China-U.S. trade restrictions and tariffs, foreign-currency volatility, limited-source suppliers, competition, covenant compliance, cybersecurity, tax changes, and litigation.
Asbestos-related liabilities were $85.8 million and related insurance receivables were $78.3 million at March 31, 2020. There were 574 outstanding asbestos claims, with 20 new claims and 38 concluded during the quarter; settlements totaled approximately $1.6 million. The company expects insurance to cover most historical exposure but cautions that coverage availability, claim trends, insurer solvency, and litigation outcomes could differ from estimates.
The company had an environmental remediation accrual of $1.0 million for its Connecticut facility. It also expects an additional approximately $0.7 million non-cash pension settlement charge in the second quarter of 2020 related to final settlement of the terminated Merged Plan.
Other unusual items included a $6.9 million foreign-currency translation loss and $1.7 million of net derivative-related losses recognized in other comprehensive income or expense. Approximately $1.4 million of pre-tax net losses in accumulated other comprehensive loss were expected to be reclassified into earnings within the next 12 months.
Important facts for investors to verify
- Whether COVID-19-related demand declines, particularly in automotive, EV/HEV, industrial, and portable electronics markets, persisted or intensified after March 31, 2020.
- The pace and sustainability of China 5G infrastructure deployments and the continuing effect of Huawei-related trade restrictions.
- Revolver utilization, interest expense, covenant headroom, and debt maturity or refinancing plans through February 2022.
- Whether reduced sales volumes and fixed-cost underabsorption caused further margin pressure or inventory and goodwill impairments.
- The collectability and duration of asbestos-related insurance recoveries and changes in claim volumes or settlement costs.
- The filing’s statement that COVID-19 had no material impact on the March 31 financial statements, while future assessments could produce material impacts.