Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Position
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 Quarterly Report on Form 10-Q 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 (the Exchange Act). 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:
•the duration and impacts of the novel coronavirus (COVID-19) global pandemic and efforts to contain its transmission, including the effect of these factors on our business, suppliers, customers, end users and economic conditions generally;
•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 (U.S.) and abroad, particularly in China, South Korea, Germany, Hungary and Belgium, where we maintain significant manufacturing, sales or administrative operations;
•the trade policy dynamics between the U.S. and China reflected in trade agreement negotiations and the imposition of tariffs and other trade restrictions, including trade restrictions on Huawei Technologies Co., Ltd. (Huawei);
•fluctuations in foreign currency exchange rates;
•our ability to develop innovative products and the extent to which they are 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 and cost-effective manner;
•intense global competition affecting both our existing products and products currently under development;
•business interruptions due to catastrophes or other similar events, such as natural disasters, war, terrorism or public health crises;
•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 in this section and elsewhere in this report, including under the section entitled “Risk Factors” in Part II, Item 1A and in our Annual Report on Form 10-K for the year ended December 31, 2019 (the Annual Report) and our other reports filed with the Securities and Exchange Commission, 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.
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q along with our audited consolidated financial statements and the related notes thereto in our Annual Report.
Company Background and Strategy
Rogers Corporation designs, develops, manufactures and sells high-performance and high-reliability engineered materials and components to meet our customers’ demanding challenges. 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 our Other operating segment. We have a history of innovation and have established Innovation Centers for our research and development (R&D) activities in Chandler, Arizona, Burlington, Massachusetts, Eschenbach, Germany and Suzhou, China. We are headquartered in Chandler, Arizona. 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, in addition to the impact of COVID-19 discussed below, the key medium- to long-term trends currently affecting our business include the increasing use of advanced driver assistance systems (ADAS) and increasing electrification of vehicles, including electric and hybrid electric vehicles (EV/HEV), in the automotive industry and the growth of 5G smartphones in the portable electronics industry. In addition to our focus on advanced mobility and advanced connectivity in the automotive and telecommunications industries, we sell into a variety of other markets including general industrial, connected devices, aerospace and defense, mass transit and renewable energy.
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: performance, quality, service, cost, efficiency, innovation and technology. We have expanded our capabilities through organic investment and acquisitions and 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.
COVID-19 Update
The global COVID-19 pandemic has affected and continues to affect Rogers’ business and operations, although to a lesser extent than the first half of 2020. In response to the outbreak, Rogers prioritized the safety and well-being of its employees—including implementing social distancing initiatives in its facilities, providing remote working arrangements for certain employees, expanding personal protective equipment usage, enhancing plant hygiene processes, and extending employee benefits, which increased our expenses in the quarter—while at the same time taking actions to preserve business continuity. Our non-manufacturing employees transitioned seamlessly to remote working arrangements and are maintaining effective collaboration, both internally and with our customers. In some cases, based on local conditions, non-manufacturing employees have returned to their worksites.
Our China business and operations were the first to be impacted by the virus, with the government temporarily suspending our operations, as well as the operations of most Chinese business, including our Chinese customers and suppliers, at the beginning of February. We resumed production in mid-February and reached full production capacity by early-March.
Our U.S. and European businesses were first impacted later in the first quarter, and the impact continued through the first, second and third quarters, and continues through the date of this filing. In both the U.S. and Europe, we generally maintained operations at close to normal levels, with the additional employee safety precautions implemented at our facilities. We do not believe these additional precautions in the aggregate, had a material impact on our financial performance during the first nine months. In the U.S., exemptions from state-level “shelter in place” directives with respect to numerous sectors, including the Communications, Healthcare and Public Health, Defense Industrial Base, Critical Manufacturing and Information Technology sectors, have largely enabled us to continue our operations while those directives were in place, and as states have continued to reopen during the second and third quarters, and through the date of this filing.
Our operations were not affected by any material shortages, as our inventory and supply chain met our manufacturing requirements. Global demand continued to be impacted in the third quarter by the COVID-19 pandemic, although to a lesser extent than prior quarters. General industrial and mass transit market demand continued to be the most impacted. Demand improved in some markets, such as portable electronics, EV/HEV, aerospace and defense and automotive relative to the second quarter.
We expect that the COVID-19 pandemic will have a continuing but uncertain impact on our business and operations in the short- and medium-term. Due to the above circumstances and as described generally in this Form 10-Q, our results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year.
Executive Summary
The following key highlights and factors should be considered when reviewing our results of operations, financial position and liquidity:
•In the third quarter of 2020 as compared to the third quarter of 2019, our net sales decreased 9.0% to $201.9 million, our gross margin increased approximately 180 basis points to 37.4% from 35.6%, and operating income decreased approximately 910 basis points to 4.4% from 13.5%. In the first nine months of 2020 as compared to the first nine months of 2019, our net sales decreased 16.0% to $591.9 million, our gross margin increased approximately 20 basis points to 35.7% from 35.5%, and operating income decreased approximately 560 basis points to 8.0% from 13.6%.
•We made $213.0 million of discretionary principal payments on our revolving credit facility during the second and third quarters of 2020, partially offset by $150.0 million in borrowings under our revolving credit facility during the first quarter of 2020 as a precautionary measure in order to increase our cash position and preserve financial flexibility given current uncertainty in the global markets resulting from the COVID-19 pandemic.
•We terminated the interest rate swap on September 30, 2020. As a result, we settled the interest rate swap for $2.4 million on October 2, 2020, representing the fair value of the interest rate swap on the date of termination. Both Rogers and the counterparties released each other from all obligation under the interest rate swap agreement, including the obligation to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to the agreed upon notional principal amount of $75.0 million.
•We commenced manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations, primarily impacting our PES and ACS operating segments, and we recognized $9.0 million of restructuring charges in the third quarter of 2020 related to this project.
•We incurred incremental transaction costs of $0.3 million in the third quarter of 2020 and $4.3 million in the first nine months of 2020, due to COVID-19 pandemic. These costs primarily consist of temporary additional benefits established under our dependent care, premium pay and sick pay programs in response to the COVID-19 pandemic, as well as additional safety supplies. A substantial portion of the additional benefits under these programs expired in mid-June. We expect significantly lower costs during the remainder of 2020, associated with the remaining additional benefits, as well as safety supplies, when compared to the first and second quarters of 2020.
•We recognized an additional $11.7 million of amortization expense in the third quarter of 2020 and $15.6 million in the first nine months of 2020, and will recognize an additional $11.7 million of amortization expense in the fourth quarter of 2020, due to the acceleration of amortization expense related to our Diversified Silicone Products, Inc. (DSP) customer relationships and trademarks and trade names definite-lived other intangible assets, which were both accelerated to be fully amortized by December 31, 2020.
Results of Operations
The following table sets forth, for the periods indicated, selected operations data expressed as a percentage of net sales:
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Gross margin
|
37.4
|
%
|
|
35.6
|
%
|
|
35.7
|
%
|
|
35.5
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
24.9
|
%
|
|
18.2
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%
|
|
22.3
|
%
|
|
18.1
|
%
|
Research and development expenses
|
3.5
|
%
|
|
3.5
|
%
|
|
3.7
|
%
|
|
3.3
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%
|
Restructuring and impairment charges
|
4.7
|
%
|
|
0.3
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%
|
|
1.6
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%
|
|
0.4
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%
|
Other operating (income) expense, net
|
(0.1)
|
%
|
|
0.1
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%
|
|
0.1
|
%
|
|
0.1
|
%
|
Operating income
|
4.4
|
%
|
|
13.5
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%
|
|
8.0
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%
|
|
13.6
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%
|
|
|
|
|
|
|
|
|
Equity income in unconsolidated joint ventures
|
0.5
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%
|
|
0.7
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%
|
|
0.5
|
%
|
|
0.6
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%
|
Other income (expense), net
|
0.7
|
%
|
|
(0.5)
|
%
|
|
0.2
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%
|
|
(0.2)
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%
|
Interest expense, net
|
(1.8)
|
%
|
|
(0.8)
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%
|
|
(1.1)
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%
|
|
(0.8)
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%
|
Income before income tax expense
|
3.8
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%
|
|
12.9
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%
|
|
7.6
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%
|
|
13.2
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%
|
|
|
|
|
|
|
|
|
Income tax expense
|
0.3
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%
|
|
2.4
|
%
|
|
1.7
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%
|
|
2.4
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%
|
|
|
|
|
|
|
|
|
Net income
|
3.5
|
%
|
|
10.5
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%
|
|
5.9
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%
|
|
10.8
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales and Gross Margin
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
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|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
$
|
201,944
|
|
|
$
|
221,842
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|
|
$
|
591,911
|
|
|
$
|
704,492
|
|
Gross margin
|
$
|
75,518
|
|
|
$
|
78,867
|
|
|
$
|
211,117
|
|
|
$
|
250,089
|
|
Percentage of net sales
|
37.4
|
%
|
|
35.6
|
%
|
|
35.7
|
%
|
|
35.5
|
%
|
Net sales decreased by 9.0% in the third quarter of 2020 compared to the third quarter of 2019. Our ACS and EMS operating segments had net sales decreases of 19.3% and 8.9%, respectively, while our PES operating segment had a net sales increase of 11.1%. The decrease in net sales was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure and automotive markets in our ACS operating segment, lower net sales in the general industrial, mass transit, automotive and consumer markets in our EMS operating segment and lower net sales in the mass transit and variable frequency drives markets in our PES operating segment. The decrease in net sales was partially offset by higher net sales in the aerospace and defense market in our ACS operating segment, higher net sales in the portable electronics and EV/HEV markets in our EMS operating segment and higher net sales in our EV/HEV and renewable energy markets in our PES operating segment. Net sales were favorably impacted by foreign currency impacts of $0.9 million, or 0.4%, due to the appreciation in value of the euro relative to the U.S. dollar.
Net sales decreased by 16.0% in the first nine months of 2020 compared to the first nine months of 2019. Our ACS, EMS and PES operating segments had net sales decreases of 20.9%, 14.2% and 9.5%, respectively. The decrease in net sales was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure and automotive markets in our ACS operating segment, lower net sales in the general industrial, mass transit, consumer, portable electronics and automotive markets in our EMS operating segment and lower net sales in the mass transit, variable frequency drives and vehicle electrification markets in our PES operating segment. The decrease in net sales was partially offset by higher net sales in the aerospace and defense market in our ACS operating segment, higher net sales in the EV/HEV market in our EMS operating segment and higher net sales in the EV/HEV and renewable energy markets in our PES operating segment. Net sales were unfavorably impacted by foreign currency impacts of $5.0 million, or 0.7%, due to the depreciation in value of the Chinese renminbi, euro and Korean won relative to the U.S. dollar.
The lower net sales in the 4G and 5G wireless infrastructure markets in our ACS operating segment reflected the waning of 4G infrastructure spending by telecommunications companies in anticipation of 5G, as well as the impacts of the trade restrictions on Huawei, increased competition and design changes by telecommunications equipment original equipment manufacturers
(OEMs), which reduced our materials content in 5G base stations. The lower net sales in the automotive market was largely due to the impacts of COVID-19 pandemic.
The lower net sales in variable frequency drives market in our PES operating segment was due to a slowdown in industrial automation demand through the first nine months of 2020 combined with customer inventory rebalancing, which began in mid-2019, and continued through most of the first half of 2020. The lower year-to-date net sales in vehicle electrification market in our PES operating segment was due to the COVID-19 impacts on the automotive sector in the first half of 2020, partially offset by the initial recovery in the third quarter of 2020.
In our ACS operating segment, we anticipate lower net sales in the 4G and 5G wireless infrastructure markets year-over-year in the fourth quarter of 2020, on both a quarter-to-date and year-to-date basis, while we anticipate higher net sales in the aerospace and defense market year-over-year on a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate lower net sales in the 4G and 5G wireless infrastructure and aerospace and defense markets, while we anticipate higher net sales in the automotive market. The effects of trade tensions, increased competition, lower 5G base station content and the ongoing decline in 4G deployments are creating a great deal of uncertainty around our outlook for wireless infrastructure. As a result, we believe the growth opportunity in wireless infrastructure is substantially reduced going forward. Our expectations of net sales in the aerospace and defense market are primarily due to the alignment of the advanced weaponry requirements with the technical capabilities of our products, partially offset by unfavorable impacts of defense program timing. Our expectations of net sales in the automotive market are primarily due to the anticipation of further recovery of the automotive sector from the impact of the COVID-19 pandemic in the second quarter of 2020.
In our EMS operating segment, we anticipate higher net sales in the EV/HEV and portable electronics markets year-over-year in the fourth quarter of 2020, on a quarter-to-date basis, and we anticipate higher net sales in the EV/HEV market, year-over-year, on a year-to-date basis, while we anticipate lower net sales in the general industrial market year-over-year, on both a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate lower net sales in the EV/HEV and portable electronics market in the fourth quarter of 2020. Our expectations of net sales in the EV/HEV market are primarily due to continued strong demand partially offset by unfavorable variations of ordering patterns. Our expectations of net sales in the portable electronics market are primarily due to an extension of the normal seasonality from the third quarter into the fourth quarter as a result of the COVID-19 pandemic. Our expectations of net sales in the general industrial market are primarily due to impact of the COVID-19 pandemic.
In our PES operating segment, we anticipate higher net sales in the EV/HEV market year-over-year in the fourth quarter of 2020, on both a quarter-to-date and year-to-date basis, while we anticipate lower net sales in the variable frequency drives market year-over-year, on both a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate higher net sales in the EV/HEV market in the fourth quarter of 2020, while we anticipate lower net sales in the variable frequency drives market. Our expectations of net sales in the EV/HEV market in the fourth quarter of 2020 are primarily due to the anticipation of further recovery of the automotive sector from the impact of the COVID-19 pandemic in the second quarter of 2020. Our expectations of the net sales in the variable frequency drives market are primarily due to the anticipated continued effects of the COVID-19 pandemic.
Gross margin as a percentage of net sales increased approximately 180 basis points to 37.4% in the third quarter of 2020 compared to 35.6% in the third quarter of 2019. Gross margin in the third quarter of 2020 was favorably impacted by lower freight, duties and tariffs costs in our ACS operating segment, favorable product mix in our EMS operating segment, lower fixed overhead costs and yield improvements in our ACS, EMS and PES operating segments, as well as higher volume, favorable productivity performance and favorable absorption of fixed overhead costs in our PES operating segment. This was partially offset by lower volume and unfavorable absorption of fixed overhead costs in our ACS and EMS operating segments, unfavorable product mix in our ACS and PES operating segments and an increase in inventory reserve provision in our ACS operating segment.
Gross margin as a percentage of net sales increased approximately 20 basis points to 35.7% in the first nine months of 2020 compared to 35.5% in the first nine months of 2019. Gross margin in the first nine months of 2020 was favorably impacted by lower freight, duties and tariffs costs, lower fixed overhead costs and yield improvements in our ACS, EMS and PES operating segments, including the recognition of a $3.3 million expected recovery of previous duty taxes paid due to a change in Chinese tariff regulations in our ACS operating segment, favorable product mix in our EMS operating segment, as well as favorable productivity performance in our PES operating segment. This was partially offset by lower volume and unfavorable absorption of fixed overhead costs in our ACS, EMS and PES operating segments, an increase in inventory reserve provisions in our ACS and EMS operating segments, as well as unfavorable product mix in our ACS and PES operating segments.
We incurred incremental transaction costs associated with the temporary additional benefits established under our dependent care, premium pay and sick pay programs in response to the COVID-19 pandemic, as well as additional safety supplies. These costs impacted our gross margin by approximately $0.3 million and $3.9 million on a quarter-to-date basis and year-to-date basis, respectively. A substantial portion of the additional benefits under these programs expired in mid-June. We expect
significantly lower gross margin impacts during the remainder of 2020, associated with the remaining additional benefits, as well as safety supplies, when compared to the first and second quarters of 2020.
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Selling, general and administrative expenses
|
$
|
50,230
|
|
|
$
|
40,448
|
|
|
$
|
132,254
|
|
|
$
|
127,349
|
|
Percentage of net sales
|
24.9
|
%
|
|
18.2
|
%
|
|
22.3
|
%
|
|
18.1
|
%
|
Selling, general and administrative (SG&A) expenses increased 24.2% in the third quarter of 2020 from the third quarter of 2019, primarily due to an $11.0 million increase in other intangible assets amortization, a $0.6 million increase in professional services a $0.4 million increase in total compensation and benefits and a $0.3 million increase in software costs, partially offset by a $1.1 million decrease in travel and entertainment expenses, a $0.3 million decrease in advertising expenses, a $0.3 million decrease in depreciation, a $0.2 million decrease in commissions expense and a $0.2 million decrease in recruiting/relocation/training expenses.
SG&A expenses increased 3.9% in the first nine months of 2020 from the first nine months of 2019, primarily due to a $13.5 million increase in other intangible assets amortization and a $1.9 million increase in professional services, partially offset by a $3.2 million decrease in travel and entertainment expenses, a $2.0 million decrease in total compensation and benefits, a $1.2 million decrease in advertising expenses, a $1.1 million decrease in depreciation, a $0.9 million decrease in commissions expense, a $0.8 million decrease in recruiting/relocation/training expenses, a $0.5 million decrease in environmental charges and a $0.3 million decrease in software costs.
The increase in amortization expense for the three and nine months ended September 30, 2020 was due to the acceleration of amortization expense related to our DSP customer relationships and trademarks and trade names definite-lived other intangible assets, which were both accelerated to be fully amortized by December 31, 2020 due to an adjustment to their remaining useful lives. We recognized an additional $11.7 million of amortization expense in the third quarter of 2020 and $15.6 million in the first nine months of 2020, and will recognize an additional $11.7 million of amortization expense in the fourth quarter of 2020. The increases in amortization expense in 2020 are offset by decreases in forecasted amortization expense in future years. For additional information, refer to “Note 6 – Goodwill and Other Intangible Assets” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
The decrease in travel and entertainment and recruiting/relocation/training expenses, on both a quarter-to-date and year-to-date basis, was primarily driven by the impacts of COVID-19.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Research and development expenses
|
$
|
7,085
|
|
|
$
|
7,830
|
|
|
$
|
22,185
|
|
|
$
|
23,282
|
|
Percentage of net sales
|
3.5
|
%
|
|
3.5
|
%
|
|
3.7
|
%
|
|
3.3
|
%
|
R&D expenses decreased 9.5% in the third quarter of 2020 from the third quarter of 2019 due to decreases in laboratory expenses as well as travel and entertainment expenses, partially offset by increases in total compensation and benefits. R&D expenses decreased 4.7% in the first nine months of 2020 from the first nine months of 2019 due to decreases in laboratory expenses as well as travel and entertainment expenses, partially offset by increases in total compensation and benefits.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and Impairment Charges and Other Operating (Income) Expense, Net
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Restructuring and impairment charges
|
$
|
9,413
|
|
|
$
|
580
|
|
|
$
|
9,413
|
|
|
$
|
2,485
|
|
Other operating (income) expense, net
|
$
|
(4)
|
|
|
$
|
124
|
|
|
$
|
(96)
|
|
|
$
|
1,075
|
|
We incurred restructuring charges associated with our manufacturing footprint optimization plans involving certain Europe and Asia manufacturing locations. We recognized $9.0 million of restructuring charges related to these restructuring projects for the three and nine months ended September 30, 2020.
We incurred restructuring charges associated with the consolidation of our Santa Fe Springs, California operations with the Company’s facilities in Carol Stream, Illinois and Bear, Delaware. We recognized no restructuring charges in the third quarter of 2019. We recognized $0.9 million of restructuring charges related to our facility consolidation in the first nine months of 2019.
We recognized $0.4 million of impairment charges primarily related to certain fixed assets in Belgium, for the three and nine months ended September 30, 2020. We recognized $0.6 million and $1.5 million in impairment charges on certain assets in connection with the Isola USA Corp. (Isola) asset acquisition for the three and nine months ended September 30, 2019, respectively.
We expect to incur between $2.5 million and $4.5 million of restructuring and impairment charges in the fourth quarter of 2020.
With respect to other operating (income) expense, net, we recognized income of $0.1 million from economic incentive grants related to the physical relocation of our global headquarters from Rogers, Connecticut to Chandler, Arizona, for the nine months ended September 30, 2020. In connection with the transitional leaseback of a portion of the facility and certain machinery and equipment acquired from Isola in August 2018, we recognized lease income of $0.1 million and $0.9 million for the three and nine months ended September 30, 2019, respectively, and related depreciation on leased assets of $0.2 million and $1.7 million, respectively, for the three and nine months ended September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Income in Unconsolidated Joint Ventures
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Equity income in unconsolidated joint ventures
|
$
|
937
|
|
|
$
|
1,498
|
|
|
$
|
3,177
|
|
|
$
|
4,077
|
|
As of September 30, 2020, we had two unconsolidated joint ventures, each 50% owned: Rogers INOAC Corporation (RIC) and Rogers INOAC Suzhou Corporation (RIS). Equity income in those unconsolidated joint ventures decreased 37.4% in the third quarter of 2020 from the third quarter of 2019, and decreased 22.1% in the first nine months of 2020 from the first nine months of 2019. On a quarter-to-date basis, the decrease was due to lower net sales due to the COVID-19 pandemic, as well as declines in operational performance for both RIS and RIC. On a year-to-date basis, the decrease was due to lower net sales due to the COVID-19 pandemic and declines in operational performance for both RIS and RIC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Settlement Charges and Other (Expense) Income, Net
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Pension settlement charges
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(55)
|
|
|
$
|
—
|
|
Other income (expense), net
|
$
|
1,446
|
|
|
$
|
(918)
|
|
|
$
|
1,294
|
|
|
$
|
(915)
|
|
In the second quarter of 2020, we recorded an immaterial pre-tax settlement charge in connection with the remaining settlement efforts for the termination of 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 (collectively, the Merged Plan)). For additional information, refer to “Note 11 – Pension Benefits and Other Postretirement Benefits.”
Other (expense) income, net increased to income of $1.4 million in the third quarter of 2020 from expense of $0.9 million in the third quarter of 2019. On a quarter-to-date basis, the increase was due to favorable impacts from our copper derivative contracts and foreign currency transactions, partially offset by unfavorable impacts from our foreign currency derivative contracts and by lower net periodic benefit credits associated with our defined benefit plans.
Other (expense) income, net increased to income of $1.3 million in the first nine months of 2020 from expense of $0.9 million in the first nine months of 2019. On a year-to-date basis, the increase was due to favorable impacts from our copper derivative contracts and foreign currency transactions, partially offset by unfavorable impacts from our foreign currency derivative contracts and by lower net periodic benefit credits associated with our defined benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, Net
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Interest expense, net
|
$
|
(3,553)
|
|
|
$
|
(1,747)
|
|
|
$
|
(6,539)
|
|
|
$
|
(5,723)
|
|
Interest expense, net, increased by 103.4% in the third quarter of 2020 from the third quarter of 2019, and increased by 14.3% in the first nine months of 2020 from the first nine months of 2019. The increase, on both a quarter-to-date and year-to-date basis, was primarily due to the $2.4 million acceleration of interest expense as a result of the unwinding of the interest rate swap on September 30, 2020. The increase on both a quarter-to-date and year-to-date basis, was partially offset by lower interest expense on borrowings under our revolving credit facility, which was mainly attributable to a lower weighted-average interest rate year-over-year. We expect interest expense, net to decrease on a quarter-to-date basis in the fourth quarter of 2020 from the fourth quarter of 2019 due to an anticipated lower weighted-average interest rate on and an anticipated lower weighted-average outstanding balance for our borrowings under our revolving credit facility. We expect interest expense, net to increase on a year-to-date basis in the fourth quarter of 2020 from the fourth quarter of 2019 due to the $2.4 million acceleration of interest expense as a result of the unwinding of the interest rate swap, partially offset by an anticipated lower weighted-average interest rate on and an anticipated lower weighted-average outstanding balance for our borrowings under our revolving credit facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Income tax expense
|
$
|
618
|
|
|
$
|
5,331
|
|
|
$
|
10,453
|
|
|
$
|
17,258
|
|
Effective tax rate
|
8.1
|
%
|
|
18.6
|
%
|
|
23.1
|
%
|
|
18.5
|
%
|
Our effective income tax rate was 8.1% and 18.6% for the three months ended September 30, 2020 and 2019, respectively. The decrease from the third quarter of 2019 was primarily due to the beneficial impact of changes in valuation allowance related to R&D credits, partially offset by the increase in current quarter accruals of reserves for uncertain tax positions, higher tax impact on unremitted foreign earnings and profits, and changes in pretax mix across jurisdictions with disparate tax rates. Our effective income tax rate was 23.1% and 18.5% for the nine months ended September 30, 2020 and 2019, respectively. The increase from the first nine months of 2019 was primarily due to the increase in current quarter accruals of reserves for uncertain tax positions, the decrease in excess tax deductions on stock-based compensation and higher tax impact on unremitted foreign earnings and profits, partially offset by the beneficial impact of changes in valuation allowance related to R&D credits and pretax mix across jurisdictions with disparate tax rates.
Operating Segment Net Sales and Operating Income
Advanced Connectivity Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
$
|
63,714
|
|
|
$
|
78,983
|
|
|
$
|
199,207
|
|
|
$
|
251,982
|
|
Operating income
|
$
|
4,981
|
|
|
$
|
13,778
|
|
|
$
|
26,067
|
|
|
$
|
45,301
|
|
ACS net sales decreased by 19.3% in the third quarter of 2020 compared to the third quarter of 2019. The decrease in net sales over the third quarter of 2019 was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure markets, as well as the automotive market, partially offset by higher net sales in the aerospace and defense market. Net sales were not materially impacted by changes in foreign currencies.
ACS net sales decreased by 20.9% in the first nine months of 2020 compared to the first nine months of 2019. The decrease in net sales over the first nine months of 2019 was primarily driven by significantly lower net sales in the 4G and 5G wireless infrastructure markets, as well as the automotive market, partially offset by higher net sales in the aerospace and defense market. Net sales were unfavorably impacted by $1.7 million, or 0.7%, due to the depreciation in value of the Chinese renminbi relative to the U.S. dollar.
The lower net sales in the 4G and 5G wireless infrastructure markets in our ACS operating segment reflected the waning of 4G infrastructure spending by telecommunications companies in anticipation of 5G, as well as the impacts of the trade restrictions on Huawei, increased competition and design changes by telecommunications equipment original equipment manufacturers (OEMs), which reduced our materials content in 5G base stations. The lower net sales in the automotive market was largely due to the impacts of COVID-19 pandemic.
In our ACS operating segment, we anticipate lower net sales in the 4G and 5G wireless infrastructure markets year-over-year in the fourth quarter of 2020, on both a quarter-to-date and year-to-date basis, while we anticipate higher net sales in the aerospace and defense market year-over-year on a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate
lower net sales in the 4G and 5G wireless infrastructure and aerospace and defense markets, while we anticipate higher net sales in the automotive market. The effects of trade tensions, increased competition, lower 5G base station content and the ongoing decline in 4G deployments are creating a great deal of uncertainty around our outlook for wireless infrastructure. As a result, we believe the growth opportunity in wireless infrastructure is substantially reduced going forward. Our expectations of net sales in the aerospace and defense market are primarily due to the alignment of the advanced weaponry requirements with the technical capabilities of our products, partially offset by unfavorable impacts of defense program timing. Our expectations of net sales in the automotive market are primarily due to the anticipation of further recovery of the automotive sector from the impact of the COVID-19 pandemic in the second quarter of 2020.
Operating income decreased by 63.8% in the third quarter of 2020 from the third quarter of 2019. As a percentage of net sales, operating income in the third quarter of 2020 was 7.8%, an approximately 960 basis point decrease as compared to the 17.4% reported in the third quarter of 2019. The decrease in operating income was primarily due to lower volume and unfavorable absorption of fixed overhead costs, unfavorable product mix and an increase in inventory reserve provision, partially offset by lower freight, duties and tariffs costs, lower fixed overhead costs and yield improvements. Additionally, our ACS operating segment incurred $2.9 million of restructuring and impairment charges in the third quarter of 2020.
Operating income decreased by 42.5% in the first nine months of 2020 from the first nine months of 2019. As a percentage of net sales, operating income in the first nine months of 2020 was 13.1%, an approximately 490 basis point decrease as compared to the 18.0% reported in the first nine months of 2019. The decrease in operating income was primarily due to lower volume, unfavorable absorption of fixed overhead costs and unfavorable product mix, partially offset by lower freight, duties and tariffs costs, including the recognition of a $3.3 million expected recovery of previous duty taxes paid due to a change in Chinese tariff regulations, yield improvements and lower fixed overhead costs. Additionally, our ACS operating segment incurred $2.9 million of restructuring and impairment charges in the first nine months of 2020.
The incremental direct costs associated with the temporary additional benefits established under our dependent care, premium pay and sick pay programs in response to the COVID-19 pandemic, as well as the additional safety supplies, impacted ACS operating income by approximately $0.2 million and $1.7 million on a quarter-to-date basis and year-to-date basis, respectively.
Elastomeric Material Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
$
|
86,444
|
|
|
$
|
94,940
|
|
|
$
|
241,596
|
|
|
$
|
281,596
|
|
Operating income
|
$
|
7,372
|
|
|
$
|
17,995
|
|
|
$
|
21,884
|
|
|
$
|
46,752
|
|
EMS net sales decreased by 8.9% in the third quarter of 2020 compared to the third quarter of 2019. The decrease in net sales over the third quarter of 2019 was primarily driven by lower net sales in the general industrial, mass transit, automotive and consumer markets, partially offset by higher net sales in the portable electronics and EV/HEV markets. Net sales were not materially impacted by changes in foreign currencies.
EMS net sales decreased by 14.2% in the first nine months of 2020 compared to the first nine months of 2019. The decrease in net sales over the first nine months of 2019 was primarily driven by lower net sales in the general industrial, mass transit, consumer, portable electronics and automotive markets, partially offset by higher net sales in the EV/HEV market. Net sales were unfavorably impacted by $1.9 million, or 0.7%, due to the depreciation in value of the Chinese renminbi, Korean won and euro relative to the U.S. dollar.
In our EMS operating segment, we anticipate higher net sales in the EV/HEV and portable electronics markets year-over-year in the fourth quarter of 2020, on a quarter-to-date basis, and we anticipate higher net sales in the EV/HEV market, year-over-year, on a year-to-date basis, while we anticipate lower net sales in the general industrial market year-over-year, on both a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate lower net sales in the EV/HEV and portable electronics market in the fourth quarter of 2020. Our expectations of net sales in the EV/HEV market are primarily due to continued strong demand partially offset by unfavorable variations of ordering patterns. Our expectations of net sales in the portable electronics market are primarily due to an extension of the normal seasonality from the third quarter into the fourth quarter as a result of the COVID-19 pandemic. Our expectations of net sales in the general industrial market are primarily due to impact of the COVID-19 pandemic.
Operating income decreased by 59.0% in the third quarter of 2020 from the third quarter of 2019. As a percentage of net sales, third quarter of 2020 operating income was 8.5%, an approximately 1,050 basis point decrease as compared to the 19.0% reported in the third quarter of 2019. As a result of the acceleration of amortization expense related to the DSP customer relationships and trademarks and trade names definite-lived other intangible assets, we recognized an additional $11.7 million of amortization expense in the third quarter of 2020. The decrease in operating income was also due to lower volume and unfavorable absorption of fixed overhead costs. This was partially offset by favorable product mix, lower fixed overhead costs and yield improvements.
Operating income decreased by 53.2% in the first nine months of 2020 from the first nine months of 2019. As a percentage of net sales, operating income in the first nine months of 2020 was 9.1%, an approximately 750 basis point decrease as compared to the 16.6% reported in the first nine months of 2019. As a result of the acceleration of amortization expense related to the DSP customer relationships and trademarks and trade names definite-lived other intangible assets, we recognized an additional $15.6 million of amortization expense in the first nine months of 2020. The decrease in operating income was also due to lower volume, unfavorable absorption of fixed overhead costs and an increase in inventory reserve provision, partially offset by favorable product mix, lower fixed overhead costs and lower freight, duties and tariffs costs.
The incremental direct costs associated with the temporary additional benefits established under our dependent care, premium pay and sick pay programs in response to the COVID-19 pandemic, as well as the additional safety supplies, impacted EMS operating income by approximately $0.1 million and $1.6 million on a quarter-to-date basis and year-to-date basis, respectively.
The increase in amortization expense for the three and nine months ended September 30, 2020 was due to the acceleration of amortization expense related to our DSP customer relationships and trademarks and trade names definite-lived other intangible assets, which were both accelerated to be fully amortized by December 31, 2020 due to an adjustment to their remaining useful lives. We recognized an additional $11.7 million of amortization expense in the third quarter of 2020 and $15.6 million in the first nine months of 2020, and will recognize an additional $11.7 million of amortization expense in the fourth quarter of 2020. The increases in amortization expense in 2020 are offset by decreases in forecasted amortization expense in future years. For additional information, refer to “Note 6 – Goodwill and Other Intangible Assets” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
Power Electronics Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
$
|
47,927
|
|
|
$
|
43,131
|
|
|
$
|
139,868
|
|
|
$
|
154,607
|
|
Operating loss
|
$
|
(4,691)
|
|
|
$
|
(3,358)
|
|
|
$
|
(3,929)
|
|
|
$
|
(976)
|
|
PES net sales increased by 11.1% in the third quarter of 2020 from the third quarter of 2019. The increase in net sales over the third quarter of 2019 was primarily driven by higher net sales in the EV/HEV and renewable energy markets, partially offset by lower net sales in the mass transit and variable frequency drives markets. Net sales were favorably impacted by foreign currency fluctuations of $0.9 million, or 2.0%, due to the depreciation in value of the euro relative to the U.S. dollar.
PES net sales decreased by 9.5% in the first nine months of 2020 from the first nine months of 2019. The decrease in net sales over the first nine months of 2019 was primarily driven by lower net sales in the mass transit, variable frequency drives and vehicle electrification markets, partially offset by higher net sales in the EV/HEV and renewable energy markets. Net sales were unfavorably impacted by foreign currency fluctuations of $1.2 million, or 0.8%, due to the depreciation in value of the euro and Chinese renminbi relative to the U.S. dollar.
The lower net sales in variable frequency drives market in our PES operating segment was due to a slowdown in industrial automation demand through the first nine months of 2020 combined with customer inventory rebalancing, which began in mid-2019, and continued through most of the first half of 2020. The lower year-to-date net sales in vehicle electrification market in our PES operating segment was due to the COVID-19 impacts on the automotive sector in the first half of 2020, partially offset by the initial recovery in the third quarter of 2020.
In our PES operating segment, we anticipate higher net sales in the EV/HEV market year-over-year in the fourth quarter of 2020, on both a quarter-to-date and year-to-date basis, while we anticipate lower net sales in the variable frequency drives market year-over-year, on both a quarter-to-date and year-to-date basis. On a sequential quarter basis, we anticipate higher net sales in the EV/HEV market in the fourth quarter of 2020, while we anticipate lower net sales in the variable frequency drives market. Our expectations of net sales in the EV/HEV market in the fourth quarter of 2020 are primarily due to the anticipation of further recovery of the automotive sector from the impact of the COVID-19 pandemic in the second quarter of 2020. Our expectations of the net sales in the variable frequency drives market are primarily due to the anticipated continued effects of the COVID-19 pandemic.
Operating loss increased by 39.7% in the third quarter of 2020 from the third quarter of 2019. As a percentage of net sales, the third quarter of 2020 operating loss was 9.8% as compared to the 7.8% for operating loss reported in the third quarter of 2019. The increase in operating loss was primarily due to $6.3 million of restructuring and impairment charges incurred in the third quarter of 2020, in addition to unfavorable product mix, partially offset by higher volume, lower fixed overhead costs, favorable productivity performance, yield improvements and favorable absorption of fixed overhead costs.
Operating loss increased by 302.6% in the first nine months of 2020 from the first nine months of 2019. As a percentage of net sales, the first nine months of 2020 operating loss was 2.8% as compared to the 0.6% for operating loss reported in the first nine months of 2019. The increase in operating loss was primarily due to $6.3 million of restructuring and impairment charges
incurred in the first nine months of 2020, in addition to lower volume, unfavorable product mix and unfavorable absorption of fixed overhead costs, partially offset by favorable productivity performance, yield improvements, lower fixed overhead costs and lower freight costs.
The incremental transaction costs associated with the temporary additional benefits established under our dependent care, premium pay and sick pay programs in response to the COVID-19 pandemic, as well as the additional safety supplies, did not materially impact PES operating loss on a quarter-to-date basis and impacted PES operating loss by approximately $0.8 million on a year-to-date basis.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
$
|
3,859
|
|
|
$
|
4,788
|
|
|
$
|
11,240
|
|
|
$
|
16,307
|
|
Operating income
|
$
|
1,132
|
|
|
$
|
1,470
|
|
|
$
|
3,339
|
|
|
$
|
4,821
|
|
Net sales in this segment decreased by 19.4% in the third quarter of 2020 from the third quarter of 2019. The decrease in net sales over the third quarter of 2019 was primarily driven by lower demand in the automotive market partially resulting from the COVID-19 pandemic. Net sales were not materially impacted by changes in foreign currencies.
Net sales in this segment decreased by 31.1% in the first nine months of 2020 from the first nine months of 2019. The decrease in net sales over the first nine months of 2019 was primarily driven by a non-recurring last time buy in the Durel business in the first quarter of 2019, as well as lower demand in the automotive market partially resulting from the COVID-19 pandemic. Net sales were unfavorably impacted by foreign currency fluctuations of $0.1 million, or 0.7%, due to the depreciation in value of the Chinese renminbi relative to the U.S. dollar.
Operating income decreased 23.0% in the third quarter of 2020 compared to the third quarter of 2019. The decrease in operating income was primarily driven by lower volume and unfavorable absorption of fixed overhead costs, partially offset by lower fixed overhead costs. As a percentage of net sales, third quarter of 2020 operating income was 29.3%, a 140 basis point decrease as compared to the 30.7% reported in the third quarter of 2019.
Operating income decreased 30.7% in the first nine months of 2020 compared to the first nine months of 2019. The decrease in operating income was primarily driven by lower volume and unfavorable absorption of fixed overhead costs, partially offset by lower fixed overhead costs. As a percentage of net sales, the first nine months of 2020 operating income was 29.7%, a 10 basis point increase as compared to the 29.6% reported in the first nine months of 2019.
Liquidity, Capital Resources and Financial Position
We believe that our existing sources of liquidity and cash flows that we expect to generate 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 in an effort to ensure that we have the appropriate access to cash to fund both our near-term operating needs and our long-term strategic initiatives.
The following table illustrates the location of our cash and cash equivalents by our three major geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
September 30, 2020
|
|
December 31, 2019
|
United States
|
$
|
43,143
|
|
|
$
|
39,354
|
|
Europe
|
46,560
|
|
|
31,166
|
|
Asia
|
96,420
|
|
|
96,329
|
|
Total cash and cash equivalents
|
$
|
186,123
|
|
|
$
|
166,849
|
|
Approximately $143.0 million of our cash and cash equivalents were held by non-U.S. subsidiaries as of September 30, 2020. We did not make any changes in the nine months ended September 30, 2020 to our position on the permanent reinvestment of our earnings from foreign operations. With the exception of certain of our Chinese subsidiaries, where a substantial portion of our Asia cash and cash equivalents are held, we continue to assert that historical foreign earnings are indefinitely reinvested.
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
September 30, 2020
|
|
December 31, 2019
|
Key Financial Position Accounts:
|
|
|
|
Cash and cash equivalents
|
$
|
186,123
|
|
|
$
|
166,849
|
|
Accounts receivable, net
|
$
|
138,611
|
|
|
$
|
122,285
|
|
Inventories
|
$
|
109,733
|
|
|
$
|
132,859
|
|
Borrowings under revolving credit facility
|
$
|
60,000
|
|
|
$
|
123,000
|
|
Changes in key financial position accounts and other significant changes in our statements of financial position from December 31, 2019 to September 30, 2020 were as follows:
•Accounts receivable, net increased 13.4% to $138.6 million as of September 30, 2020, from $122.3 million as of December 31, 2019. The increase from year-end was primarily due to higher net sales at the end of the third quarter of 2020 compared to at the end of 2019, as well as an increase to our days sales outstanding and an increase in our income taxes receivable.
•Inventories decreased 17.4% to $109.7 million as of September 30, 2020, from $132.9 million as of December 31, 2019, primarily driven by a decline in inventory levels to align with our lower net sales volumes, as well as an increase in inventory reserve provision within the EMS operating segment and a reduction of capitalized variances associated with the timing of volumes produced versus sold relative to the end of 2019.
•Borrowings under revolving credit facility decreased 51.2% to $60.0 million as of September 30, 2020, from $123.0 million as of December 31, 2019. This was as a result of $213.0 million of discretionary principal payments on our revolving credit facility during the second and third quarters of 2020, partially offset by $150.0 million in borrowings under our revolving credit facility during the first quarter of 2020 as a precautionary measure in order to increase our cash position and preserve financial flexibility given current uncertainty in the global markets resulting from the COVID-19 pandemic. For additional information regarding this facility and the Third Amended Credit Agreement and the Fourth Amended Credit Agreement, refer to “Note 9 – Debt” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(Dollars in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
Key Cash Flow Measures:
|
|
|
|
Net cash provided by operating activities
|
$
|
113,673
|
|
|
$
|
115,672
|
|
Net cash used in investing activities
|
$
|
(28,944)
|
|
|
$
|
(36,193)
|
|
Net cash provided by (used in) financing activities
|
$
|
(67,033)
|
|
|
$
|
(104,010)
|
|
As of September 30, 2020, cash and cash equivalents were $186.1 million as compared to $166.8 million as of December 31, 2019, an increase of $19.3 million, or 11.6%. This increase was primarily due to the $150.0 million in borrowings under our revolving credit facility during the first quarter of 2020, supplemented by cash flows generated by operations. This increase was partially offset by $213.0 million of discretionary principal payments on our revolving credit facility during the second and third quarters of 2020, $28.9 million in capital expenditures and $5.1 million in tax payments related to net share settlement of equity awards.
Restrictions on Payment of Dividends
The 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 September 30, 2020.
The Fourth 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 total net leverage ratio does not exceed 2.75 to 1.00. If our total net leverage ratio exceeds 2.75 to 1.00, we may nonetheless make up to $20.0 million in restricted payments, including cash dividends, during each fiscal year, provided that no default or event of default has occurred and is continuing or would result from the payments. Our total net leverage ratio did not exceed 2.75 to 1.00 as of October 16, 2020.
Contingencies
During the third quarter of 2020, we did not become aware of any material developments related to environmental matters disclosed in our Annual Report, our asbestos litigation or other material contingencies previously disclosed or incur any material costs or capital expenditures related to such matters. Refer to “Note 12 – Commitments and Contingencies” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for further discussion of these contingencies.
Off-Balance Sheet Arrangements
As of September 30, 2020, we did 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 Policies
There were no material changes in our critical accounting policies during the third quarter of 2020.
Recent Accounting Pronouncements
Refer to “Note 16 – Recent Accounting Standards” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for discussion of recent accounting pronouncements including expected dates of adoption.